# EASTMAN KODAK CO (KODK) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from EASTMAN KODAK CO's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/31235/000143774923006897/ekc20221231_10k.htm
Accession: 0001437749-23-006897
Filing date: 2023-03-16
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/KODK/
All MD&A years: /company/KODK/mda/
Previous year: /company/KODK/mda/fy2021/ (FY 2021)
Next year: /company/KODK/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Kodak and should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data” (“Item 8”) of this Annual Report on Form 10-K. All references to Notes relate to Notes to the Financial Statements in Item 8.

CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report on Form 10-K includes "forward–looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995.

Forward–looking statements include statements concerning Kodak’s plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, liquidity, investments, financing needs and business trends and other information that is not historical information. When used in this document, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “predicts,” “forecasts,” “strategy,” “continues,” “goals,” “targets” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and similar words and expressions, as well as statements that do not relate strictly to historical or current facts, are intended to identify forward–looking statements. All forward–looking statements, including management’s examination of historical operating trends and data, are based upon Kodak’s current expectations and assumptions. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in or implied by such forward-looking statements. Important factors that could cause actual events or results to differ materially from the forward-looking statements include, among others, the risks and uncertainties described in more detail in this report on Form 10–K under the headings “Business,” “Risk Factors,” “Legal Proceedings” and/or “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources,” and in other filings the Company makes with the SEC from time to time, as well as the following:

[[GREPCENT_TABLE]]
[["","\u25cf","Continued sufficient availability of borrowings and letters of credit under the Amended ABL Credit Agreement and L/C Facility Agreement, Kodak\u2019s ability to obtain additional or alternate financing if and as needed, Kodak\u2019s continued ability to manage world-wide cash through inter-company loans, distributions and other mechanisms, and Kodak's ability to provide or facilitate financing for its customers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to improve and sustain its operating structure, cash flow, profitability and other financial results;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to achieve strategic objectives, cash forecasts, financial projections, and projected growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to achieve the financial and operational results contained in its business plans;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to comply with the covenants in its various credit facilities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to fund continued investments, capital needs, collateral requirements and restructuring payments and service its debt and Series B Preferred Stock and Series C Preferred Stock;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Changes in foreign currency exchange rates, commodity prices, interest rates and tariff rates;"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","The impact of the global economic environment, including inflationary pressures, medical epidemics such as the COVID-19 pandemic, geopolitical issues such as the war in Ukraine, and Kodak\u2019s ability to effectively mitigate the associated increased costs of aluminum and other raw materials, energy, labor, shipping, delays in shipment and production times, and fluctuations in demand;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The performance by third parties of their obligations to supply products, components or services to Kodak and Kodak\u2019s ability to address supply chain disruptions and continue to obtain raw materials and components available from single or limited sources of supply, which may be adversely affected by the COVID-19 pandemic and the war in Ukraine;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to effectively anticipate technology and industry trends and develop and market new products, solutions and technologies, including products based on its technology and expertise that relate to industries in which it does not currently conduct material business;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to effectively compete with large, well-financed industry participants;"],["","\u25cf","Kodak\u2019s ability to effect strategic transactions, such as investments, acquisitions, strategic alliances, divestitures and similar transactions, or to achieve the benefits sought to be achieved from such strategic transactions;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Kodak\u2019s ability to discontinue, sell or spin-off certain non-core businesses or operations, or otherwise monetize assets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The impact of the investigations, litigation and claims arising out of the circumstances surrounding the announcement on July 28, 2020, by the U.S. International Development Finance Corporation of the signing of a non\u2010binding letter of interest to provide a subsidiary of Kodak with a potential loan to support the launch of an initiative for the manufacture of pharmaceutical ingredients for essential generic drugs; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","The potential impact of force majeure events, cyber\u2010attacks or other data security incidents that could disrupt or otherwise harm Kodak\u2019s operations."]]
[[/GREPCENT_TABLE]]

Future events and other factors may cause Kodak’s actual results to differ materially from the forward–looking statements. All forward–looking statements attributable to Kodak or persons acting on its behalf apply only as of the date of this report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this document.  Kodak undertakes no obligation to update or revise forward–looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, except as required by law.

The following Management’s Discussion and Analysis ("MD&A") provides a historical and prospective narrative on the Company’s financial condition and results of operations for the year ended December 31, 2022 as compared to the year ended December 31, 2021. Cross references to Notes in this MD&A are to the Notes in the Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data". The discussion of the Company’s financial condition and results of operations for the year ended December 31, 2021 compared to the same period in 2020 is included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10–K for the year ended December 31, 2021.

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EXECUTIVE OVERVIEW

Consolidated revenues in the year ended December 31, 2022 were $1.205 billion, an improvement of $55 million (5%) from 2021. Currency impacted revenue unfavorably in 2022 compared to 2021 ($70 million).

Traditional Printing’s revenues, which accounted for 59% of Kodak’s total revenues in 2022, improved by $52 million (8%) compared to 2021. Volume for SONORA Process Free Plates improved by 2% compared to the prior year period or 9% when including volume under a licensing agreement pursuant to which Kodak received approximately $1 million in royalties in 2022. Digital Printing revenues declined $22 million (9%) and Advanced Materials and Chemicals revenue improved $22 million (10%) from 2021 to 2022.

Impact of COVID‐19 and Other Global Events:

Kodak's products are sold and serviced in numerous countries across the globe with more than half of sales generated outside the U.S.  Current global economic conditions remain highly volatile due to the ongoing impacts from the COVID‐19 pandemic, heightened levels of inflation, unfavorable foreign exchange rates, the war in Ukraine, and other global events which impacted Kodak’s operations. Kodak is experiencing supply chain disruptions, shortages in materials and labor, and increased labor, material and distribution costs as well as volume declines for certain businesses.

Kodak has implemented numerous measures to mitigate the challenges associated with supply chain disruptions and shortages in materials, including increasing safety stock on certain materials, increasing lead‐times, providing suppliers with longer forecasts of future demand and certifying additional sources or substitute materials where possible.  These measures have enabled Kodak to largely meet current demand.  

The Advanced Materials and Chemicals segment has also experienced labor shortages in certain manufacturing areas. Increased demand for consumer film products along with manufacturing equipment limitations and labor shortages have contributed to increased backorders. Kodak has increased headcount in this segment to better meet demand, but supply will continue to be constrained by manufacturing equipment limitations without further capital improvements.

Kodak has implemented various pricing actions in response to increased labor, material and distribution costs primarily within its Traditional Printing segment.  In order to mitigate the impact of higher aluminum, energy and packaging costs, the segment implemented surcharges on purchases of plates largely beginning in the latter part of the second quarter of 2021 that continue to be periodically reviewed and adjusted for accordingly.

Due to current global economic conditions and pricing actions, the Traditional Printing segment is experiencing a slowdown in customer demand that negatively impacted volume in 2022.  Kodak has implemented various actions in response, including supply chain and workforce optimization, productivity improvements and other cost savings that are projected to mitigate the impact of lower volumes. However, the potential worsening of economic conditions and the negative impact on customer demand due to further pricing actions could unfavorably impact this segment's operating results.

Kodak continues to work closely with government and health officials in the jurisdictions where it operates to protect employees worldwide, with particular measures in place for those working in plants and distribution facilities. Kodak closed its manufacturing facility located in Shanghai, China in April 2022 in response to a mandatory government lockdown. The mandatory government lockdown ended on June 1, 2022 and Kodak’s Shanghai, China manufacturing facility has resumed operations. The temporary closure did not have a material impact on Kodak’s financial statements. None of Kodak’s other manufacturing facilities have been ordered to close by governmental authorities.

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Kodak also continues to monitor the rapidly evolving events surrounding the war in Ukraine and the various sanctions imposed in response to the war. Kodak is in compliance with all sanctions. Kodak is experiencing worldwide supply constraints for aluminum and electronic components, and increased energy and transportation costs due in part to the war in Ukraine.  The extent to which the military conflict in Ukraine will impact the global economy and Kodak's business and operations remains uncertain.  

The war in Ukraine and the international response have disrupted Kodak’s ability to operate its Russian subsidiary in the ordinary course, affecting its ability to pay vendors and employees, receive amounts owed from customers in Russia and deliver product. Kodak is in the process of an orderly winding down of its Russian subsidiary and direct Russian operations. The direct operations of Kodak’s Russian subsidiary are not material to the Company’s financial statements (less than 1% of total consolidated revenues and assets for 2021 and 2022), and there were no material impacts to the consolidated results as of and for the year ended December 31, 2022.

The ongoing impact of the COVID‐19 pandemic, the war in Ukraine, changes in global economic conditions and other global events on Kodak’s operations and financial performance remains uncertain and will depend on several factors such as the duration of supply chain disruptions and slowdown in customer demand, the ability to secure raw materials and components, the ability to offset higher labor, material and distribution costs through pricing actions and the duration and further evolution of the COVID‐19 pandemic and governmental responses thereto.  

Business Overview and Strategy:

Segments within the print industry and the film industry face competition from digital substitution. Kodak’s strategy is to:

[[GREPCENT_TABLE]]
[["","\u2022","Focus product investment in core competency areas of print, advanced materials and chemicals, leveraging Kodak\u2019s proprietary technologies to deliver technologically advanced products in the product goods packaging, graphic communications and functional printing markets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Grow revenues through a focus on customers across Kodak\u2019s print divisions, increasing overall share and profitability;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Promote the use of film and expand the applications of Kodak\u2019s film and chemicals to best utilize the existing infrastructure; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Continue to streamline processes to drive cost reductions and improve operating leverage."]]
[[/GREPCENT_TABLE]]

A discussion of opportunities and challenges related to Kodak’s strategy follows:

[[GREPCENT_TABLE]]
[["","\u2022","Traditional Printing\u2019s digital plate products include traditional digital plates and KODAK SONORA Process Free Plates. SONORA Process Free Plates allow Kodak customers to skip the plate processing step prior to mounting plates on a printing press. This improvement in the printing process is intended to save time and costs for customers. Also, SONORA Process Free Plates reduce the environmental impact of the printing process because they eliminate the use of chemicals (including solvents), water and power that is otherwise required to process a traditional plate. The segment is experiencing challenges from higher prices and availability of raw materials, digital substitution and competitive pricing pressures. Kodak seeks to mitigate the impact of increases in manufacturing costs, including aluminum prices, through a combination of surcharges and price increases, improved production efficiency and cost reduction initiatives. In addition, Kodak seeks to offset the impact of short-term and long-term market dynamics on pricing and volume pressures through innovations in Kodak product lines, including investing in digital print technologies."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u2022","In Digital Printing, the PROSPER business is expected to grow as the legacy VERSAMARK business continues to decline as a percentage of the segment\u2019s total revenue. The Prosper Inkjet Systems business is expected to continue to build profitability. Kodak launched the PROSPER 7000 Turbo Press in June 2022. The PROSPER 7000 Turbo Press enables commercial, publishing and newspaper printers to compete more effectively with offset and to shift more long run jobs from conventional printing processes to inkjet. Investment in the next generation technology, ULTRASTREAM, is focused on the ability to place ULTRASTREAM writing systems in Kodak branded presses and in various original equipment manufacturers in applications ranging from commercial print to packaging. The first flexible packaging printing system utilizing Kodak's ULTRASTREAM inkjet technology was placed during the second quarter of 2022. In addition, Kodak officially launched the KODAK PROSPER ULTRA 520 Digital Press utilizing Kodak's ULTRASTREAM inkjet technology, which offers offset print quality in a smaller footprint."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Advanced Materials and Chemicals segment is using Kodak's deep expertise in chemistry and strengths in deposition and coating processes that come from decades of experience in film manufacturing to work on new initiatives:"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","EV/Energy Storage Battery Material Manufacturing - Coating of substrates is a critical aspect of manufacturing materials for batteries and Kodak plans to capitalize on its expertise in coating technology to develop opportunities in this area. Kodak is currently in the process of expanding its pilot coating facility. On July 13, 2022, Kodak invested $25 million to acquire a minority preferred equity interest in Wildcat Discovery Technologies, Inc. (\u201cWildcat\u201d), a private technology company that uses proprietary methods to research and develop new battery materials, including an EV battery. Kodak has also entered into an agreement to provide coating and engineering services in collaboration with Wildcat to develop and scale film coating technologies. Wildcat has granted Kodak certain rights to negotiate a production or licensing arrangement with Wildcat when and if Wildcat\u2019s technology reaches commercial readiness."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Light-Blocking Technology - Kodak plans to leverage a proprietary technology initially developed for electrophotographic toners to commercialize a carbon\u2010less fabric coating designed to offer superior light management, from complete blackout to selective light filtering, and coating compatibility with an unmatched range of fabrics. Kodak is installing and commissioning a production-scale coating machine to coat fabrics in Eastman Business Park, located in Rochester, NY."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Transparent Antennas - Kodak plans to leverage its proprietary copper micro\u2010wire technologies and high\u2010resolution printing expertise to contract\u2010manufacture custom transparent antennas for automotive, commercial construction, and other applications requiring excellent radio frequency (\u201cRF\u201d) and optical performance. The integration of antennas is growing worldwide due to the rapid expansion of 5G and an overall increase in RF communications, and the ubiquity of glass surfaces makes transparent antennas attractive for multiple end\u2010use markets."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Reagent Manufacturing - Kodak plans to capitalize on its existing chemical manufacturing expertise, including current production of unregulated Key Starting Materials for pharmaceuticals, to implement an expansion into manufacturing Diagnostic Test Reagent solutions. Kodak has started construction of a lab and manufacturing facility to manufacture reagents for healthcare applications within an existing building located at Eastman Business Park."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Film and related component manufacturing operations and Kodak Research Laboratories utilize capacity at EBP, which helps cost absorption for both Kodak operations and tenants at Eastman Business Park."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Kodak plans to capitalize on its intellectual property through new business or licensing opportunities, focusing on opportunities in smart material applications and printed electronics markets and also pursuing certain opportunities in 3D printing materials."]]
[[/GREPCENT_TABLE]]

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RESULTS OF OPERATIONS

[[GREPCENT_TABLE]]
[["","","Year Ended","","","","","","","Year Ended"],["","","December 31,","","","% of","","","December 31,","","","% of","","","$ Change vs."],["","","2022","","","Sales","","","2021","","","Sales","","","2021"],["Revenues","","$","1,205","","","","","","","$","1,150","","","","","","","$","55"],["Cost of revenues","","","1,035","","","","","","","","986","","","","","","","","49"],["Gross profit","","","170","","","","14","%","","","164","","","","14","%","","","6"],["Selling, general and administrative expenses","","","153","","","","13","%","","","177","","","","15","%","","","(24",")"],["Research and development costs","","","34","","","","3","%","","","33","","","","3","%","","","1"],["Restructuring costs and other","","","10","","","","1","%","","","6","","","","1","%","","","4"],["Other operating income, net","","","(1",")","","","0","%","","","(6",")","","","-1","%","","","5"],["Loss from continuing operations before interest expense, pension income excluding service cost component, other charges (income), net and income taxes","","","(26",")","","","(2","%)","","","(46",")","","","(4","%)","","","20"],["Interest expense","","","40","","","","3","%","","","33","","","","3","%","","","7"],["Pension income excluding service cost component","","","(98",")","","","(8","%)","","","(102",")","","","(9","%)","","","4"],["Other charges (income), net","","","1","","","","0","%","","","(5",")","","","(0","%)","","","6"],["Earnings from continuing operations before income taxes","","","31","","","","3","%","","","28","","","","2","%","","","3"],["Provision for income taxes","","","5","","","","0","%","","","4","","","","0","%","","","1"],["NET EARNINGS","","$","26","","","","2","%","","$","24","","","","2","%","","$","2"]]
[[/GREPCENT_TABLE]]

Revenues

For the year ended December 31, 2022, revenues improved approximately $55 million compared with the same period in 2021 primarily due to improved pricing within Traditional Printing ($151 million), improved pricing and product mix as well as increased volume within Advanced Materials and Chemicals ($15 million and $11 million, respectively), improved product mix in Digital Printing ($5 million) and improved volume in Brand ($2 million). Partially offsetting these favorable impacts was lower volume in Traditional Printing and Digital Printing ($46 million and $13 million, respectively) and unfavorable foreign currency ($70 million). See segment discussions for additional details. 

Gross Profit

Gross profit for 2022 improved approximately $6 million compared with the same period in 2021, primarily due to improved pricing and product mix in Traditional Printing ($153 million), improved pricing and product mix as well as higher volume in Advanced Materials and Chemicals ($13 million and $5 million, respectively), improved volume in Brand ($2 million) and a reduction in employee benefit reserves ($6 million) and depreciation ($2 million). Partially offsetting these favorable impacts was higher aluminum costs in Traditional Printing ($69 million), higher manufacturing costs and lower volumes in Traditional Printing ($63 million) and Digital Printing ($9 million), higher manufacturing costs in Advanced Materials and Chemicals ($12 million), an increase in restructuring costs reported in Cost of revenues ($3 million) and unfavorable foreign currency ($16 million). See segment discussions for additional details.

Selling, General and Administrative Expenses

Consolidated SG&A for 2022 decreased $24 million in 2022 primarily due to lower consulting and other costs ($21 million) primarily associated with lower spend on investigations and litigation and insurance reimbursement.  SG&A includes $10 million of income in the year ended December 31, 2022 representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation matters.  Also contributing to the decrease in Consolidated SG&A was a decrease in employee benefit reserves ($4 million), lower equity-based compensation ($2 million) and favorable foreign currency ($6 million) partially offset by an increase in selling and administrative costs ($2 million).

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Research and Development Costs

Consolidated R&D expenses decreased $1 million in 2022.

Restructuring Costs and Other

These costs, as well as restructuring costs reported in Cost of revenues, are discussed under the "Restructuring Costs and Other" section in this MD&A and Note 19, “Restructuring Costs and Other”.

Interest Expense

The increase in interest expense in 2022 of $7 million primarily reflects the impact of the Delayed Draw Term Loan entered into during the second quarter of 2022 combined with a full year of interest expense associated with the financing transactions entered into during the first quarter of 2021. Refer to Note 9, “Debt and Finance Leases” for further information.

Other Operating Income, Net

For details, refer to Note 16, “Other Operating Income, Net.”

Pension Income

For details, refer to Note 20, “Retirement Plans."

Other Charges (Income), Net

For details, refer to Note 17, “Other Charges (Income), Net.”

Provision for Income Taxes

For details, refer to Note 18, “Income Taxes.”

DETAILED RESULTS OF OPERATIONS

Net Revenues from Continuing Operations by Reportable Segment

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021"],["(in millions)"],["Traditional Printing","","$","711","","","$","659"],["Digital Printing","","","227","","","","249"],["Advanced Materials and Chemicals","","","234","","","","212"],["Brand","","","17","","","","15"],["Total of reportable segments","","","1,189","","","","1,135"],["Other","","","16","","","","15"],["Consolidated total","","$","1,205","","","$","1,150"]]
[[/GREPCENT_TABLE]]

Kodak’s segment measure of profit and loss is an adjusted earnings before interest, taxes, depreciation and amortization (“Operational EBITDA”). As demonstrated in the table below, Operational EBITDA represents the earnings from continuing operations before income taxes excluding non-service cost components of pension and other postemployment benefits income; depreciation and amortization expense; restructuring costs and other; stock-based compensation expense; consulting and other costs; idle costs; other operating income, net; interest expense and other (charges) income, net.

Kodak’s segments are measured using Operational EBITDA both before and after allocation of corporate selling, general and administrative expenses (“SG&A”). The segment earnings measure reported is after allocation of corporate SG&A as this most closely aligns with U.S. GAAP.  Research and development activities not directly related to the other segments are reported within the Advanced Materials and Chemicals segment.

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Segment Operational EBITDA and Consolidated Income from Continuing Operations Before Income Taxes

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(in millions)","","2022","","","2021"],["Traditional Printing","","$","27","","","$","9"],["Digital Printing","","","(22",")","","","(5",")"],["Advanced Materials and Chemicals","","","(1",")","","","(6",")"],["Brand","","","14","","","","13"],["Other","","","3","","","","2"],["Depreciation and amortization","","","(29",")","","","(31",")"],["Restructuring costs and other","","","(13",")","","","(6",")"],["Stock-based compensation","","","(5",")","","","(7",")"],["Consulting and other costs (1)","","","2","","","","(19",")"],["Idle costs (2)","","","(3",")","","","(2",")"],["Other operating income, net, (3)","","","1","","","","6"],["Interest expense (3)","","","(40",")","","","(33",")"],["Pension income excluding service cost component (3)","","","98","","","","102"],["Other (charges) income, net (3)","","","(1",")","","","5"],["Consolidated earnings from continuing operations before income taxes","","$","31","","","$","28"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Consulting and other costs are primarily professional services and internal costs associated with certain corporate strategic initiatives, investigations and litigation. Consulting and other costs include $10 million of income in the year ended December 31, 2022 representing insurance reimbursement of legal costs previously paid by the Company associated with investigations and litigation matters."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Consists of third-party costs such as security, maintenance and utilities required to maintain land and buildings in certain locations not used in any Kodak operations and the costs, net of any rental income received, of underutilized portions of certain properties."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","As reported in the Consolidated Statement of Operations."]]
[[/GREPCENT_TABLE]]

In 2022, Kodak decreased employee benefit reserves by $15 million composed of a reduction in workers’ compensation reserves of approximately $13 million driven by changes in discount rates and a decrease in other employee benefit reserves of approximately $2 million, driven by both changes in discount rates and favorable experience. The decrease in reserves in 2022 impacted gross profit by approximately $9 million, R&D by approximately $1 and SG&A by approximately $5 million.

Kodak decreased workers’ compensation reserves by approximately $4 million in 2021 driven by changes in discount rates. The decrease in reserves in 2021 impacted gross profit by approximately $3 million and SG&A by approximately $1 million.

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2023 Segments

Change in Segments

Effective February 2023 Kodak changed its organizational structure.  The Traditional Printing segment and the Digital Printing segment were combined into one segment, named the Print segment.  No changes were made to Kodak's other segments.

TRADITIONAL PRINTING SEGMENT

Revenues

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","$ Change"],["Revenues","","$","711","","","$","659","","","$","52"],["Operational EBITDA","","","27","","","","9","","","","18"],["Operational EBITDA as a % of revenues","","","4","%","","","1","%"]]
[[/GREPCENT_TABLE]]

Revenues

The increase in Traditional Printing revenues of approximately $52 million primarily reflected improved pricing in Prepress Solutions consumables ($151 million), partially offset by reduced volumes in Prepress Solutions consumables ($47 million) and unfavorable foreign currency ($53 million).

Operational EBITDA

Traditional Printing Operational EBITDA improved approximately $18 million primarily due to improved pricing in Prepress Solutions consumables ($151 million), improved product mix in Prepress Solutions equipment ($2 million) and a reduction in employee benefit reserves ($2 million) partially offset by higher aluminum costs ($69 million), increased manufacturing costs and lower volume ($63 million) driven by increases in other costs such as utilities, transportation and supplies, and higher selling and administrative costs ($4 million) as well as unfavorable foreign currency ($3 million).

DIGITAL PRINTING SEGMENT

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","$ Change"],["Revenues","","$","227","","","$","249","","","$","(22",")"],["Operational EBITDA","","","(22",")","","","(5",")","","","(17",")"],["Operational EBITDA as a % of revenues","","","-10","%","","","-2","%"]]
[[/GREPCENT_TABLE]]

Revenues

The decrease in Digital Printing revenues of approximately $22 million primarily reflected volume declines in Electrophotographic Printing Solutions equipment as well as consumables and service ($3 million each), volume declines in PROSPER components, Software and VERSAMARK consumables and service ($2 million each) and unfavorable foreign currency ($14 million).  The unfavorable impacts were partially offset by improved pricing and product mix in PROSPER annuities and Electrophotographic Printing Solutions equipment ($2 million each).

Operational EBITDA

The decline in Digital Printing Operational EBITDA of $17 million was driven by increased manufacturing costs ($9 million), increased spending on R&D projects and selling and administrative costs (each $2 million) unfavorable product mix in Electrophotographic Printing Solutions consumables and service ($1 million) and unfavorable foreign currency ($4 million), partially offset by higher margins on Electrophotographic Printing Solutions equipment ($1 million) and a reduction in employee benefit reserves ($4 million).

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ADVANCED MATERIALS AND CHEMICALS SEGMENT

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","$ Change"],["Revenues","","$","234","","","$","212","","","$","22"],["Operational EBITDA","","","(1",")","","","(6",")","","","5"],["Operational EBITDA as a % of revenues","","","0","%","","","-3","%"]]
[[/GREPCENT_TABLE]]

Revenues

The improvement in Advanced Materials and Chemicals revenues of approximately $22 million is the result of pricing and product mix improvements in Industrial Film and Chemicals ($14 million) and improved volume in Industrial Film and Chemicals and Motion Picture ($3 million and $9 million, respectively) partially offset by unfavorable foreign currency ($3 million).

Operational EBITDA

Advanced Materials and Chemicals Operational EBITDA improved approximately $5 million reflecting improved pricing and product mix and increased volume in Industrial Film and Chemicals ($12 million and $3 million, respectively), higher Motion Picture volumes ($3 million) and a reduction in employee benefit reserves ($4 million). The favorable impacts were partially offset by increased manufacturing costs for Industrial Film and Chemicals ($11 million), increased SG&A and R&D spending ($2 million and $1 million, respectively) and unfavorable foreign currency ($2 million).

BRAND SEGMENT

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","$ Change"],["Revenues","","$","17","","","$","15","","","$","2"],["Operational EBITDA","","","14","","","","13","","","","1"],["Operational EBITDA as a % of revenues","","","82","%","","","87","%"]]
[[/GREPCENT_TABLE]]

Brand revenues and Operational EBITDA improved approximately $2 million and $1 million, respectively, reflecting higher volumes in 2022.

RESTRUCTURING COSTS AND OTHER

2022

Restructuring actions taken in 2022 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included ceasing manufacturing of the Electrophotographic Printing Solutions equipment products as well as various targeted reductions in manufacturing, service, sales, research and development and administrative functions.

As a result of these actions, for the year ended December 31, 2022 Kodak recorded $13 million of charges of which $10 million were reported as Restructuring costs and other and $3 million were reported as Cost of revenues in the accompanying Consolidated Statement of Operations.

Kodak made cash payments related to restructuring of approximately $6 million for the year ended December 31, 2022.

The restructuring actions implemented in 2022 are expected to generate future annual cash savings of approximately $12 million. These savings are expected to reduce future annual Cost of revenues, SG&A and R&D expenses by $2 million, $7 million and $3 million, respectively. Kodak expects the majority of the annual savings to be in effect by the end of the second quarter of 2023 as actions are completed. See Note 19, “Restructuring Costs and Other”  for additional information on Kodak’s restructuring actions.

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LIQUIDITY AND CAPITAL RESOURCES

Management’s Assessment of Liquidity

Kodak ended the year with a cash balance of $217 million, a decrease of $145 million from December 31, 2021. On June 15, 2022, Kodak exercised its right to draw down in full an additional $50 million in aggregate principal pursuant to the Term Loan Credit Agreement and received net proceeds of $49 million. On July 13, 2022, Kodak invested $25 million of the proceeds received from the Delayed Draw Term Loans to acquire a minority preferred equity interest in Wildcat.

The financing transactions entered into during the first quarter of 2021 and the full draw down of the Delayed Draw Term Loans in the second quarter of 2022 provided additional liquidity for the Company to fund on‐going operations and obligations, invest in growth opportunities in Kodak’s businesses of print and advanced materials and chemicals and for corporate infrastructure investments expected to contribute to improvements in cash flow.

Available liquidity includes cash balances and the Excess Availability under the 2023 Amended ABL Credit Agreement (see below for the definition of Excess Availability). The amount of available liquidity is subject to fluctuations and includes cash balances held by various entities worldwide. At December 31, 2022 and 2021 approximately $152 million and $250 million, respectively, of cash and cash equivalents were held within the U.S. and approximately $65 million and $112 million, respectively, of cash and cash equivalents were held outside the U.S. Cash balances held outside the U.S. are generally required to support local country operations and may have high tax costs or other limitations that delay the ability to repatriate, and therefore may not be readily available for transfer to other jurisdictions.  Kodak utilizes cash balances outside the U.S. to fund needs in the U.S. through the use of inter-company loans.

As of December 31, 2022 and 2021, outstanding inter-company loans to the U.S. were $399 million and $418 million, respectively, which includes short-term inter-company loans from Kodak’s international finance center of $109 million and $119 million, respectively. In China, where approximately $24 million and $42 million of cash and cash equivalents was held as of December 31, 2022 and 2021, respectively, there are limitations related to net asset balances that may impact the ability to make cash available to other jurisdictions in the world. Under the terms of the Amended ABL Credit Agreement, the Company is permitted to invest up to $75 million in Restricted Subsidiaries that are not Loan Parties and in joint ventures or Unrestricted Subsidiaries that are not party to the Amended ABL Credit Agreement.

The Company’s Hong Kong subsidiary has an $80 million inter-company loan from one of the Company’s Chinese subsidiaries with a maturity date of November 16, 2024, the proceeds of which were in turn loaned to the Company. The inter-company loan is required to be repaid in the next two years in four equal installments, with the first $20 million installment due by November 16, 2023 and the remaining installments due in 2024. The amounts repaid to the Chinese subsidiary may not be able to be loaned, repatriated or otherwise moved back to the U.S., in which case the Company’s U.S. liquidity would be reduced.  If the inter-company loan is not extended, refinanced or amended and the Hong Kong subsidiary does not pay any of the installments by the end of the 30-day grace period following notice by the Chinese subsidiary after a failure to pay on the due date of such installment, the Hong Kong subsidiary would default on the inter-company loan.  Such a default may cause a cross-default under the Company’s other credit facilities unless requisite waivers are obtained.  The Company intends to pursue alternatives that will allow it and its subsidiaries to perform their obligations to each other while minimizing the impact on U.S. liquidity.

On March 14, 2023, the Company entered into an amendment to the Amended ABL Credit Agreement (the “2023 Amended ABL Credit Agreement”) and Letter of Credit Facility Agreement (the “2023 Amended L/C Facility Agreement) to, among other things: (i) extend the maturity date from February 26, 2024 to the earliest of June 12, 2024, the termination of the 2023 Amended L/C Facility Agreement or the 2023 Amended ABL Credit Agreement, as applicable, or the date that is 91 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing; (ii) maintain daily Minimum Liquidity of $50 million, subject to certain cure rights, in addition to maintaining the existing quarterly Minimum Liquidity of $80 million, and (iii) on February 26, 2024 decrease the aggregate amount of commitments from $90 million to $81 million.

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The maturity date of the Amended ABL Credit Agreement prior to the 2023 Amended ABL Credit Agreement was February 26, 2024 or the date that is 91 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company's Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing.  Upon the occurrence of the termination date under the Amended ABL Credit Agreement the obligations thereunder will become due, and the Company will need to provide alternate collateral in place for the $9 million of letters of credit issued under the Amended ABL Credit Agreement.

Under both the Amended ABL Credit Agreement and the L/C Facility Agreement the Company is required to maintain Minimum Liquidity of at least $80 million, which is tested at the end of each quarter. Minimum Liquidity was $150 million and $250 million at December 31, 2022 and 2021. If Minimum Liquidity falls below $80 million an Event of Default would occur and the Agent has the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be immediately terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the Amended ABL Credit Agreement to be immediately due and payable. The 2023 Amended ABL Credit Agreement and 2023 Amended L/C Facility Agreement added a requirement that the Company maintain a daily Minimum Liquidity of $50 million, subject to certain cure rights, in addition to the quarterly Minimum Liquidity requirement of $80 million.

Kodak is experiencing negative cash flows due to supply chain disruptions, shortages in materials and labor, increased labor, commodity and distribution costs and slowdown in customer demand related to global economic conditions. The economic uncertainty surrounding the COVID-19 pandemic, the war in Ukraine, the current inflationary environment, and other global events represents an additional element of complexity in Kodak’s plans to return to sustainable positive cash flow. The Company cannot predict the duration and scope of the COVID-19 pandemic, the war in Ukraine, as well as other factors such as the ability to continue to secure raw materials and components, the impact of rising costs of labor, commodity and distribution costs, or how quickly and to what extent normal economic and operating conditions can resume.

Kodak's plans to return to sustainable positive cash flow include growing revenues profitably through pricing actions, implementing effective working capital utilization, reducing operating expenses, continuing to simplify the organizational structure, generating cash from selling and leasing underutilized assets and implementing ways to reduce cash collateral needs.

Kodak believes that its liquidity position is adequate to fund its operating and investing needs for the next twelve months, to maintain compliance with the Minimum Liquidity provisions under the credit agreements and to provide the flexibility to respond as necessary to ordinary changes in the business and economic environment. Kodak’s ability to adequately fund its long-term liquidity and capital requirements will be dependent on amending, refinancing or extending the maturity date of the 2023 Amended ABL Credit Agreement and 2023 Amended L/C Facility Agreement, or finding alternative collateral in place of the letters of credit issued such facilities, managing world-wide cash through intercompany loans, distributions or other mechanisms while minimizing the impact on U.S. liquidity, generating positive cash flows from operations or obtaining additional financing to fund its growth investments.

Amended and Restated ABL Credit Agreement

On February 26, 2021, the Company entered into an amendment to the ABL Credit Agreement (as amended in 2021, the “Amended ABL Credit Agreement”). The Amended ABL Credit Agreement amended the ABL Credit Agreement to, among other things, (i) extend the maturity date to February 26, 2024 or the date that is 90 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing and (ii) decrease the aggregate amount of commitments from $110 million to $90 million.

Commitments under the Amended ABL Credit Agreement continue to be able to be used in the form of revolving loans or letters of credit. The Company had issued approximately $58 million and $46 million letters of credit under the Amended ABL Credit Agreement as of December 31, 2022 and 2021, respectively.

Letter of Credit Facility Agreement

On February 26, 2021, the Company entered into a Letter of Credit Facility Agreement (the “L/C Facility Agreement”, and together with the Term Loan Credit Agreement and the Amended ABL Credit Agreement the “Credit Agreements”). Pursuant to the L/C Facility Agreement, the L/C Lenders committed to issue letters of credit on the Company’s behalf in an aggregate amount of up to $50 million, provided the Company posts cash collateral in an amount greater than or equal to 103% of the aggregate amount of letters of credit issued and outstanding at any given time (the “L/C Cash Collateral”).

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The term of the L/C Facility Agreement is three years, subject to the same automatic springing maturity as the Amended ABL Credit Agreement. The Company had issued approximately $43 million and $44 million letters of credit under the L/C Facility Agreement as of December 31, 2022 and 2021, respectively. The letters of credit under the L/C Facility Agreement are collateralized by cash collateral (L/C Cash Collateral).  The balance on deposit in the L/C Cash Collateral account as of December 31, 2022 and 2021 is approximately $44 million and $45 million, respectively.

Under the Amended ABL Credit Agreement and the L/C Facility Agreement the Company is required to maintain Excess Availability above 12.5% of lender commitments ($11.25 million at December 31, 2022 and 2021), which is tested at the end of each month. Excess Availability was $21 million and $27 million as of December 31, 2022 and 2021, respectively. If Excess Availability falls below 12.5% of lender commitments a Fixed Charge Coverage Ratio Trigger Event would occur. During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0.

If Excess Availability falls below 12.5% of lender commitments, Kodak may, in addition to the requirement to be in compliance with the minimum Fixed Charge Coverage Ratio, become subject to cash dominion control. Since Excess Availability was greater than 12.5% of lender commitments at December 31, 2022 and 2021, Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0.

Kodak intends to continue to maintain Excess Availability above the minimum threshold. The borrowing base is supported by Eligible Receivables, Eligible Inventory and Eligible Equipment. As noted above, since Excess Availability was greater than 12.5% of lender commitments Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0. As of December 31, 2022 Fixed Charges (as defined in the ABL Credit Agreement) exceeded EBITDA by approximately $39 million, therefore the Fixed Charges Coverage Ratio was less than 1.0 to 1.0.

Cash Flow:

Cash, cash equivalents and restricted cash balances were as follows:

[[GREPCENT_TABLE]]
[["","","As of December 31,"],["(in millions)","","2022","","","2021"],["Cash, cash equivalents and restricted cash","","$","286","","","$","423"]]
[[/GREPCENT_TABLE]]

Cash Flow Activity

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,","","","Year-Over-"],["(in millions)","","2022","","","2021","","","Year Change"],["Cash flows from operating activities:"],["Net cash used in operating activities","","$","(116",")","","$","(47",")","","$","(69",")"],["Cash flows from investing activities:"],["Net cash used in investing activities","","","(56",")","","","(20",")","","","(36",")"],["Cash flows from financing activities:"],["Net cash provided by financing activities","","","43","","","","238","","","","(195",")"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","","","(8",")","","","(4",")","","","(4",")"],["Net (decrease) increase in cash, cash equivalents and restricted cash","","$","(137",")","","$","167","","","$","(304",")"]]
[[/GREPCENT_TABLE]]

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Table of Contents

Operating Activities

Net cash used in operating activities increased $69 million for the year ended December 31, 2022 as compared with the prior year primarily due to an increase in cash used for accounts payable, an increased investment in inventory to strengthen the ability to supply customers and lower reductions of accounts receivable driven by revenue growth.

Investing Activities

Net cash used in investing activities increased $36 million for the year ended December 31, 2022 as compared to the prior year due to the investment in Wildcat and an increase in capital expenditures driven by investments in growth initiatives and back-office automation. 

Financing Activities

The change in net cash provided by financing activities of $195 million in the year ended December 31, 2022 compared to the corresponding period in 2021 was primarily driven by net proceeds of $247 million received in the prior year from refinancing transactions partially offset by proceeds of $49 million received in the second quarter of 2022 from the Delayed Draw Term Loans as well as lower preferred stock cash dividend payments in the current year period.

Excess Cash Flow

On an annual basis, the Company will prepay, within 10 business days following the filing of annual Form 10-K, outstanding Loans in an amount equal to Excess Cash Flow (“ECF”) as defined in the Term Loan Credit Agreement provided no such prepayment is required if such prepayment would cause U.S. liquidity to be less than $85 million. For the year ended December 31, 2022 ECF was a negative amount, therefore no prepayment is required in 2023.

Other Collateral Requirements

The New York State Workers’ Compensation Board (“NYSWCB”) requires security deposits related to self-insured workers’ compensation obligations, which security deposits are recalculated annually.  Due to changes in 2019 to the manner in which the required security deposit is determined, the Company has been required to post additional collateral over the last several years.  At December 31, 2022, the Company had posted $75.0 million of collateral, representing 107% of the Company’s undiscounted actuarial workers’ compensation obligations.  Based on informal communications with representatives of the NYSWCB, the Company understands the NYSWCB may adopt a financial contingency requirement based on the self-insured’s credit rating that could obligate the Company to post up to an additional $38 million of collateral as early as December 2023.  The Company believes no financial contingency is appropriate where the security deposit is already 107% of the undiscounted actuarial liability; however, the Company cannot predict the financial contingency methodology that will be adopted by the NYSWCB, if any.  Any additional security deposit required based on a financial contingency concept adopted by the NYSWCB would reduce the Company’s liquidity to the extent the Company is unable to obtain some form of relief from such requirement.

Based on the legacy nature of the Company’s workers’ compensation obligations, the undiscounted actuarial obligation has been declining and the Company expects it to continue to decline.  While it may not be indicative of the rate of future declines, the undiscounted actuarial liability declined by an average of $5.5 million per year between 2014 and 2022.  Accordingly, subject to the possibility of being required to post additional collateral based on a financial contingency methodology adopted by the NYSWCB or other changes to the calculation of required security deposits by the NYSWCB, the Company expects the amount of the required security deposit to decline over time and gradually return the capital used to support the security deposits that have been made.

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As a result of the Company’s credit ratings, during the second quarter of 2020 two surety bond holders notified the Company they required approximately $9 million of incremental collateral. The Company reduced the surety bond value by approximately $9 million in July 2020 with an equivalent increase to an existing letter of credit with the New York Workers’ Compensation Board. The Company could be required to provide up to an additional $4 million of letters of credit to the issuers of certain surety bonds in the future to fully collateralize the bonds.

Other Sources/Uses of Cash Related to Financing Transactions and Stock Options

The holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4% per annum. All dividends have been declared and paid when due. Due to exercises of stock options primarily by ex-employees, the Company received approximately $33 million, net of tax payments, in 2020.

Defined Benefit Pension and Postretirement Plans

Kodak made contributions (funded plans) or paid net benefits (unfunded plans) totaling approximately $14 million relating to its non-U.S. defined benefit pension and postretirement benefit plans in 2022.  For 2023, the forecasted contribution (funded plans) and net benefit payment (unfunded plans) requirements for its non-U.S. defined benefit pension and postretirement plans are approximately $12 million. Kodak does not expect to make any cash contributions to its major U.S. pension plan in 2023, and expects benefit payments (unfunded plans) related to its non-major U.S. plans to be less than $1 million.

Capital Expenditures

Cash flows from investing activities included $31 million for capital expenditures for the year ended December 31, 2022.  Kodak expects approximately $30 million to $40 million of cash flows for investing activities from capital expenditures for the year ending December 31, 2023. 

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U.S. International Development Finance Corporation Non-Binding Letter of Interest

On July 28, 2020, the U.S. International Development Finance Corporation signed a non-binding letter of interest to provide a subsidiary of the Company with a potential $765 million loan to support the launch of Kodak Pharmaceuticals, an initiative that would manufacture pharmaceutical ingredients for essential generic drugs. The DFC Loan would have been for facility upgrades and construction, provide working capital, and finance other necessary direct expenditures supporting the launch of Kodak Pharmaceuticals.  As previously reported, on April 22, 2022 the Company received a letter from the DFC advising the Company that the authority conferred on the DFC by Executive Order 13922 expired on March 27, 2022 and that, consequently, the DFC is unable to consider the project further and the Company’s application has been closed.

The Company remains interested in working with governmental agencies to leverage its assets and technology to on-shore manufacturing of pharmaceutical and other healthcare materials. As described under “Overview” above, the Company is also continuing to explore expanding further into the pharmaceutical space on a smaller scale than contemplated by the DFC Loan using other sources of capital, including a portion of the capital raised by the Company on February 26, 2021.

Contractual Obligations

The impact that contractual obligations are expected to have on Kodak's cash flow in future periods is as follows:

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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Primarily represents the maturity values of Kodak's long-term debt obligations as of December 31, 2022. The loans made under the Term Credit Agreement become due on February 26, 2026. The 2021 Convertible Notes become due on May 28, 2026. The loans made under the Term Credit Agreement receive 4% paid-in-kind interest at maturity. The 2021 Convertible Notes receive 5% paid-in-kind interest at maturity. The paid-in-kind interest for both the Term Credit Agreement and the 2021 Convertible Notes is included in the principal amount due. The contractual obligations do not reflect any contingent mandatory annual principal prepayments that may be required to be made upon achieving certain excess cash flow targets, as defined in the Term Credit Agreement. Refer to Note 9, \"Debt and Finance Leases\" ."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Includes cash interest payments on the Term Credit Agreement, the RED-Rochester LLC debt and commitment fees for the Amended ABL Credit Agreement and the L/C Facility Agreement."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Purchase obligations include agreements related to raw materials, supplies, production and administrative services, as well as marketing and advertising, that are enforceable and legally binding on Kodak and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","Due to uncertainty regarding the completion of tax audits and possible outcomes, an estimate of the timing of payments related to uncertain tax positions and interest cannot be made. See Note 18, \u201cIncome Taxes,\u201d for additional information regarding Kodak's uncertain tax positions."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(5)","For 2023, the Company is forecasting $12 million in contributions and net benefit payments for its Non-U.S. major defined benefit retirement plans and other postretirement benefit plans. Expected contributions are excluded from the contractual obligations table because they do not represent contractual cash outflows, as they are dependent on numerous factors which may result in a wide range of outcomes."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(6)","Because timing of their future cash outflows are uncertain, the other long-term liabilities presented in Note 8, \u201cOther Long-Term Liabilities,\u201d are excluded from this table."]]
[[/GREPCENT_TABLE]]

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Table of Contents

[[GREPCENT_TABLE]]
[["(7)","On February 26, 2021, the Company issued 1,000,000 shares of 4% Series B Convertible Preferred Stock, no par value per share (the \u201cSeries B Preferred Stock\u201d) and 1,000,000 shares of 5% Series C Convertible Preferred Stock, no par value per share (the \u201cSeries C Preferred Stock\u201d). The Series B and Series C Preferred Stock have a liquidation preference of $100 per share. The holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4% per annum. The holder of Series C Preferred Stock is entitled to cumulative dividends payable quarterly in additional shares of Series C Preferred Stock. If holders of the Series B and Series C Preferred stock convert their shares into common stock, dividends will decrease. The Company is required to redeem all shares not converted prior to May 28, 2026 at $100 per share plus the amount of any accrued and unpaid dividends. Due to uncertainty regarding the number of shares that will be redeemed, the redemption amount has not been included in the above table. Refer to Note 10, \"Redeemable, Convertible Preferred Stock\"."]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant accounting policies used in the preparation of the Consolidated Financial Statements are more fully described in Note 1, “Basis of Presentation and Significant Accounting Policies”. The accounting policies most critical to the preparation of the consolidated financial statements and require the most difficult, subjective or complex judgments are described below.

Revenue Recognition

Kodak's revenue transactions include sales of products, equipment, software, services, integrated solutions, intellectual property and brand licensing and commercial real estate management activities.  Complex multiple element arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including the allocation of transaction price to the various performance obligations and determination of the stand-alone selling price of each performance obligation. When the stand-alone selling price is not directly observable, it is estimated based on management judgment considering available data such as internal margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs.

For equipment sales, revenue recognition may depend on completion of installation based on the type of equipment, level of customer specific customization and other contractual terms. In instances in which the agreement with the customer contains a customer acceptance clause, revenue is deferred until customer acceptance is obtained, provided the customer acceptance clause is considered to be substantive.

At the time revenue is recognized, Kodak also records reductions to revenue for customer incentive programs such as volume rebates and promotional allowances.  For those incentives that require estimation, such as for volume rebates, Kodak uses historical experience and both internal and customer data to estimate the sales incentive at the time revenue is recognized.  In the event that the actual results of these items differ from the estimates, adjustments to the sales incentive accruals are recorded. Future market conditions and product transitions may require Kodak to increase customer incentive offers, possibly resulting in an incremental reduction of revenue at the time the incentive is offered.

Valuation and Useful Lives of Long-Lived Assets, Including Goodwill and Intangible Assets

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of the reporting unit below its’ carrying amount. As of December 31, 2022, goodwill is only recorded in the Brand and Software reporting units.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. Kodak estimates the fair value of its reporting units using the guideline public company method and discounted cash flow method. To estimate fair value utilizing the guideline public company method, Kodak applies valuation multiples, derived from the operating data of publicly-traded benchmark companies, to the same operating data of the reporting units. The valuation multiples are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). To estimate fair value utilizing the discounted cash flow method, Kodak establishes an estimate of future cash flows for each reporting unit and discounts those estimated future cash flows to present value. 

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Kodak performed a quantitative test of impairment for all reporting units for its annual goodwill impairment test as of December 31, 2022. Kodak utilized the discounted cash flow method and guideline public company method to estimate the fair value of reporting units with goodwill.

For these reporting units, Kodak selected equal weighting of the guideline public company method and the discounted cash flow method as the valuation approaches produced comparable ranges of fair value. Fair values for the reporting units without goodwill were estimated using the discounted cash flow method only.

To estimate fair value utilizing the discounted cash flow method, Kodak established an estimate of future cash flows for the period January 1, 2023 to December 31, 2027 and discounted the estimated future cash flows to present value. The expected cash flows were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. The discount rates are estimated based on an after-tax weighted average cost of capital (“WACC”) for each reporting unit reflecting the rate of return that would be expected by a market participant. The WACC also takes into consideration a company specific risk premium for each reporting unit reflecting the risk associated with the overall uncertainty of the financial projections. Discount rates of 16% to 35% were utilized in the valuation based on Kodak’s best estimates of the after-tax WACC of each reporting unit.

A terminal value was included for all reporting units at the end of the cash flow projection period to reflect the remaining value that the reporting unit is expected to generate. The terminal value was calculated using either the constant growth method (“CGM”) based on the cash flows of the final year of the discrete period or the H-model, which assumes the growth during the terminal period starts at a higher rate and declines in a linear manner over a specified transition period toward a stable growth rate.

Based upon the results of Kodak’s December 31, 2022 analysis, Kodak concluded that the fair value of the reporting units substantially exceeded their carrying values, therefore no impairment of goodwill was indicated. Impairment of goodwill could occur in the future if a reporting unit’s fair value changes significantly, if Kodak’s market capitalization significantly declines, if a reporting unit’s carrying value changes materially compared with changes in its fair values, or as a result of changes in operating segments or reporting units.

The carrying value of the indefinite-lived intangible asset related to the Kodak trade name is evaluated for potential impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Kodak performed its annual test of impairment for the Kodak trade name as of December 31, 2022. The fair value of the Kodak trade name was valued using the income approach, specifically the relief from royalty method based on the following significant assumptions: (a) forecasted revenues for the period January 1, 2023 to December 31, 2027, including a terminal year with growth rates ranging from -0.5% to 2.5%; (b) an after-tax royalty rate of 0.4% of expected net sales determined with regard to comparable market transactions and profitability analysis; and (c) discount rates ranging from 17% to 29%, which were based on the after-tax WACC.

Based on the results of Kodak’s December 31, 2022 annual impairment test, the carrying value of the Kodak trade name exceeded its fair value and Kodak recorded a pre-tax impairment charge of $1 million driven by lower forecasted revenues primarily associated with decision to cease manufacturing of the Electrophotographic Printing Solutions equipment products.  Impairment of the Kodak trade name could occur in the future if expected revenues decline or if there are significant changes in the discount rates or royalty rates. A one percent increase in the discount rate and a 10% miss in expected revenues would impact the fair value of the Kodak trade name by $2 million.

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Long-lived assets other than goodwill and indefinite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. When evaluating long-lived assets for impairment, the carrying value of an asset group is compared to its estimated undiscounted future cash flows.  An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset group.  The impairment is the excess of the carrying value over the fair value of the long-lived asset group. Kodak updated its estimate of undiscounted cash flows for each asset group as of December 31, 2022. Based on the results of the impairment tests, no impairments were recorded.

The value of property, plant, and equipment is depreciated over its expected useful life in such a way as to allocate it as equitably as possible to the periods during which services are obtained from their use, which aims to distribute the value over the remaining estimated useful life of the unit in a systematic and rational manner. An estimate of useful life not only considers the economic life of the asset, but also the remaining life of the asset to the entity. Impairment of long-lived assets other than goodwill and indefinite lived intangible assets could occur in the future if expected future cash flows decline or if there are significant changes in the estimated useful life of the assets.

Convertible Notes Embedded Conversion Features

The 2021 Convertible Notes are considered more akin to debt-type instruments. The economic characteristics and risks of the embedded conversion features in the 2021 Convertible Notes were not considered clearly and closely related to the 2021 Convertible Notes. Accordingly, these embedded features were bifurcated from the 2021 Convertible Notes and separately accounted for at fair value as a single derivative, which reduced the carrying value of the 2021 Convertible Notes. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other charges (income), net in the Consolidated Statement of Operations.

The fair value of the embedded conversion features derivative is calculated using unobservable inputs (Level 3 fair measurements). The binomial model is used to estimate the fair value of the embedded derivative which requires the input of highly subjective assumptions, including the expected volatility of Kodak’s common stock. If factors change and different assumptions are used, the fair value of the embedded derivative liability could be materially different in the future. Refer to Note 14, “Financial Instruments” for additional information regarding the key inputs in the determination of fair value for the embedded conversion features.

The table below summarizes the expected stock price volatility and the closing stock price used as of December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","2021 Convertible Notes"],["","","As of December 31,"],["","","2022","","","2021"],["Value of embedded derivative liability at December 31, 2022 (in millions)","","$","2","","","$","4"],["Expected stock price volatility as of December 31, 2022","","","50","%","","","36","%"],["Closing stock price as of December 31, 2022","","$","3.05","","","$","4.68"]]
[[/GREPCENT_TABLE]]

Taxes

Kodak recognizes deferred tax liabilities and assets for the expected future tax consequences of operating losses, credit carry-forwards and temporary differences between the carrying amounts and tax basis of Kodak’s assets and liabilities.

Kodak records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.  Kodak has considered forecasted earnings, future taxable income, the geographical mix of earnings in the jurisdictions in which Kodak operates and prudent and feasible tax planning strategies in determining the need for these valuation allowances.  As of December 31, 2022, Kodak has net deferred tax assets before valuation allowances of approximately $799 million and a valuation allowance related to those net deferred tax assets of approximately $826 million, resulting in net deferred tax liabilities of approximately $27 million.

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Kodak considers both positive and negative evidence, in determining whether a valuation allowance is needed by territory, including, but not limited to, whether particular entities are in three-year cumulative income positions. As of March 31, 2020, Kodak determined that it was more likely than not that deferred tax assets outside the U.S. which were not offset with valuation allowances as of March 31, 2020 would not be realized due to reductions in estimates of future profitability as a result of the COVID-19 pandemic in locations outside the U.S. Accordingly, Kodak recorded a provision of $167 million associated with the establishment of a valuation allowance on those deferred tax assets.

Kodak may be able to make the determination that the realization of deferred tax assets in certain foreign jurisdictions is more likely than not in the future. Kodak will continue to evaluate whether valuation allowances are needed, at a jurisdictional level, in future reporting periods.

It is possible that sufficient positive evidence, including sustained profitability, may become available in future periods with respect to one or more jurisdictions to reach a conclusion that all or part of the valuation allowance with respect to such jurisdictions could be reversed.

Utilization of net operating losses (“NOL”) and tax credits may be subject to limitations in the event of significant changes in stock ownership of the Company in the future. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses as defined under that Section, upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of five percent stockholders in Kodak’s stock by more than 50 percentage points over a three-year testing period. The Company has a relatively high concentration of stockholders that hold 5% or more of the outstanding stock. Future transactions, when combined with reported transactions within the testing period could aggregate an ownership change during the testing period in excess of 50 percentage points.

A Section 382 ownership change would significantly impair Kodak’s ability to utilize NOLs and tax credits in the U.S. As of December 31, 2022, Kodak had available U.S. NOL carry-forwards for income tax purposes of approximately $1,486 million and unused foreign tax credits of $358 million. Any impairment of these tax attributes would be fully offset by a corresponding decrease in Kodak’s U.S. valuation allowance, which would result in no net tax provision.

Kodak has deferred tax liabilities of $17 million and $20 million for potential taxes on undistributed earnings, primarily attributable to foreign withholding taxes, as of December 31, 2022 and 2021, respectively.

Kodak operates within multiple taxing jurisdictions worldwide and is subject to audit in these jurisdictions.  These audits can involve complex issues, which may require an extended period of time for resolution.  Management’s ongoing assessments of the outcomes of these issues and related tax positions require judgment, and although management believes that adequate provisions have been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of Kodak.  Conversely, if these issues are resolved favorably in the future, the related provisions would be reduced, thus having a positive impact on earnings.

Pension and Other Postretirement Benefits 

Kodak’s defined benefit pension and other postretirement benefit costs and obligations are estimated using several key assumptions.  The assumptions that have the most significant effect on the Company’s consolidated financial position and results of operations are the expected long-term rate of return on plan assets (“EROA”) and discount rates. Actual results that differ from Kodak’s assumptions are recorded as unrecognized gains and losses as a component of accumulated other comprehensive income in shareholders’ equity and are amortized to earnings over the estimated future service period of the active participants in the plan or, if the plan is almost entirely inactive, the average remaining lifetime expectancy of inactive participants, to the extent such total net unrecognized gains and losses exceed 10% of the greater of the plan's projected benefit obligation or the calculated value of plan assets.  Significant differences in actual experience or significant changes in future assumptions would affect Kodak’s pension and other postretirement benefit costs and obligations.

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Return on Plan Assets

EROA is a long-term assumption, which Kodak reviews annually. Kodak utilizes asset and liability modeling studies to adjust asset exposures to conform to its investment strategy, and to review its liability hedging program. These studies generate forward-looking estimates of correlation, risk and return which are used in the development of the EROA. The EROA is estimated utilizing a forward-looking building block model which factors in the expected risk of each asset category, return, and correlation over a five to seven-year horizon, and weighs the exposures by the strategic asset allocation.

Historical inputs are utilized in the forecasting model, including historical asset returns with adjustments based on the forward-looking view. Kodak aggregates investments into major asset categories based on the underlying benchmark of the strategy. Each allocation to these major asset categories is determined to accomplish unique objectives, including enhancing portfolio return, providing portfolio diversification, or hedging plan liabilities, in accordance with the overall investment strategy.

The EROA, once set, is applied to the calculated value of plan assets in the determination of the expected return component of Kodak’s pension expense.  Kodak uses a calculated value of plan assets, which recognizes gains and losses in the fair value of assets over a four-year period, to calculate expected return on assets.  

At December 31, 2022, the calculated value of the assets of Kodak’s major U.S. and non-U.S. defined benefit pension plans was approximately $4.1 billion and the fair value of the assets of Kodak’s major U.S. and non-U.S. defined benefit pension plans was approximately $4.2 billion.  Asset gains and losses that are not yet reflected in the calculated value of plan assets are not included in amortization of unrecognized gains and losses.

Kodak’s major U.S. defined benefit pension plan accounts for substantially all of Kodak’s net pension income and represents approximately 87% of the total fair value of major plan assets as of December 31, 2022. The following table presents actual and expected return on plan assets, as well as the corresponding percentages for Kodak’s major U.S. defined benefit pension plan:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["(in millions)"],["Actual return on plan assets","","$","(152",")","","$","716","","","$","495"],["Expected return on plan assets","","","178","","","","167","","","","196"],["Actual rate of return on plan assets","","","(6.1","%)","","","17.7","%","","","14.9","%"],["Expected rate of return on plan assets","","","5.3","%","","","5.2","%","","","6.0","%"]]
[[/GREPCENT_TABLE]]

The actual rate of return on Kodak’s major U.S. defined benefit pension plan for 2022 was (6.1%), lower than the expected rate of return of 5.3%, driven by lower than expected bond performance due to rising interest rates. For 2021 the actual rate of return exceeded the expected rate of return driven by higher returns for the U.S. Plan’s private equity and hedge fund portfolio. For 2020 the actual rate of return exceeded the expected rate of return driven by strong stock and bond market performance as well as realized gains recorded from derivative investments held by the U.S. Plan. The expected average rate of return on plan assets is a long-term, forward-looking assumption and will likely differ from the actual return in any specific year.

Gains or losses from direct investments in derivative instruments by Kodak’s major U.S defined benefit pension plan can be volatile from year to year and could materially affect the fair value of plan assets. The total net realized (losses) gains from these derivative investments that were included in the actual return on plan assets balance in the table above for the years ending December 31, 2022, 2021 and 2020 were approximately ($128) million, $(23) million and $159 million, respectively. Refer to the Derivative Instruments discussion below for additional information.

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Approximately $2.6 billion and $3.4 billion of the total fair value of Kodak’s major U.S. defined pension plan as of December 31, 2022 and 2021, respectively, represents plan assets where the fair market value is not readily determinable and are measured using the net asset value (“NAV”) per share expedient. Except for investments in private equity funds and real estate funds, the remaining investments have redemption rights and can be, and historically have been, redeemed by the U.S. Plan at NAV. For private equity funds and real estate funds, the investors do not have an option to redeem their interest in these funds but rather receive distributions from time to time through the liquidation of the underlying investments in the funds. Secondary sales of a material portion of the investments in these funds are infrequent and historically, immaterial portions of these funds were sold for values not significantly different from NAV.

Discount Rates:

Generally, Kodak bases the discount rate assumption for its significant plans on high quality corporate bond yields in the respective countries as of the measurement date.  Specifically, for its U.S., Canadian, Euro-zone and UK plans, Kodak determines a discount rate using a cash flow model to incorporate the expected timing of benefit payments and an AA-rated corporate bond yield curve.  For Kodak’s U.S. Plan, the Citigroup Above Median Pension Discount Curve is used.  For Kodak’s non-U.S. plans, discount rates are determined by comparison to published local high-quality bond yields or indices considering estimated plan duration and removing any outlying bonds, as warranted.

Changes in discount rates for Kodak’s major U.S. defined benefit plan has the most significant effect on the total projected benefit obligations for Kodak.

The table below shows the discount rates for Kodak’s major U.S. pension plan for the years shown:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["","","2022","","","2021","","","2020"],["Discount Rates - Projected Benefit Obligation:"],["U.S. Plan","","","5.13","%","","","2.54","%","","","2.09","%"]]
[[/GREPCENT_TABLE]]

As discount rates reflect the market rate on the measurement date, the rates can be volatile from year to year. The increase in the discount rate for Kodak’s major U.S. defined benefit pension plan from December 31, 2021 to December 31, 2022 resulted in a decrease in the projected benefit obligation of approximately $582 million at December 31, 2022. The increase in the discount rate for the U.S. Plan from December 31, 2020 to December 31, 2021 resulted in a decrease in the projected benefit obligation of approximately $105 million at December 31, 2021.

Sensitivity Analysis:

The following table illustrates the sensitivity to a change to certain key assumptions used in the calculation of expense for the year ending December 31, 2023 and the projected benefit obligation (“PBO”) at December 31, 2022 for Kodak's major U.S. and non-U.S. defined benefit pension plans:

[[GREPCENT_TABLE]]
[["","","Impact on 2023","","","Impact on PBO"],["","","Pre-Tax Pension Expense","","","December 31, 2022"],["(in millions)","","Increase (Decrease)","","","Increase (Decrease)"],["","","U.S.","","","Non-U.S.","","","U.S.","","","Non-U.S."],["Change in assumption:"],["25 basis point decrease in discount rate","","$","6","","","$","\u2014","","","$","46","","","$","12"],["25 basis point increase in discount rate","","","(6",")","","","\u2014","","","","(44",")","","","(12",")"],["25 basis point decrease in EROA","","","9","","","","1","","","","N/A","","","","N/A"],["25 basis point increase in EROA","","","(9",")","","","(1",")","","","N/A","","","","N/A"]]
[[/GREPCENT_TABLE]]

Total pension income from continuing operations before special termination benefits, curtailments and settlements for the major U.S. defined benefit pension plan was $88 million for 2022 and is expected to be approximately $148 million in 2023. The increase in pension income for 2023 is driven by an anticipated higher expected rate of return on plan assets than experienced in 2022. Pension expense from continuing operations before special termination benefits, curtailments and settlements for the major non-U.S. defined benefit pension plans was $8 million for 2022 and is projected to be $3 million in 2023.

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Derivative Instruments:

Kodak’s major U.S. defined benefit plan utilizes derivative investments primarily to hedge liability interest rate risk to U.S. government bonds. Kodak’s major U.S. defined benefit pension plan’s derivative portfolio consists of exchange traded futures contracts. As of December 31, 2022 and 2021 the notional amount of these derivative instruments approximated $389 million and $1.0 billion, respectively. Daily variation margin payments are made to or received from the counterparty for changes in the market value of futures contracts and are recorded as realized gains and losses in the Gain on Plan Assets balance. As these futures contracts have short-term maturities, the fair value of these derivative instruments at December 31, 2022 and 2021 was $0 million and $10 million, respectively, which represents the unrealized gains and losses on these contracts. Refer to Note 20, “Retirement Plans” in the Notes to Financial Statements for additional information.

An increase in interest rates is the primary factor that could precipitate material losses in the U.S. Plan’s existing derivatives portfolio. A 25-basis point increase in interest rates would cause a loss from the government bond derivatives of approximately $7 million. However, as illustrated in the above table, a 25-basis point increase in the discount rate used to measure the PBO of the U.S. Plan would cause a $44 million decrease in the PBO. Accordingly, while an increase in interest rates would expose the U.S. Plan’s derivative investments to losses, it would also likely result in an offsetting decrease the U.S. Plan’s PBO.

Kodak’s major U.S. defined benefit plan invests in a diversified portfolio of hedge funds that utilize a variety of investment strategies. The total net asset value of these hedge funds was approximately $1.5 billion and $1.8 billion as of December 31, 2022 and 2021 respectively. Separate from the U.S. Plan’s direct investments in exchange traded futures contracts, hedge funds may utilize derivative instruments to execute their investment strategy.

Any gains or losses, as well as changes in the fair value of derivative investments held by the hedge fund, are included in the hedge fund’s net asset value. Losses could occur in the future from hedge fund investments which may result in part from the use of derivative investments by the hedge funds. However, the maximum potential loss on any individual fund would be limited to the U.S. Plan’s investment in that fund.

Workers’ Compensation

The estimated liability for workers’ compensation is based on actuarially estimated discounted cost of claims, including claims incurred but not reported. Historical loss development factors are utilized to project the future development of incurred losses, and the amounts are adjusted based on actual claim experience, settlements, claim development trends, changes in state regulations and judicial interpretations.

Changes in discount rates is the primary driver for changes in workers’ compensation reserves. Kodak decreased workers’ compensation reserves by approximately $13 million and $4 million in 2022 and 2021, respectively, driven by changes in discount rates. A 25 basis-point change in the discount rate would have had a $1 million impact on the expense and net liability as of December 31, 2022.

Stock Compensation

Kodak recorded stock compensation expense of $5 million, $7 million and $15 million for the years ended December 31, 2022, 2021 and 2020, respectively. Compensation expense is recognized over the service or performance period for each separately vesting tranche of the award and is adjusted for actual forfeitures before vesting.

Compensation cost related to restricted stock units and restricted stock awards was $4 million, $5 million and $1 million for the years ended December 31, 2022, 2021 and 2020, respectively. The fair value of restricted stock units and restricted stock awards is based on the closing market price of the Company’s stock on the grant date. Changes in the fair value of restricted stock units and restricted stock awards is driven by the volatility of the Company’s stock price and the number of awards issued.

Compensation cost related to stock options for the years ended December 31, 2022, 2021 and 2020 was $1 million, $2 million and $14 million, respectively. Except for the awards granted on July 27, 2020, which resulted in approximately $12.6 million of compensation expense being recognized in the year ended December 31, 2020, Kodak utilizes the Black-Scholes option valuation model to estimate the fair value of stock options. Changes in the fair value of stock options is primarily driven by the volatility of the Company’s stock price.

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Inventories

Inventories are stated at the lower of average cost or net realizable value. Judgment is required to assess the ultimate demand for and realizable value of inventory. The analysis of inventory carrying values considers several factors including length of time inventory is on hand, historical sales, product shelf life, product life cycle, product category, and product obsolescence.

New Accounting Pronouncements

A description of new accounting pronouncements is contained in Note 1, “Summary of Significant Accounting Policies”.