Quarterly Report


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
__________
_
FORM 10-Q
______
 
[X]
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2015
 
or
 
[   ]
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
Commission File Number 1-87
 
__________
 
EASTMAN KODAK COMPANY
(Exact name of registrant as specified in its charter)
 
__________
 
   
NEW JERSEY
16-0417150
(State of incorporation)
(IRS Employer Identification No.)
   
343 STATE STREET, ROCHESTER, NEW YORK
14650
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: 585-724-4000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.    Yes [X]    No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months.    Yes [X]     No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company . See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[  ]
Accelerated filer
[X]
Non-accelerated filer
[  ]
Smaller reporting company
[  ]
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Title of each Class
 
Number of Shares Outstanding at
Oc tob er 15, 2015
 
Common Stock, $0.01 par value
41,990,867

 

 
1
 
 

EASTMAN KODAK COMPANY
Form 10-Q
 
September 30, 2015
 
Table of Contents
 
     
   
Page
 
Part I.—Financial Information
 
     
Item 1.
Financial Statements
3
 
Consolidated Statement of Operations (Unaudited)
3
 
Consolidated Statement of Comprehensive (Loss) Income (Unaudited)
4
 
Consolidated Statement of Financial Position (Unaudited)
5
 
Consolidated Statement of Cash Flows (Unaudited)
6
 
Notes to Financial Statements (Unaudited)
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
26
 
Liquidity and Capital Resources
38
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
40
Item 4.
Controls and Procedures
40
 
Part II.—Other Information
     
Item 1.
Legal Proceedings
41
Item 2.
Unregistered Sales of Securities and Use of Proceeds
41
Item 5.
Other Information
42
Item 6.
Exhibits
42
     
 
Signature
43
 
Index to Exhibits
44
 
 

 
 
2

 

 
 
Part I. FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
 
(in millons, except per share data)
 

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
                    
 
2015
   
2014
   
2015
   
2014
 
Revenues
                       
Sales
  $ 357     $ 475     $ 1,066     $ 1,300  
Services
    89       93       265       284  
Total revenues
    446       568       1,331       1,584  
Cost of revenues
                               
Sales
    287       343       880       1,021  
Services
    60       69       189       216  
Total cost of revenues
    347       412       1,069       1,237  
   Gross profit
    99       156       262       347  
Selling, general and administrative expenses
    59       67       179       239  
Research and development costs
    15       20       50       73  
Restructuring costs and other
    6       9       29       42  
Other operating (income) expense, net
    (2 )     2       -       2  
Income (loss) from continuing operations before interest expense, other charges, net, reorganization items, net and income taxes
    21       58       4       (9 )
Interest expense
    16       15       46       47  
Other charges, net
    (3 )     (1 )     (15 )     (4 )
Reorganization items, net
    -       1       5       11  
Income (loss) from continuing operations before income taxes
    2       41       (62 )     (71 )
Provision for income taxes
    15       10       28       11  
(Loss) income from continuing operations
    (13 )     31       (90 )     (82 )
(Loss) earnings from discontinued operations, net of income taxes
    (8 )     (12 )     (8 )     5  
Net (loss) income
    (21 )     19       (98 )     (77 )
  Less: Net income attributable to noncontrolling interests
    1       2       6       4  
NET (LOSS) INCOME ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (22 )   $ 17     $ (104 )   $ (81 )
                                 
Basic net (loss) earnings per share attributable to Eastman Kodak Company common shareholders:
                               
  Continuing operations
  $ (0.34 )   $ 0.70     $ (2.29 )   $ (2.06 )
  Discontinued operations
    (0.19 )     (0.29 )     (0.19 )     0.12  
  Total
  $ (0.53 )   $ 0.41     $ (2.48 )   $ (1.94 )
                                 
Diluted net (loss) earnings per share attributable to Eastman
  Kodak Company common shareholders:
                               
  Continuing operations
  $ (0.34 )   $ 0.67     $ (2.29 )   $ (2.06 )
  Discontinued operations
    (0.19 )     (0.28 )     (0.19 )     0.12  
  Total
  $ (0.53 )   $ 0.39     $ (2.48 )   $ (1.94 )
Number of common shares used in basic and diluted net (loss) earnings per share
                               
Basic
    41.9       41.8       41.9       41.7  
Diluted
    41.9       43.3       41.9       41.7  

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

 
3

 

EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS (Unaudited)
 
(in millions)
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
NET (LOSS) INCOME
  $ (21 )   $ 19     $ (98 )   $ (77 )
Less: Net income attributable to noncontrolling interests
    1       2       6       4  
Net (loss) income attributable to Eastman Kodak Company
    (22 )     17       (104 )     (81 )
                                 
Other comprehensive loss, net of tax:
                               
Currency translation adjustments
    (23 )     (17 )     (27 )     (10 )
Unrealized losses on available-for-sale securities, net of tax
    -       (1 )     (1 )     -  
Pension and other postretirement benefit plan obligation activity, net of tax
    (3 )     (20 )     2       (35 )
Other comprehensive loss, net of tax attributable to Eastman Kodak Company
    (26 )     (38 )     (26 )     (45 )
COMPREHENSIVE LOSS, NET OF TAX ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (48 )   $ (21 )   $ (130 )   $ (126 )
                                 

The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
4

 

EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)
 
(in millions)
   
As of
September 30,
2015
   
As of
December 31,
2014
 
ASSETS
           
Cash and cash equivalents
  $ 521     $ 712  
Receivables, net
    376       414  
Inventories, net
    375       349  
Deferred income taxes
    21       31  
Assets held for sale
    -       14  
Other current assets
    32       30  
Total current assets
    1,325       1,550  
Property, plant and equipment, net of accumulated depreciation of $ 314 and $231, respectively
    433       524  
Goodwill
    90       96  
Intangible assets, net of accumulated amortization of $52 and $33, respectively
    164       182  
Restricted cash
    38       37  
Deferred income taxes
    29       38  
Other long-term assets
    121       129  
TOTAL ASSETS
  $ 2,200     $ 2,556  
                 
LIABILITIES AND EQUITY
               
Liabilities
               
Accounts payable, trade
  $ 186     $ 212  
Current portion of long-term debt
    4       5  
Liabilities held for sale
    -       10  
Other current liabilities
    312       372  
Total current liabilities
    502       599  
Long-term debt, net of current portion
    670       672  
Pension and other postretirement liabilities
    556       662  
Other long-term liabilities
    290       324  
Total liabilities
    2,018       2,257  
                 
Commitments and Contingencies (Note 5)
           
             
Equity
           
Common stock, $0.01 par value
    -       -  
Additional paid in capital
    629       621  
Treasury stock, at cost
    (5 )     (4 )
Accumulated deficit
    (307 )     (204 )
Accumulated other comprehensive loss
    (162 )     (136 )
Total Eastman Kodak Company shareholders’ equity
    155       277  
Noncontrolling interests
    27       22  
  Total equity
    182       299  
 TOTAL LIABILITIES AND EQUITY
  $ 2,200     $ 2,556  
                 

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

 
5

 

EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
 
(in millions)
   
Nine Months Ended
September 30,
 
   
2015
   
2014
 
Cash flows from operating activities:
           
Net loss
  $ (98 )   $ (77 )
Adjustments to reconcile to net cash used in operating activities:
               
Depreciation and amortization
    113       161  
Pension and other postretirement income
    (81 )     (68 )
Net gain on sales of businesses/assets
    (4 )     (22 )
Gain on assets acquired for no monetary consideration
    (3 )     -  
Non-cash restructuring costs, asset impairments and other charges
    7       2  
Stock based compensation
    17       6  
Payment of claims
    (10 )     (2 )
Non-cash reorganizations items, net
    -       (7 )
Provision (benefit) for deferred income taxes
    8       (11 )
Decrease in receivables
    12       150  
Increase in inventories
    (40 )     (50 )
Decrease in liabilities excluding borrowings
    (65 )     (227 )
Other items, net
    1       9  
Total adjustments
    (45 )     (59 )
Net cash used in operating activities
    (143 )     (136 )
Cash flows from investing activities:
               
Additions to properties
    (25 )     (22 )
Net proceeds from sales of businesses/assets, net
    2       16  
(Funding) use of restricted cash
    (6 )     62  
Marketable securities - purchases
    -       (2 )
Net cash (used in) provided by investing activities
    (29 )     54  
Cash flows from financing activities:
               
Repayment of emergence credit facilities
    (3 )     (3 )
Equity transactions of noncontrolling interests
    -       (3 )
Net repayment of VIE credit facility
    (1 )     -  
Treasury stock purchases
    (1 )     -  
Net cash used in financing activities
    (5 )     (6 )
Effect of exchange rate changes on cash
    (14 )     (12 )
Net decrease in cash and cash equivalents
    (191 )     (100 )
Cash and cash equivalents, beginning of period
    712       844  
Cash and cash equivalents, end of period
  $ 521     $ 744  
                 

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

 
6

 

EASTMAN KODAK COMPANY
NOTES TO FINANCIAL STATEMENTS (Unaudited)
 
NOTE 1: BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS
 
BASIS OF PRESENTATION

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results of operations, financial position and cash flows of Eastman Kodak Company (“EKC” or the “Company”) and all companies directly or indirectly controlled, either through majority ownership or otherwise (collectively, “Kodak”). The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. These consolidated interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Kodak is the primary beneficiary of a utilities variable interest entity, RED – Rochester, LLC (“RED”). Therefore, Kodak consolidates RED’s assets, liabilities and results of operations.  Consolidated assets and liabilities of RED are $71 million and $9 million, respectively, as of September 30, 2015 and $77 million and $11 million, respectively, as of December 31, 2014.  RED’s equity in those net assets as of September 30, 2015 and December 31, 2014 is $27 million and $21 million, respectively.  RED’s results of operations are reflected in net income attributable to noncontrolling interest in the accompanying Consolidated Statement of Operations.

Reclassifications
Certain amounts for prior periods have been reclassified to conform to the current period classification due to Kodak’s new organization structure as of January 1, 2015 and for a change in the segment measure of profitability.  Refer to Note 14, “Segment Information” for more information about these changes.  In addition to the changes in segment reporting under the new organization structure, tenant rental income for Eastman Business Park previously reported in Cost of Revenues is now reported in Revenues.

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In April 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360).”  ASU 2014-08 defines a discontinued operation as a disposal of a component (or group of components) of an entity that was disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.  ASU 2014-08 expands the disclosures when an entity retains a significant continuing involvement with a discontinued operation as well as for disposals of individually material components that do not qualify as discontinued operations.  The amendments in the update were effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2014 (January 1, 2015 for Kodak) to new disposals and new disposal groups classified as held for sale after the effective date. The adoption of this guidance did not have a material impact on Kodak’s Consolidated Financial Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2015, the FASB issued ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 (January 1, 2016 for Kodak) with retrospective application to all periods presented. Early application is permitted. The adoption of this guidance requires changes in presentation only and will not have an impact on Kodak’s Consolidated Financial Statements.

In April 2015, the FASB issued ASU 2015-03, Imputation of Interest (Sub-Topic 835.30):  Simplifying the Presentation of Debt Issuance Costs.  ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15 clarifying the application of this guidance to line of credit arrangements.  The amendments in the ASUs are effective retrospectively for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for Kodak). Early adoption is permitted for financial statements not previously issued.  Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

 
7

 

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”. The amendments in ASU 2015-02 change the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 (January 1, 2016 for Kodak). Early adoption is permitted, including adoption in an interim period. A reporting entity may apply the amendments in this ASU either retrospectively or use a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. Kodak does not expect the adoption of this guidance to have a material impact on its Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).”  ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition” and most industry-specific guidance.  The core principle of ASU 2014-09 is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.  In July 2015, the FASB deferred the effective date of ASU 2014-09.  The new revenue standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017 (January 1, 2018 for Kodak) and allows either a full retrospective adoption to all periods presented or a modified retrospective adoption approach with the cumulative effect of initial application of the revised guidance recognized at the date of initial application.  Kodak is currently evaluating the adoption alternatives and impact of this ASU.

NOTE 2: RECEIVABLES, NET

   
As of
 
 (in millions)                                                        
 
September 30,
2015
   
December 31,
2014
 
Trade receivables
  $ 320     $ 361  
Miscellaneous receivables
    56       53  
Total (net of allowances of $11 as of September 30, 2015 and December 31, 2014).
  $ 376     $ 414  
 
               

Approximately $26 million and $31 million of the total trade receivable amounts as of September 30, 2015 and December 31, 2014, respectively, will potentially be settled through customer deductions in lieu of cash payments. Such deductions represent rebates owed to customers and are included in Other current liabilities in the accompanying Consolidated Statement of Financial Position.
 
NOTE 3: INVENTORIES, NET

 
As of
 
(in millions)
September 30,
2015
   
December 31,
2014
 
Finished goods
$ 223     $ 204  
Work in process
  74       73  
Raw materials
  78       72  
           Total
$ 375     $ 349  
               

 
 
8

 
NOTE 4: GOODWILL

The following table presents the changes in the carrying value of goodwill by reportable segment.  The Enterprise Inkjet Systems and Eastman Business Park segments do not have goodwill and are therefore not presented.

(in millions)
 
Print Systems
   
Micro 3D Printing and Packaging
   
Software and Solutions
   
Consumer and Film
   
Intellectual Property Solutions
   
Total
 
                                     
Balance as of January 1, 2015:
  $ 56     $ 26     $ 6     $ 6     $ 2     $ 96  
Impairment
    -       (6 )     -       -       -       (6 )
Balance as of September 30, 2015:
  $ 56     $ 20     $ 6     $ 6     $ 2     $ 90  
                                                 
 
As a result of the change in segments that became effective as of January 1, 2015, Kodak’s goodwill reporting units changed. Refer to Note 14, “Segment Information” for additional information on the change to Kodak’s organizational structure.  The Print Systems segment has two goodwill reporting units: Prepress Solutions and Electrophotographic Printing Solutions. The Micro 3D Printing and Packaging segment has two goodwill reporting units: Packaging and Functional Printing.  The Software and Solutions segment has two goodwill reporting units: Kodak Technology Solutions and Unified Workflow Solutions.  The Consumer and Film segment has three goodwill reporting units: Consumer Inkjet Solutions, Entertainment Imaging and Commercial Films and Brand Licensing.  The Enterprise Inkjet Systems segment has two goodwill reporting units:  Commercial Inkjet Printing Solutions and Digital Front-End Controllers.  The Intellectual Property Solutions segment and the Eastman Business Park segment each have one goodwill reporting unit.

As of December 31, 2014, the goodwill balance of $96 million under the prior year segment reporting structure was comprised of $67 million for the Graphics, Entertainment and Commercial Films segment and $29 million for the Digital Printing and Enterprise segment. The goodwill in the Graphics, Entertainment and Commercial Films segment was reported in the Graphics and Intellectual Property and Brand Licensing reporting units.  The goodwill in the Digital Printing and Enterprise segment was reported in the Packaging and Functional Printing and Consumer Inkjet Systems reporting units.

Goodwill previously reported in the Graphics goodwill reporting unit was transferred to the Prepress Solutions goodwill reporting unit and the Unified Workflow Solutions goodwill reporting unit.  The goodwill previously reported in the Packaging and Functional Printing goodwill reporting unit was transferred to the Packaging goodwill reporting unit and the Functional Printing goodwill reporting unit. The goodwill previously reported in the Intellectual Property and Brand Licensing goodwill reporting unit was transferred to the Intellectual Property Solutions goodwill reporting unit and the Brand Licensing goodwill reporting unit. Goodwill was reassigned to affected reporting units using a relative fair value allocation.

Due to the change in Kodak’s reporting units and the delay in commercializing new technologies in the Functional Printing reporting unit, Kodak concluded that the carrying value of the Functional Printing reporting unit exceeded its implied fair value.  The fair value of the Functional Printing reporting unit was estimated using the discounted cash flow method in which the future cash flows, including a terminal value at the end of the projection period, were discounted to present value.  Kodak recorded a pre-tax impairment charge of $6 million in the first quarter of 2015 that is included in Other operating (income) expense, net in the Consolidated Statement of Operations representing the entire amount of goodwill for this reporting unit.

 
9

 
 
NOTE 5: COMMITMENTS AND CONTINGENCIES
 
Environmental
 
The Company provided an indemnity as part of the 1994 sale of Sterling Corporation (now “STWB”), which covered a number of environmental sites including the Lower Passaic River Study Area (“LPRSA”) portion of the Diamond Alkali Superfund Site.  STWB, now owned by Bayer Corporation, is a potentially responsible party at the LPRSA site based on alleged releases from facilities formerly owned by subsidiaries of Sterling. On February 29, 2012, the Company notified STWB and Bayer that, under the voluntary petition for bankruptcy by the Company and its U.S. subsidiaries, it elected to discontinue funding and participation in remedial investigations of the LPRSA. STWB and its parent, Bayer, filed proofs of claim against the Company and its U.S. subsidiaries.  These claims have been discharged pursuant to the First Amended Joint Chapter 11 Plan of Reorganization.  Environmental matters at three sites owned by the Company and one site for which the Company was not the owner but was responsible for the remediation were not resolved by the discharge.  On March 17, 2015, the Company entered into an agreement with STWB related to these four sites.  The agreement calls for the Company to retain ownership and environmental responsibility of one of the sites.  Ownership and environmental responsibility for one site and environmental responsibility for the unowned site transferred to STWB in the second quarter of 2015. Ownership of the remaining site is expected to pass to an unrelated party by 2018 at which point the Company’s environmental responsibility will pass to STWB.  If the ownership for the fourth site does not transfer to that unrelated party prior to January 1, 2020, the Company and STWB will share approximately equally in the ongoing costs of the site.  As a result of this agreement, the Company reduced its environmental liabilities by approximately $5 million and recognized a gain in the first quarter of 2015 of the same amount.

Other Commitments and Contingencies
 
As of September 30, 2015, the Company had outstanding letters of credit of $118 million issued under the Asset Based Revolving Credit Agreement (the “ABL Credit Agreement”), as well as bank guarantees and letters of credit of $5 million, surety bonds in the amount of $18 million, and restricted cash and deposits of $53 million, primarily to ensure the payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies, rental payments and to support various customs, tax and trade activities. The restricted cash and deposits are reflected in Restricted cash, Other current assets and Other long-term assets in the Consolidated Statement of Financial Position.

Kodak’s Brazilian operations are involved in various litigation matters and have received or been the subject of numerous governmental assessments related to indirect and other taxes in various stages of litigation, as well as civil litigation and disputes associated with former employees and contract labor.  The tax matters, which comprise the majority of the litigation matters, are primarily related to federal and state value-added taxes.  Kodak is disputing these matters and intends to vigorously defend its position. Kodak routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable. As of September 30, 2015, the unreserved portion of these contingencies, inclusive of any related interest and penalties, for which there was at least a reasonable possibility that a loss may be incurred, amounted to approximately $43 million.

In connection with assessments in Brazil, local regulations may require Kodak to post security for a portion of the amounts in dispute. As of September 30, 2015, Kodak has posted security composed of $5 million of pledged cash reported within Restricted cash in the Consolidated Statement of Financial Position and liens on certain Brazilian assets with a net book value of approximately $58 million.  Generally, any encumbrances on the Brazilian assets would be removed to the extent the matter is resolved in Kodak's favor.

Kodak is involved in various lawsuits, claims, investigations, remediation and proceedings, including commercial, customs, employment, environmental, and health and safety matters, which are being handled and defended in the ordinary course of business.  Kodak is also subject, from time to time, to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of Kodak’s products.  These matters are in various stages of investigation and litigation, and are being vigorously defended.   Based on information currently available, Kodak does not believe that it is probable that the outcomes in any of these matters, individually or collectively, will have a material adverse effect on its financial position or results of operations. Litigation is inherently unpredictable, and judgments could be rendered or settlements entered that could adversely affect Kodak’s operating results or cash flows in a particular period.  Kodak routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.

 
10

 

NOTE 6: GUARANTEES
 
EKC guarantees obligations to third parties for some of its consolidated subsidiaries. The maximum amount guaranteed is $19 million and the outstanding amount for those guarantees is $7 million.

In connection with the settlement of certain of the Company’s historical environmental liabilities at Eastman Business Park, in the event the historical liabilities exceed $99 million, the Company will become liable for 50% of the portion above $99 million with no limitation to the maximum potential future payments.  There is no liability recorded for this guarantee.

Warranty Costs

Kodak has warranty obligations in connection with the sale of its products and equipment. The original warranty period is generally three months or less.  In limited cases it may be longer but never exceeding one year.  The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale. Kodak estimates its warranty cost at the point of sale for a given product based on historical failure rates and related costs to repair.
 
The change in Kodak’s accrued warranty obligations balance, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:
 
(in millions)
 
Accrued warranty obligations as of December 31, 2014
  $ 5  
Actual warranty experience during 2015
    (6 )
2015 warranty provisions
    5  
Accrued warranty obligations as of September 30, 2015
  $ 4  
         

Kodak also offers its customers extended warranty arrangements that are generally one year, but may range from three months to five years after the original warranty period. Kodak provides repair services and routine maintenance under these arrangements. Kodak has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so. Therefore, these revenues and costs have been aggregated in the discussion that follows. The change in Kodak’s deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2014 to September 30, 2015, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:

(in millions)
Deferred revenue on extended warranties as of December 31, 2014
  $ 27  
New extended warranty and maintenance arrangements in 2015
    140  
Recognition of extended warranty and maintenance arrangement revenue in 2015
    (141 )
Deferred revenue on extended warranties as of September 30, 2015
  $ 26  
         

 
 
11

 
 
  NOTE 7: INCOME TAXES
 
Kodak’s income tax provision and effective tax rate were as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in millions)
 
2015
   
2014
   
2015
   
2014
 
Earnings (loss) from continuing operations before income taxes
  $ 2     $ 41     $ (62 )   $ (71 )
Effective tax rate
    750.0 %     24.4 %     (45.2 )%     (15.5 )%
Provision for income taxes
    15       10       28       11  
Provision (benefit) for income taxes @ 35%
    1       14       (22 )     (25 )
Difference between tax at effective vs. statutory rate
  $ 14     $ (4 )   $ 50     $ 36  
                                 

The  difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35.0% for the three month period ended September 30, 2015 is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) the mix of earnings from operations in certain lower-taxed jurisdictions outside the U.S., and (3) a provision associated with foreign withholding taxes on undistributed earnings.

The  difference between the Company’s recorded provision and the benefit that would result from applying the U.S. statutory rate of 35.0% for the nine month period ended September 30, 2015 is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) the mix of earnings from operations  in certain lower-taxed jurisdictions outside the U.S., (3) a provision associated with foreign withholding taxes on undistributed earnings.

For the three months ended September 30, 2014, the difference between the Company’s recorded provision and the provision that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) income generated within the U.S. for which no provision was recognized, offset by losses in certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a benefit associated with foreign withholding taxes on undistributed earnings, and (3) changes in audit reserves.
 
For the nine months ended September 30, 2014, the difference between the Company’s recorded provision and the benefit that would result from applying the U.S. statutory rate of 35.0% is primarily attributable to: (1) losses generated within the U.S. and certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized, (2) a benefit as a result of Kodak reaching a settlement with a taxing authority in a location outside the U.S. related to withholding taxes, (3) a benefit associated with foreign withholding taxes on undistributed earnings, and (4) changes in audit reserves.

 
12

 
NOTE 8: RESTRUCTURING LIABILITIES
 
Charges for restructuring activities are recorded in the period in which Kodak commits to a formalized restructuring plan, or executes the specific actions contemplated by the plan, and all criteria for liability recognition under the applicable accounting guidance have been met. Restructuring actions taken in the first nine months of 2015 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included continued progress toward the Leeds plate manufacturing facility exit, as well as various targeted reductions in service, sales, research and development and other administrative functions.

Leeds Plate Manufacturing Facility Exit

On March 3, 2014, Kodak announced a plan to exit its prepress plate manufacturing facility located in Leeds, England.  This decision was pursuant to Kodak’s initiative to consolidate manufacturing operations globally, and is expected to result in a more efficient delivery of its products and solutions.  Kodak began the exit of the facility in the second quarter of 2014, phased out production at the site through the third quarter of 2015, and expects to complete the exit of the facility by the second quarter of 2016.

As a result of the decision, Kodak currently expects to incur total charges of $20 to $30 million, including approximately $10 million of charges related to separation benefits, $10 to $15 million of non-cash related charges for accelerated depreciation and asset write-offs and $2 to $5 million in other cash related charges associated with this action.
 
Kodak incurred severance charges of $1 million and $7 million and accelerated depreciation charges of $1 million and $6 million in the three and nine months ended September 30, 2015, respectively, and other exit costs of $1 million in both the three and nine months ended September 30, 2015 under this program.

On a cumulative basis as of September 30, 2015, Kodak has recorded severance charges of $10 million, long-lived asset impairment charges of $2 million, accelerated depreciation charges of $8 million, and other exit costs of $1 million.

Restructuring Reserve Activity

The activity in the accrued balances and the non-cash charges and credits incurred in relation to restructuring activities for the three and nine months ended September 30, 2015 were as follows:

(in millions)
 
Severance Reserve (1)
   
Exit
Costs
Reserve (1)
   
Long-lived Asset Impairments and Inventory
Write-downs (1)
   
Accelerated Depreciation (1)
   
Total
 
Balance as of December 31, 2014
  $ 22     $ 5     $ -     $ -     $ 27  
                                         
Q1 2015 charges
    16       1       -       3       20  
Q1 utilization/cash payments
    (10 )     (1 )     -       (3 )     (14 )
Q1 2015 other adjustments & reclasses   (2)
    (6 )     -       -       -       (6 )
Balance as of March 31, 2015
  $ 22     $ 5     $ -     $ -     $ 27  
                                         
Q2 2015 charges
  $ 5     $ 1     $ -     $ 2     $ 8  
Q2 utilization/cash payments
    (10 )     (1 )     -       (2 )     (13 )
Q2 2015 other adjustments & reclasses   (3)
    (1 )     -       -       -       (1 )
Balance as of June 30, 2015
  $ 16     $ 5     $ -     $ -     $ 21  
                                         
Q3 2015 charges
  $ 4     $ 1     $ 1     $ 1     $ 7  
Q3 utilization/cash payments
    (5 )     (2 )     (1 )     (1 )     (9 )
Q3 2015 other adjustments & reclasses (4)
    (1 )     -       -       -       (1 )
Balance as of September 30, 2015
  $ 14     $ 4     $ -     $ -     $ 18  
                                         

(1)   
The severance and exit costs reserves require the outlay of cash, while long-lived asset impairments, accelerated depreciation and inventory write-downs represent non-cash items.

(2)   
The $(6) million includes $(4) million of severance related charges for pension plan special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position, and $(2) million of foreign currency translation adjustments.

(3)   
The $(1) million represents severance related charges for pension plan special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.
 
   (4)   The $(1) million represents severance related charges for pension plan special termination benefits, which are reflected in Pension and other postretirement liabilities in the Consolidated Statement of Financial Position.
 
 
13

 

For the three months ended September 30, 2015, the $7 million of charges includes $1 million of charges for accelerated depreciation which were reported in Cost of revenues in the accompanying Consolidated Statement of Operations. The remaining $6 million was reported as Restructuring costs and other.

The severance costs for the three months ended September 30, 2015 related to the elimination of approximately 25 positions, primarily administrative positions in the United States and Canada.

For the nine months ended September 30, 2015, the $35 million of charges includes $6 million of charges for accelerated depreciation which were reported in Cost of revenues in the accompanying Consolidated Statement of Operations. The remaining $29 million was reported as Restructuring costs and other.

The severance costs for the nine months ended September 30, 2015 related to the elimination of approximately 425 positions, including approximately 200 manufacturing/ service positions, 50 research and development positions and 175 administrative positions. The geographic composition of these positions includes approximately 150 in the United States and Canada and 275 throughout the rest of the world.

As a result of these initiatives, the majority of the severance will be paid during periods through the end of 2015. However, in some instances, the employees whose positions were eliminated can elect or are required to receive their payments over an extended period of time. In addition, certain exit costs, such as long-term lease payments, will be paid over periods throughout the remainder of 2015 and beyond.

 
 
14

 

NOTE 9: RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
 
Components of the net periodic benefit cost for all major U.S. and Non-U.S. defined benefit plans are as follows:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in millions)
 
2015
   
2014
   
2015
   
2014
 
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
 
Major defined benefit plans:
                                               
  Service cost
  $ 4     $ 1     $ 4     $ 1     $ 12     $ 3     $ 13     $ 4  
  Interest cost
    37       4       42       7       111       13       136       23  
  Expected return on plan assets
    (68 )     (7 )     (72 )     (9 )     (204 )     (23 )     (226 )     (29 )
  Amortization of:
                                                               
Prior service credit
    (1 )     -       (1 )     -       (5 )     -       (1 )     -  
Actuarial gain
    -       (1 )     -       -       -       (2 )     -       -  
Net pension income before special termination benefits
    (28 )     (3 )     (27 )     (1 )     (86 )     (9 )     (78 )     (2 )
Special termination benefits
    1       -       3       -       6       -       3       -  
Net pension income
    (27 )     (3 )     (24 )     (1 )     (80 )     (9 )     (75 )     (2 )
Other plans including unfunded plans
    -       2       -       3       -       6       -       6  
Total net pension (income) expense
  $ (27 )   $ (1 )   $ (24 )   $ 2     $ (80 )   $ (3 )   $ (75 )   $ 4  
                                                                 
 
For the nine months ended September 30, 2015, the special termination benefits charges of $6 million were incurred as a result of Kodak’s restructuring actions.

Kodak made contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $12 million relating to its defined benefit pension plans for the nine months ended September 30, 2015.
 
Postretirement benefit costs for the Company’s U.S., Canada and U.K. postretirement benefit plans, which represent the Company’s major postretirement plans, include:

(in millions)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Service cost
  $ -     $ -     $ -     $ -  
Interest cost
    1       1       2       3  
Total net postretirement benefit expense
  $ 1     $ 1     $ 2     $ 3  
                                 

Kodak paid benefits, net of participant contributions, totaling $4 million relating to its postretirement benefit plans for the nine months ended September 30, 2015.

 
15

 
 
NOTE 10: EARNINGS PER SHARE

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share include any dilutive effect of potential common shares.  In periods with a net loss from continuing operations, diluted earnings per share are calculated using weighted-average basic shares for that period, as utilizing diluted shares would be anti-dilutive to loss per share.

Weighted-average basic and diluted shares outstanding were 41.9 million for both the three and nine months ended September 30, 2015, and 41.7 million for the nine months ended September 30, 2014.  For the three months ended September 30, 2014, weighted-average basic shares outstanding were 41.8 million and weighted-average diluted shares outstanding were 43.3 million.

As a result of the net loss from continuing operations presented for the three months and nine months ended September 30, 2015 and the nine months ended September 30, 2014, Kodak calculated diluted earnings per share using weighted-average basic shares outstanding for that period. If Kodak had reported earnings from continuing operations for the three months and nine months ended September 30, 2015 and the nine months ended September 30, 2014, the following potential shares of its common stock would have been dilutive in the computation of diluted earnings per share:
 
(in millions of shares)
 
Three Months Ended
September 30,
   
Nine Months
Ended
September 30,
 
   
2015
   
2015
   
2014
 
Unvested share-based awards
    0.2       0.2       0.3  
Detachable warrants to purchase common shares
    -       0.4       1.7  
   Total
    0.2       0.6       2.0  
                         
 
Weighted-average diluted shares outstanding for the three months ended September 30, 2014 were 43.3 million and included the dilutive effect of the following potential shares of common stock:
(in millions of shares)
 
Three Months Ended
September 30,
 
   
2014
 
Unvested share-based awards
    0.2  
Detachable warrants to purchase common shares
    1.3  
   Total
    1.5  
         

The computation of diluted earnings per share would have excluded 0.1 million shares for the three month periods ended September 30, 2015 and September 30, 2014 and 0.2 million shares for the nine month period ended September 30, 2014 associated with the assumed conversion of outstanding employee stock options because the effects would have been anti-dilutive.  There were no potentially dilutive outstanding employee stock options in the nine month period ended September 30, 2015.
 
 
16

 
 
NOTE 11: SHAREHOLDERS’ EQUITY

Kodak has 560 million shares of authorized stock, consisting of: (i) 500 million shares of common stock, par value $0.01 per share and (ii) 60 million shares of preferred stock, no par value, issuable in one or more series.  As of September 30, 2015 and December 31, 2014, there were 42.0 million shares of common stock and 41.9 million shares of common stock, respectively, and no shares of preferred stock outstanding. Treasury stock consisted of approximately 0.3 million shares and 0.2 million shares at September 30, 2015 and December 31, 2014, respectively.

Stock-Based Compensation
Kodak may settle a portion of its 2015 incentive compensation plans with a variable amount of common stock based on the stock price at the time of settlement.  The plans include minimum performance gates and annual performance metrics for 2015.  The amount of incentive compensation to be paid will depend on performance against the metrics.  The fair value of the awards is determined based on a targeted dollar amount for the expected performance against the plans’ criteria as of the balance sheet date.  The actual number of shares to be issued will be determined at the end of the performance period based on actual results achieved by Kodak and the stock price on the date of issuance.  The shares will be issued under the 2013 Omnibus Incentive Plan.  Stock compensation expense associated with these awards for the three and nine months ended September 30, 2015 represented approximately $2 million and $9 million, respectively, of the total stock compensation expense recorded by Kodak of $6 million and $17 million, respectively.

NOTE 12: OTHER COMPREHENSIVE LOSS
 
The changes in Other comprehensive loss, by component, were as follows:
(in millions)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Currency translation adjustments
  $ (23 )   $ (17 )   $ (27 )   $ (10 )
                                 
Unrealized (losses) gains on available-for-sale securities, before tax
    -       (1 )     (1 )     -  
Tax provision
    -       -       -       -  
Unrealized (losses) gains on available-for-sale securities, net of tax
    -       (1 )     (1 )     -  
                                 
Pension and other postretirement benefit plan changes
                               
Newly established prior service credit
    -       61       4       61  
Newly established net actuarial (loss) gain
    (1 )     (80 )     4       (96 )
Tax benefit
    -       -       -       (1 )
Newly established prior service credit and net actuarial (loss) gain, net of tax
    (1 )     (19 )     8       (34 )
Reclassification adjustments:
                               
Amortization of prior service credit
(a)
  (2 )     (1 )   (a)   (6 )     (1 )
Amortization of actuarial gains
(a)
  -       -     (a)   (1 )     -  
Total reclassification adjustments
    (2 )     (1 )     (7 )     (1 )
Tax provision
    -       -       1       -  
Reclassification adjustments, net of tax
    (2 )     (1 )     (6 )     (1 )
Pension and other postretirement benefit plan changes, net of tax
    (3 )     (20 )     2       (35 )
Other comprehensive loss
  $ (26 )   $ (38 )   $ (26 )   $ (45 )
                                 
 
(a)   Reclassified to Total Net Periodic Benefit Cost - refer to Note 9, "Retirement Plans and Other Postretirement Benefits" for additional information.

 
 
17

 
 
NOTE 13: ACCUMULATED OTHER COMPREHENSIVE LOSS
 
Accumulated other comprehensive loss is composed of the following:
   
As of
 
(in millions)
 
September 30,
2015
   
December 31, 2014
 
Currency translation adjustments
  $ (59 )   $ (32 )
Unrealized loss on investments
    (1 )     -  
Pension and other postretirement benefit plan changes
    (102 )     (104 )
Total
  $ (162 )   $ (136 )
                 
 
 
 
18

 
 
NOTE 14: SEGMENT INFORMATION

Effective January 1, 2015, Kodak has seven reportable segments:  Print Systems, Enterprise Inkjet Systems, Micro 3D Printing and Packaging, Software and Solutions, Consumer and Film, Intellectual Property Solutions and Eastman Business Park.  The balance of Kodak’s continuing operations, which do not meet the criteria of a reportable segment, are reported in All Other.  Prior period segment results have been revised to conform to the current period segment reporting structure.  A description of the reportable segments follows.

Print Systems : The Print Systems segment is comprised of two lines of business:  Prepress Solutions and Electrophotographic Printing Solutions.
 
Enterprise Inkjet Systems : The Enterprise Inkjet Systems segment is comprised of two lines of business:  Commercial Inkjet Printing Solutions and Digital Front-End Controllers.
 
Micro 3D Printing and Packaging : The Micro 3D Printing and Packaging segment is comprised of two lines of business:  Packaging and Micro 3D Printing.
 
Software and Solutions : The Software and Solutions segment is comprised of two lines of business:  Kodak Technology Solutions and Unified Workflow Solutions.
 
Consumer and Film : The Consumer and Film segment is comprised of three lines of business:  Consumer Inkjet Solutions; Entertainment Imaging and Commercial Films, and Brand Licensing.
 
Intellectual Property Solutions : The Intellectual Property Solutions segment includes licensing and research and development activities not directly related to the other segments.
 
Eastman Business Park : The Eastman Business Park segment includes the operations of the Eastman Business Park, a more than 1,200 acre technology center and industrial complex.
 
All Other: All Other is composed of Kodak’s consumer film business in countries where that business has not yet transferred ownership to the KPP Purchasing Parties (as defined in Note 15 “Discontinued Operations”) and the RED utilities variable interest entity.

Segment financial information is shown below. 
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in millions)
 
2015
   
2014
   
2015
   
2014
 
Revenues from continuing operations:
                       
Print Systems
  $ 278     $ 319     $ 814     $ 928  
Enterprise Inkjet Systems
    39       43       123       138  
Micro 3D Printing and Packaging
    32       32       97       94  
Software and Solutions
    30       27       85       78  
Consumer and Film
    64       92       202       265  
Intellectual Property Solutions
    -       52       -       70  
Eastman Business Park
    3       3       10       11  
  Consolidated total
  $ 446     $ 568     $ 1,331     $ 1,584  
                                 
 

 
19

 
 
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(in millions)
 
2015
   
2014
   
2015
   
2014
 
Segment Operational EBITDA and Consolidated loss from continuing operations before income taxes
                       
Print Systems
  $ 28     $ 31     $ 61     $ 63  
Enterprise Inkjet Systems
    (4 )     (12 )     (22 )     (36 )
Micro 3D Printing and Packaging (4)
    5       1       9       (1 )
Software and Solutions
    2       1       5       -  
Consumer and Film
    12       24       38       49  
Intellectual Property Solutions
    (4 )     45       (18 )     46  
Eastman Business Park
    -       -       1       -  
  Total of reportable segments
    39       90       74       121  
All Other
    1       2       5       3  
Restructuring costs and other
    (6 )     (9 )     (29 )     (42 )
Corporate components of pension and
  OPEB income (1)
    34       30       100       90  
Depreciation and amortization
    (36 )     (49 )     (113 )     (161 )
Stock based compensation
    (6 )     (2 )     (17 )     (6 )
Consulting and other costs (2)
    (4 )     (1 )     (11 )     (5 )
Idle costs (3)
    -       (1 )     (2 )     (3 )
Costs previously allocated to discontinued operations
    -       -       -       (4 )
Other operating income (expense), net excluding gain related to
   Unipixel termination (4)
    (1 )     (2 )     (3 )     (2 )
Interest expense
    (16 )     (15 )     (46 )     (47 )
Other charges, net
    (3 )     (1 )     (15 )     (4 )
Reorganization items, net
    -       (1 )     (5 )     (11 )
Consolidated income (loss) from continuing
  operations before income taxes
  $ 2     $ 41     $ (62 )   $ (71 )
                                 

(1)   
Composed of interest cost, expected return on plan assets, amortization of actuarial gains and losses and curtailments and settlement components of pension and other postretirement benefit expenses.

(2)   
Consulting and other costs are primarily related to professional services provided for corporate strategic initiatives in the current year periods.  The prior year periods primarily represent the cost of AlixPartners filling interim executive positions which are not captured within “Reorganization items, net” as well as consulting services provided by former executives during transitional periods.

(3)   
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.

(4)   
In the third quarter of 2015 a $3   million gain was recognized related to assets that were acquired for no monetary consideration as a part of the termination of the relationship with Unipixel.  The gain was reported in Other operating income (expense), net in the Consolidated Statement of Operations.  Other operating income (expense), net is typically excluded from the segment measure.  However, this particular gain was included in the Micro 3D Printing and Packaging segment’s earnings for the third quarter of 2015.

 
 
20

 
 
Segment Measure of Profit and Loss
Kodak’s segment measure of profit and loss is an adjusted earnings before interest, taxes, depreciation and amortization (“Operational EBITDA”).    As demonstrated in the table above, operational EBITDA represents the income (loss) from continuing operations excluding the provision (benefit) for income taxes; Reorganization items, net; Other charges (income), net; Other operating income (expense), net (unless otherwise indicated); Restructuring costs; depreciation and amortization expense; corporate components of pension and OPEB income, stock-based compensation expense, consulting and other costs, idle costs, interest expense and; in prior periods, indirect costs previously allocated to discontinued operations and the impact of certain fresh start accounting adjustments.

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 Intellectual Property Solutions segment.

Change in Segment Measure of Profit and Loss
During the third quarter of 2015 a gain was recognized related to assets that were acquired for no monetary consideration.  The gain was reported in Other operating income (expense), net in the Consolidated Statement of Operations.  Other operating income (expense), net is typically excluded from the segment measure.  However, this particular gain was included in the Micro 3D Printing and Packaging segment’s earnings for the third quarter of 2015.  The change affected third quarter of 2015 segment earnings by $3 million.  No other periods were impacted by this change.

NOTE 15: DISCONTINUED OPERATIONS
 
Upon emergence from bankruptcy, as a part of a settlement agreement between Eastman Kodak Company, the KPP Trustees Limited (“KPP” or the “Trustee”), as trustee for the U.K. Pension Plan, and certain other Kodak entities, Kodak consummated the sale of certain assets of Kodak’s Personalized Imaging and Document Imaging businesses (together the “Business”) to KPP Holdco Limited (“KPP Holdco”), a wholly owned subsidiary of KPP, and certain direct and indirect subsidiaries of KPP Holdco (together with KPP Holdco, the “KPP Purchasing Parties”), for net cash consideration, in addition to the assumption by the KPP Purchasing Parties of certain liabilities of the Business, of $325 million. Up to $35 million in aggregate of the purchase price is subject to repayment to KPP if the Business does not achieve certain annual adjusted EBITDA targets over the four-year period ending December 31, 2018. Certain assets and liabilities of the Business in certain jurisdictions were not transferred at the initial closing, but were transferred in a series of deferred closings. The final deferred closing occurred in September 2015.  Kodak operated the Business relating to the deferred closing jurisdiction, subject to certain covenants, until the applicable deferred closing occurred, and delivered to (or received from) a KPP subsidiary at each deferred closing a true-up payment reflecting the actual economic benefit (or detriment) to the Business in the applicable deferred closing jurisdiction(s) from the time of the initial closing through the time of the applicable deferred closing. Up to the time of the deferred closing, the results of the operations of the Business were reported as (Loss) earnings from discontinued operations, net of income taxes in the Consolidated Statement of Operations and the assets and liabilities of the Business were categorized as Assets held for sale or Liabilities held for sale in the Consolidated Statement of Financial Position, as appropriate.
 
On March 17, 2014 the KPP Purchasing Parties agreed to pay Kodak $20 million of incremental consideration ($13 million was paid in March 2014 and the remainder was paid in March 2015) in lieu of working capital adjustments contemplated by the settlement agreement.
 
The following table summarizes the major classes of assets and liabilities related to the disposition of the Business which have been segregated and included in Assets held for sale and Liabilities held for sale in the Consolidated Statement of Financial Position:
   
As of
 
(in millions)
 
September 30,
2015
   
December 31,
2014
 
Inventories, net
  $ -     $ 2  
Property, plant and equipment, net
    -       4  
Intangible assets and other
    -       6  
Assets held for sale
  $ -     $ 12  
                 
Trade payables
  $ -     $ 1  
Liabilities held for sale
  $ -     $ 1  
                 
 
Discontinued operations of Kodak include the Business (excluding the consumer film business, for which Kodak entered into an ongoing supply arrangement with one or more KPP Purchasing Parties) and other miscellaneous businesses.
 
 
 
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The significant components of revenues and (loss) earnings from discontinued operations, net of income taxes, are as follows:

(in millions)
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Revenues from Personalized and Document Imaging
  $ -     $ 1     $ 1     $ 60  
Revenues from other discontinued operations
    -       -       -       1  
Total revenues from discontinued operations
  $ -     $ 1     $ 1     $ 61  
                                 
Pre-tax (loss) earnings from Personalized and Document Imaging
  $ (5 )   $ (9 )   $ (5 )   $ 10  
Provision for income taxes related to discontinued operations
    (3 )     (3 )     (3 )     (5 )
(Loss) earnings from discontinued operations, net of income taxes
  $ (8 )   $ (12 )   $ (8 )   $ 5  
                                 

The $5 million in pre-tax loss recognized in the third quarter of 2015 represents costs incurred related to the final deferred closing.
 
 
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NOTE 16: FINANCIAL INSTRUMENTS
 
The following tables present the carrying amounts, estimated fair values, and location in the Consolidated Statement of Financial Position for Kodak’s financial instruments:
 
     
Value Of Items Recorded At Fair Value
 
(in millions)
   
As of September 30, 2015
 
     
Total
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
                         
Derivatives
                         
Short-term foreign exchange contracts
Receivables, net
  $ 2     $ -     $ 2     $ -  
                                   
Marketable securities
                                 
Long-term available-for-sale securities
Other long-term assets
    2       2       -       -  
                                   
LIABILITIES
                                 
Derivatives
                                 
Short-term foreign exchange contracts
Other current liabilities
    1       -       1       -  
                                   
 
(in millions)
     
Value Of Items Not Recorded At Fair Value
 
       
As of September 30, 2015
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
LIABILITIES
                           
Debt
                           
Short-term debt
Current portion of long-term debt
Carrying value
  $ 4     $ -     $ 4     $ -  
   
Fair value
    4       -       4       -  
                                     
Long-term debt
Long-term debt, net of current portion
Carrying value
    670       -       670       -  
   
Fair value
    685       -       685       -  
 
     
Value Of Items Recorded At Fair Value
 
(in millions)
   
As of December 31, 2014
 
     
Total
   
Level 1
   
Level 2
   
Level 3
 
ASSETS
                         
Derivatives
                         
Short-term foreign exchange contracts
Receivables, net
  $ 2     $ -     $ 2     $ -  
                                   
Marketable securities
                                 
Long-term available-for-sale securities
Other long-term assets
    3       3       -       -  
                                   
LIABILITIES
                                 
Derivatives
                         
Short-term foreign exchange contracts
Other current liabilities
    1       -       1       -  
                                   
 
       
Value Of Items Not Recorded At Fair Value
 
(in millions)
     
As of December 31, 2014
 
       
Total
   
Level 1
   
Level 2
   
Level 3
 
LIABILITIES
                           
Debt
                           
Short-term debt
Current portion of long-term debt
Carrying value
  $ 5     $ -     $ 5     $ -  
   
Fair value
    5       -       5       -  
                                     
Long-term debt
Long-term debt, net of current portion
Carrying value
    672       -       672