ek10q3rdq2010.htm


SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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

For the quarterly period ended September 30, 2010
or

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

For the transition period from ___ to ___

Commission File Number 1-87

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

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

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

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

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

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

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

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

 
Title of each Class
Number of shares Outstanding at
October 22, 2010
 
Common Stock, $2.50 par value
268,876,597
   


 
 

 



Eastman Kodak Company
Form 10-Q
September 30, 2010

Table of Contents

   
Page
   
     
  3
 
  3
 
  4
 
  5
 
  6
 
  7
 
26
 
43
     
47
48
     
 
Part II. - Other Information
 
     
48
49
55
     
55
     
 
56
 
57
     
     


 
2

 

Part I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

EASTMAN KODAK COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
(in millions, except per share data)

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
                     
 
2010
   
2009
   
2010
   
2009
 
                         
Net sales
  $ 1,758     $ 1,781     $ 5,260     $ 5,024  
Cost of goods sold
    1,282       1,420       3,686       4,143  
   Gross profit
    476       361       1,574       881  
Selling, general and administrative expenses
    314       318       937       955  
Research and development costs
    83       81       243       270  
Restructuring costs, rationalization and other                                    
    24       33       48       179  
Other operating (income) expenses, net
    (3 )     10       (1 )     13  
Earnings (loss) from continuing operations before interest expense,
  other income (charges), net and income taxes
    58       (81 )     347       (536 )
Interest expense
    38       27       117       75  
Loss on early extinguishment of debt, net
    -       -       102       -  
Other income (charges), net
    8       9       4       8  
Earnings (loss) from continuing operations before income taxes
    28       (99 )     132       (603 )
Provision for income taxes                
    71       12       223       59  
Loss from continuing operations        
    (43 )     (111 )     (91 )     (662 )
(Loss) earnings from discontinued operations, net of income taxes
    -       -       (1 )     3  
Extraordinary item, net of tax
    -       -       -       6  
NET LOSS ATTRIBUTABLE TO EASTMAN KODAK COMPANY          
  $ (43 )   $ (111 )   $ (92 )   $ (653 )
                                 
Basic and diluted net (loss) earnings per share attributable to Eastman
  Kodak Company common shareholders:
                               
  Continuing operations
  $ (0.16 )   $ (0.41 )   $ (0.34 )   $ (2.47 )
  Discontinued operations
    -       -       -       0.01  
  Extraordinary item, net of tax
    -       -       -       0.02  
  Total
  $ (0.16 )   $ (0.41 )   $ (0.34 )   $ (2.44 )
                                 
Number of common shares used in basic and diluted net (loss) earnings
  per share
    268.5       268.2       268.4       268.2  
                                 


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

 
3

 




EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF RETAINED EARNINGS (Unaudited)
(in millions)




   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Retained earnings at beginning of period  
  $ 5,620     $ 5,359     $ 5,676     $ 5,903  
Net loss
    (43 )     (111 )     (92 )     (653 )
Loss from issuance of treasury stock
    (12 )     (2 )     (19 )     (4 )
Retained earnings at end of period
  $ 5,565     $ 5,246     $ 5,565     $ 5,246  
                                 

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

 
4

 



EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Unaudited)


(in millions)
 
September 30,
   
December 31,
 
                                                                              
 
2010
   
2009
 
ASSETS
           
Current Assets
           
Cash and cash equivalents                                
  $ 1,397     $ 2,024  
Receivables, net                                                   
    1,314       1,395  
Inventories, net                                                     
    849       679  
Other current assets                                                  
    211       205  
 Total current assets                                               
    3,771       4,303  
Property, plant and equipment, net of accumulated depreciation of $5,183 and $5,178, respectively                       
    1,069       1,254  
Goodwill                                                                
    916       907  
Other long-term assets                                           
    1,173       1,227  
 TOTAL ASSETS                                           
  $ 6,929     $ 7,691  
LIABILITIES AND EQUITY (DEFICIT)
               
Current Liabilities
               
Accounts payable, trade
  $ 726     $ 919  
Short-term borrowings and current portion of long-term debt                                               
    61       62  
Other current liabilities
    1,578       1,915  
 Total current liabilities                                          
    2,365       2,896  
Long-term debt, net of current portion                   
    1,189       1,129  
Pension and other postretirement liabilities            
    2,628       2,694  
Other long-term liabilities                                       
    960       1,005  
 Total liabilities                                                    
    7,142       7,724  
                 
 Commitments and Contingencies (Note 7)
               
                 
Equity (Deficit)
               
Common stock, $2.50 par value                   
    978       978  
Additional paid in capital                                           
    1,101       1,093  
Retained earnings                                                    
    5,565       5,676  
Accumulated other comprehensive loss
    (1,864 )     (1,760 )
                                                                                
    5,780       5,987  
Less: Treasury stock, at cost
    (5,995 )     (6,022 )
 Total Eastman Kodak Company shareholders’ deficit                                       
    (215 )     (35 )
Noncontrolling interests
    2       2  
  Total deficit
    (213 )     (33 )
                 
 TOTAL LIABILITIES AND DEFICIT                      
  $ 6,929     $ 7,691  
                 

 

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

 
5

 



EASTMAN KODAK COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)  

   
Nine Months Ended
 
   
September 30,
 
(in millions)
 
2010
   
2009
 
             
Cash flows from operating activities:                         
           
Net loss
  $ (92 )   $ (653 )
Adjustments to reconcile to net cash used in operating activities:
               
   Loss (earnings) from discontinued operations, net of income taxes
    1       (3 )
   Earnings from extraordinary item, net of income taxes
    -       (6 )
   Depreciation and amortization
    289       328  
   Loss on sales of businesses/assets
    2       7  
   Loss on early extinguishment of debt, net
    102       -  
   Non-cash restructuring and rationalization costs, asset impairments and other charges       
    2       17  
   Provision (benefit) for deferred income taxes
    37       (61 )
   Decrease in receivables
    68       431  
   (Increase) decrease in inventories
    (178 )     70  
   Decrease in liabilities excluding borrowings
    (663 )     (1,000 )
   Other items, net
    (72 )     (88 )
     Total adjustments
    (412 )     (305 )
     Net cash used in operating activities
    (504 )     (958 )
Cash flows from investing activities:
               
   Funding of restricted cash account
    -       (575 )
   Additions to properties  
    (87 )     (96 )
   Proceeds from sales of businesses/assets
    17       47  
   Business acquisitions, net of cash acquired
    -       (17 )
   Marketable securities - sales
    65       28  
   Marketable securities - purchases
    (59 )     (28 )
     Net cash used in investing activities
    (64 )     (641 )
Cash flows from financing activities:
               
   Proceeds from borrowings
    491       700  
   Repayment of borrowings
    (542 )     (74 )
   Debt and equity issuance costs
    (12 )     (30 )
     Net cash (used in) provided by financing activities
    (63 )     596  
Effect of exchange rate changes on cash
    4       5  
Net decrease in cash and cash equivalents   
    (627 )     (998 )
Cash and cash equivalents, beginning of period
    2,024       2,145  
Cash and cash equivalents, end of period
  $ 1,397     $ 1,147  
                 


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

BASIS OF PRESENTATION

The consolidated interim financial statements are unaudited, and certain information and footnote disclosures related thereto normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted in accordance with Rule 10-01 of Regulation S-X.  In the opinion of management, the accompanying unaudited consolidated financial statements were prepared following the same policies and procedures used in the preparation of the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations, financial position and cash flows of Eastman Kodak Company and its subsidiaries (the Company).  The results of operations for the interim peri ods are not necessarily indicative of the results for the entire fiscal year.  These consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.  

RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends the Accounting Standards Codification (ASC) Topic 820, “Fair Value Measures and Disclosures.”  ASU No. 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also require more detailed disclosure about the activity within Level 3 fair value measurements.  The Company adopted the guidance in ASU No. 2010-06 on January 1, 2010, except for the requirements related to Level 3 disclosures, which will be effective for annual and interim reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company).  This guidance req uires expanded disclosures only, and did not and is not expected to have any impact on the Company’s Consolidated Financial Statements.
 
In June 2009, the FASB issued revised authoritative guidance related to variable interest entities, which requires entities to perform a qualitative analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity.  The guidance also requires an ongoing reassessment of variable interests and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary.  This guidance, which was reissued by the FASB in December 2009 as ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” amends ASC Topic 810, “Consolidation,” and was adopted by the Company on January 1, 2010.  The adoption of this guidance did not have an im pact on the Company’s Consolidated Financial Statements.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In October 2009, the FASB issued ASU No. 2009-13, "Multiple-Deliverable Revenue Arrangements," which amends ASC Topic 605, "Revenue Recognition."  ASU No. 2009-13 amends the ASC to eliminate the residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method.  The ASU also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes: (1) vendor-specific objective evidence if available, (2) third-party evidence if vendor-specific objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available.  Additionally, ASU No. 2009-13 expands the disclosure requirements related to a vendor's multiple-deliverable revenue arrangements.  The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its Consolidated Financial Statements, which is effective for the Company on January 1, 2011.

 
7

 
 
In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements That Include Software Elements," which amends ASC Topic 985, "Software."  ASU No. 2009-14 amends the ASC to change the accounting model for revenue arrangements that include both tangible products and software elements, such that tangible products containing both software and non-software components that function together to deliver the tangible product's essential functionality are no longer within the scope of software revenue guidance.  The Company is currently evaluating the potential impact, if any, of the adoption of this guidance on its Consolidated Financial Statements, which is effective for the Company on January 1, 2011.

NOTE 2:  RECEIVABLES, NET

   
As of
 
   
September 30,
   
December 31,
 
 (in millions)                                                         
 
2010
   
2009
 
             
Trade receivables
  $ 1,073     $ 1,238  
Miscellaneous receivables
    241       157  
  Total (net of allowances of $79 and $98 as of September 30, 2010 and December 31, 2009,
    respectively)       
  $ 1,314     $ 1,395  
    
               

Approximately $188 million and $218 million of the total trade receivable amounts as of September 30, 2010 and December 31, 2009, respectively, are expected to be settled through customer deductions in lieu of cash payments.  Such deductions represent rebates owed to the customer and are included in Other current liabilities in the accompanying Consolidated Statement of Financial Position at each respective balance sheet date.  The increase in miscellaneous receivables was due to revenue of $550 million being recognized in the first quarter of 2010 for a non-recurring intellectual property arrangement, for which approximately $113 million is due during the remainder of 2010.  Approximately $19 million of the receivable will be withheld at the time of receipt to satisfy tax obligations.  

NOTE 3:  INVENTORIES, NET

   
As of
 
(in millions)
 
September 30,
   
December 31,
 
   
2010
   
2009
 
  
           
Finished goods
  $ 505     $ 409  
Work in process
    197       164  
Raw materials
    147       106  
                 
           Total
  $ 849     $ 679  
                 
 
NOTE 4:  GOODWILL

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

   
As of
 
   
September 30,
   
December 31,
 
(in millions)
 
2010
   
2009
 
             
Consumer Digital Imaging Group
  $ 197     $ 195  
Film, Photofinishing and Entertainment Group
    626       618  
Graphic Communications Group
    93       94  
Total
  $ 916     $ 907  
                 
 

 
 
8

 

The Company tests goodwill for impairment annually on September 30, or whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.  The Company tests goodwill for impairment at a level of reporting referred to as a reporting unit, which is an operating segment or one level below an operating segment (referred to as a component).  A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.  When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit.  0;An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.

The components of the Film, Photofinishing and Entertainment Group (FPEG) operating segment are similar and, therefore, the segment meets the definition of a reporting unit.  Likewise, the components of the Consumer Digital Imaging Group (CDG) are similar and, therefore, the segment meets the definition of a reporting unit.  The Graphic Communications Group (GCG) operating segment has two reporting units: the Business Services and Solutions Group (BSSG) reporting unit and the Commercial Printing reporting unit (consisting of the Prepress Solutions and Digital Printing Solutions strategic product groups).  The Commercial Printing reporting unit consists of components that have similar economic characteristics and, therefore, have been aggregated into a single reporting unit.

The Company’s reporting units changed in 2010 as a result of organizational changes that became effective in the current year.  Image Sensor Solutions (ISS) was a reporting unit in 2009.  ISS no longer meets the definition of a component and, therefore, no longer qualifies as a reporting unit.  ISS is now a part of the CDG reporting unit.  The ISS reporting unit did not have any goodwill allocated to it in the prior year.  In addition, within the GCG operating segment, the Enterprise Solutions strategic product group (SPG) was combined with the Document Imaging SPG to form a new SPG called BSSG, which meets the definition of a component and a reporting unit.  The Document Imaging SPG was a reporting unit in the prior year.  The remainder of the GCG operating segme nt represents the Commercial Printing reporting unit, as noted above.  These 2010 reporting structure changes had no impact on the Company’s segment reporting.

Goodwill is tested by initially comparing the fair value of each of the Company’s reporting units to their related carrying values.  If the fair value of the reporting unit is less than its carrying value, the Company must determine the implied fair value of the goodwill associated with that reporting unit.  The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of its assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities.  If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment charge that must be recognized.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.  The Company estimates the fair value of its reporting units utilizing income and market approaches through the application of discounted cash flow and market comparable methods, respectively.  To estimate fair value utilizing the income approach, the Company established an estimate of future cash flows for each reporting unit and discounted those estimated future cash flows to present value.  Key assumptions used in the income approach were: (a) expected cash flows for the period from October 1, 2010 to December 31, 2015; and (b) discount rates of 15% to 28%, which were based on the Company’s best estimates of the after-tax weighted-average cost of capital of each reporting unit.  To esti mate fair value utilizing the market comparable methodology, the Company applied valuation multiples, derived from publicly-traded benchmark companies, to operating data of each reporting unit.  Benchmark companies are selected for each reporting unit based on comparability of the underlying business and economics, and if they could potentially purchase the reporting unit.  Key assumptions used in the market approach include the selection of appropriate benchmark companies and the selection of an appropriate market value multiple for each reporting unit based on a comparison of the reporting unit with the benchmark companies as of the impairment testing date.  Both the income and market approaches estimate fair values based on ability to generate earnings and are, therefore, meaningful in estimating the fair value of each of the Company’s reporting units.  The use of each methodology also provides corroboration for the other methodology.  Consistent wit h prior years, with the exception of the FPEG reporting unit, the Company determined fair value of each of its reporting units using 50% weighting for each valuation methodology as we believe that each methodology provides equally valuable information.  The Company determined fair value for the FPEG reporting unit using only the income approach due to the unique circumstances of the film and photofinishing industry.
 
Based upon the results of the Company’s September 30, 2010 analysis, no impairment of goodwill was indicated.

A 20 percent change in estimated future cash flows or a 10 percentage point change in discount rate would not have caused a goodwill impairment to be recognized by the Company for any of its reporting units as of September 30, 2010.  Each of the Company’s reporting units, with the exception of the CDG reporting unit, has a negative carrying value as of September 30, 2010.    Impairment of goodwill could occur in the future if market or interest rate environments deteriorate, expected future cash flows decrease, or if reporting unit carrying values change materially compared with changes in respective fair values.

 
9

 
 
NOTE 5:  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

Long-term debt and related maturities and interest rates were as follows at September 30, 2010 and December 31, 2009:

                 
As of
 
(in millions)
             
September 30, 2010
   
December 31, 2009
 
                           
           
Weighted-Average
             
           
Effective
             
           
Interest
   
Carrying
   
Carrying
 
Country
Type
 
Maturity
   
Rate
   
Value
   
Value
 
                           
U.S.
Convertible
 
2010
      3.38 %   $ 11     $ 12  
U.S.
Term note
    2010-2013       6.16 %     27       35  
Germany  
Term note
    2010-2013       6.16 %     107       141  
U.S.
Term note
    2013       7.25 %     300       500  
U.S.
Secured term note
    2017       19.36 %     -       195  
U.S.
Convertible
    2017       12.75 %     302       295  
U.S.
Term note
    2018       9.95 %     3       3  
U.S.
Secured term note
    2018       10.11 %     490       -  
U.S.
Term note
    2021       9.20 %     10       10  
                                   
                        1,250       1,191  
Current portion of long-term debt
              (61 )     (62 )
Long-term debt, net of current portion
            $ 1,189     $ 1,129  
                                   

Annual maturities (in millions) of long-term debt outstanding at September 30, 2010 were as follows:

   
Carrying
   
Maturity
 
   
Value
   
Value
 
             
2010
  $ 11     $ 11  
2011
    47       50  
2012
    45       50  
2013
    342       350  
2014
    -       -  
 2015 and thereafter
    805       913  
Total
  $ 1,250     $ 1,374  
                 



The difference between the carrying values and the maturity values is primarily due to the original allocation of a portion of the proceeds received on the 2017 convertible notes to equity, representing the value of the conversion feature.  The difference between the carrying values and the maturity values will be accreted to interest expense over the remaining terms of the notes.

Issuance of Senior Secured Notes due 2018
On March 5, 2010, the Company issued $500 million of aggregate principal amount of 9.75% senior secured notes due March 1, 2018 (the “2018 Senior Secured Notes”).  The Company will pay interest at an annual rate of 9.75% of the principal amount at issuance, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2010.  

 
10

 
 
Upon issuance of the 2018 Senior Secured Notes, the Company received net proceeds of approximately $490 million ($500 million aggregate principal less $10 million stated discount).  The proceeds were used to repurchase all of the Senior Secured Notes due 2017 and to fund the tender of $200 million of the 7.25% Senior Notes due 2013.  

In connection with the 2018 Senior Secured Notes, the Company and the subsidiary guarantors (as defined below) entered into an indenture, dated as of March 5, 2010, with Bank of New York Mellon as trustee and collateral agent (the “Indenture”).

At any time prior to March 1, 2014, the Company will be entitled at its option to redeem some or all of the 2018 Senior Secured Notes at a redemption price of 100% of the principal plus accrued and unpaid interest and a “make-whole” premium (as defined in the Indenture).  On and after March 1, 2014, the Company may redeem some or all of the 2018 Senior Secured Notes at certain redemption prices expressed as percentages of the principal plus accrued and unpaid interest.  In addition, prior to March 31, 2013, the Company may redeem up to 35% of the 2018 Senior Secured Notes at a redemption price of 109.75% of the principal plus accrued and unpaid interest using proceeds from certain equity offerings, provided the redemption takes place within 120 days after the closing of the related equity offering and not less than 65% of the original aggregate principal remains outstanding immediately thereafter.  

Upon the occurrence of a change of control, each holder of the 2018 Senior Secured Notes has the right to require the Company to repurchase some or all of such holder’s 2018 Senior Secured Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

The Indenture contains covenants limiting, among other things, the Company’s ability and the ability of the Company’s restricted subsidiaries (as defined in the Indenture) to (subject to certain exceptions and qualifications): incur additional debt or issue certain preferred stock; pay dividends or make distributions in respect of capital stock or make other restricted payments; make principal payments on, or purchase or redeem subordinated indebtedness prior to any scheduled principal payment or maturity; make certain investments; sell certain assets; create liens on assets; consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s and its subsidiaries’ assets; enter into certain transactions with affiliates; and designate the Company’s subsidiaries as unrestricted subsidia ries.  The Company was in compliance with these covenants as of September 30, 2010.

The 2018 Senior Secured Notes are fully and unconditionally guaranteed (the “guarantees”) on a senior secured basis by each of the Company’s existing and future direct or indirect 100% owned domestic subsidiaries, subject to certain exceptions (the “Subsidiary Guarantors”).  The 2018 Senior Secured Notes and guarantees are secured by second-priority liens, subject to permitted liens, on substantially all of the Company’s domestic assets and substantially all of the domestic assets of the Subsidiary Guarantors pursuant to a security agreement entered into with Bank of New York Mellon as second lien collateral agent on March 5, 2010.  The carrying value of the assets pledged as collateral at September 30, 2010 was approximately $2 billion.

The 2018 Senior Secured Notes are the Company’s senior secured obligations and rank senior in right of payment to any future subordinated indebtedness; rank equally in right of payment with all of the Company’s existing and future senior indebtedness; are effectively senior in right of payment to the Company’s existing and future unsecured indebtedness, are effectively subordinated in right of payment to indebtedness under the Company’s Amended Credit Agreement (as defined below) to the extent of the collateral securing such indebtedness on a first-priority basis; and effectively are subordinated in right of payment to all existing and future indebtedness and other liabilities of the Company’s non-guarantor subsidiaries.

Certain events are considered events of default and may result in the acceleration of the maturity of the 2018 Senior Secured Notes including, but not limited to: default in the payment of principal or interest when it becomes due and payable; subject to applicable grace periods, failure to purchase Senior Secured Notes tendered when and as required; events of bankruptcy; and non-compliance with other provisions and covenants and the acceleration or default in the payment of principal of other forms of debt.  If an event of default occurs, the aggregate principal amount and accrued and unpaid interest may become due and payable immediately.

Repurchase of Senior Secured Notes due 2017
On February 24, 2010, the Company entered into an agreement with affiliates of Kohlberg, Kravis Roberts & Co. L.P. (“KKR”) to repurchase all $300 million aggregate principal amount of the Company’s 10.5% Senior Secured Notes due 2017 previously issued to KKR (the “KKR Notes”).    

 
11

 
 
On March 5, 2010, the Company completed the repurchase of the KKR Notes.  KKR received cash equal to 100% of the principal amount plus accrued and unpaid interest.  The repurchase of the KKR Notes resulted in a loss on early debt extinguishment of $111 million, which was reported in Loss on early extinguishment of debt, net in the Statement of Operations for the nine months ended September 30, 2010.  This loss was primarily the result of the principal repayment of $300 million exceeding the carrying value of the KKR Notes by approximately $195 million as of the repurchase date.    

Repurchase of Senior Notes due 2013
On March 10, 2010, the Company accepted for purchase $200 million aggregate principal amount of Senior Notes due 2013 (the “2013 Notes”) pursuant to the terms of a tender offer that commenced on February 3, 2010.  Holders who validly tendered their 2013 Notes received cash equal to approximately 95% of the principal amount of the 2013 Notes accepted in the tender offer plus accrued and unpaid interest.    

The repurchase of the 2013 Notes resulted in a gain on early debt extinguishment of approximately $9 million, reported in Loss on early extinguishment of debt, net in the Statement of Operations for the nine months ended September 30, 2010.  The gain was a result of the principal repayment of approximately $190 million being less than the carrying value of the repurchased debt of $200 million.  As of September 30, 2010, $300 million of the 2013 Notes remain outstanding.  
 
Amended Credit Agreement
On February 10, 2010, the Company and its subsidiary, Kodak Canada, Inc. (together the “Borrowers”), together with the Company’s U.S. subsidiaries as guarantors (the “Guarantors”), agreed to amend the Amended and Restated Credit Agreement dated March 31, 2009 (the “Amended Credit Agreement”) with the named lenders and Citicorp, USA, Inc., as agent, in order to allow the Company to incur additional permitted senior debt of up to $200 million aggregate principal amount, and debt that refinances existing debt and permitted senior debt so long as the refinancing debt meets certain requirements.  In connection with the amendment, the Company reduced the commitments of its non-extending lenders by approximately $125 million.  This change did not reduce the maximum borrowing availabil ity of up to $500 million under the Amended Credit Agreement.  On October 18, 2010, the non-extending lender commitments expired capping the Company’s borrowing limit to the $410 million of extending lender commitments as of that date.  The Company may continue to add additional lender commitments to the Amended Credit Agreement up to the maximum borrowing availability of $500 million.  

Advances under the Amended Credit Agreement are available based on the Borrowers’ respective borrowing base from time to time.  The borrowing base is calculated based on designated percentages of eligible accounts receivable, inventory, machinery and equipment and, once mortgages are recorded, certain real property, subject to applicable reserves.  As of September 30, 2010, based on this borrowing base calculation and after deducting the face amount of letters of credit outstanding of $131 million and $100 million of collateral to secure other banking arrangements, the Company had $224 million available to borrow under the Amended Credit Agreement.  As of September 30, 2010, the Company had no debt for borrowed money outstanding under the Amended Credit Agreement.  

In addition to letters of credit outstanding under the Amended Credit Agreement of $131 million, there were bank guarantees and letters of credit of $17 million and surety bonds of $39 million outstanding under other banking arrangements primarily to ensure payment of possible casualty and workers’ compensation claims, environmental liabilities, legal contingencies, rental payments, and to support various customs and trade activities.

Under the terms of the Amended Credit Agreement, the Company has agreed to certain affirmative and negative covenants customary in similar asset-based lending facilities.  In the event the Company’s excess availability under the borrowing base formula under the Amended Credit Agreement falls below $100 million for three consecutive business days, among other things, the Company must maintain a fixed charge coverage ratio of not less than 1.1 to 1.0 until the excess availability is greater than $100 million for 30 consecutive days.  For the quarter ended September 30, 2010, excess availability was greater than $100 million.  The Company is also required to maintain cash and cash equivalents in the U.S. of at least $250 million.  The negative covenants limit, under certain circumstances, among o ther things, the Company’s ability to incur additional debt or liens, make certain investments, make shareholder distributions or prepay debt, except as permitted under the terms of the Amended Credit Agreement.  The Company was in compliance with all covenants under the Amended Credit Agreement as of September 30, 2010.

In addition to the Amended Credit Agreement, the Company has other committed and uncommitted lines of credit as of September 30, 2010 totaling $19 million and $131 million, respectively.  These lines primarily support operational and borrowing needs of the Company’s subsidiaries, which include term loans, overdraft coverage, revolving credit lines, letters of credit, bank guarantees and vendor financing programs.  Interest rates and other terms of borrowing under these lines of credit vary from country to country, depending on local market conditions.  As of September 30, 2010, usage under these lines was approximately $44 million all of which were supporting non-debt related obligations.

 
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NOTE 6:  INCOME TAXES

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

(dollars in millions)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Earnings (loss) from continuing operations before income
  taxes
  $ 28     $ (99 )   $ 132     $ (603 )
Effective tax rate
    253.6 %     (12.1 )%     168.9 %     (9.8 )%
Provision for income taxes
  $ 71     $ 12     $ 223     $ 59  
Provision (benefit) for income taxes @ 35%
  $ 10     $ (35 )   $ 46     $ (211 )
Difference between tax at effective vs. statutory rate
  $ 61     $ 47     $ 177     $ 270  
                                 

For the three and nine months ended September 30, 2010, 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) withholding taxes related to licensing revenue,  (2) 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, and (3) the mix of earnings from operations in certain lower-taxed jurisdictions outside the U.S.

For the three and nine months ended September 30, 2009, 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; and (2) the mix of earnings from operations in certain lower-taxed jurisdictions outside the U.S.  For the nine months ended September 30, 2009, 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 also attributable to adjustments for uncertain tax positions and tax audits.

NOTE 7:  COMMITMENTS AND CONTINGENCIES

Environmental

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

   
As of
 
(in millions)
 
September 30,
   
December 31,
 
   
2010
   
2009
 
             
Eastman Business Park site, Rochester, NY
  $ 50     $ 51  
Other operating sites
    10       10  
Sites associated with former operations
    21       21  
Sites associated with the non-imaging health business sold in 1994
    19       20  
           Total
  $ 100     $ 102  


These amounts are reported in Other long-term liabilities in the accompanying Statement of Financial Position.    

 
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Cash expenditures for the aforementioned investigation, remediation and monitoring activities are expected to be incurred over the next twenty-six to thirty years for many of the sites.  For these known environmental liabilities, the accrual reflects the Company’s best estimate of the amount it will incur under the agreed-upon or proposed work plans.  The Company’s cost estimates were determined using the ASTM Standard E 2137-06, "Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters," and have not been reduced by possible recoveries from third parties.  The overall method includes the use of a probabilistic model which forecasts a range of cost estimates for the remediation required at individual sites.  The projects are closely monitored and the mode ls are reviewed as significant events occur or at least once per year.  The Company’s estimate includes investigations, equipment and operating costs for remediation and long-term monitoring of the sites.  The Company does not believe it is reasonably possible that the losses for the known exposures could exceed the current accruals by material amounts.

A Consent Decree was signed in 1994 in settlement of a civil complaint brought by the U.S. Environmental Protection Agency and the U.S. Department of Justice.  In connection with the Consent Decree, the Company has completed the required compliance schedule, under which the Company improved its waste characterization procedures, upgraded one of its incinerators, and upgraded its industrial sewer system.  As of October 26, 2010, the court overseeing this matter has terminated the Consent Decree.  Costs associated with the sewer inspection program have not been material.

The Company is presently designated as a potentially responsible party (“PRP”) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (the “Superfund Law”), or under similar state laws, for environmental assessment and cleanup costs as the result of the Company’s alleged arrangements for disposal of hazardous substances at eight Superfund sites.  With respect to each of these sites, the Company’s liability is minimal.  In addition, the Company has been identified as a PRP in connection with the non-imaging health businesses in two active Superfund sites.  Numerous other PRPs have also been designated at these sites.  Although the law imposes joint and several liability on PRPs, the Company’s historical experienc e demonstrates that these costs are shared with other PRPs.  Settlements and costs paid by the Company in Superfund matters to date have not been material.  

Estimates of the amount and timing of future costs of environmental remediation requirements are by their nature imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties.  Based upon information presently available, such future costs are not expected to have a material effect on the Company’s competitive or financial position.  However, such costs could be material to results of operations and/or cash flows in a particular future quarter or year.

Other Commitments and Contingencies

As of September 30, 2010, the Company had outstanding letters of credit of $131 million issued under the Amended Credit Agreement, as well as bank guarantees and letters of credit of $17 million and surety bonds in the amount of $39 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 Company’s Brazilian operations are involved in governmental assessments of indirect and other taxes in various stages of litigation, primarily related to federal and state value-added taxes.  The Company is disputing these matters and intends to vigorously defend its position.  Based on the opinion of legal counsel and current reserves already recorded for those matters deemed probable of loss, management does not believe that the ultimate resolution of these matters will materially impact the Company’s results of operations or financial position.  The Company routinely assesses all these matters as to the probability of ultimately incurring a liability in its Brazilian operations, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as p robable.  As of September 30, 2010, 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 $59 million.

 
14

 

The Company recorded a contingency accrual of approximately $21 million in the fourth quarter of 2008 related to employment litigation matters in the U.S.  The employment litigation matters related to a number of cases, which had similar fact patterns related to legacy equal employment opportunity issues.  In the second quarter of 2009, the plaintiffs filed an unopposed motion for preliminary approval of a settlement in this action pursuant to which the Company would establish a settlement fund in the amount of $21 million that will be used for payments to plaintiffs and class members, as well as attorney’s fees, litigation costs, and claims administration costs.  In the third quarter of 2010, the court approved the settlement with the exception of the attorney’s fees application, which is stil l pending.   

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

NOTE 8:  GUARANTEES

The Company guarantees debt and other obligations of certain customers.  The debt and other obligations are primarily due to banks and leasing companies in connection with financing of customers’ purchases of equipment and product from the Company.  At September 30, 2010, the maximum potential amount of future payments (undiscounted) that the Company could be required to make under these customer-related guarantees was $49 million and the carrying amount of the liability related to these customer guarantees was not material.    

The customer financing agreements and related guarantees, which mature between 2010 and 2016, typically have a term of 90 days for product and short-term equipment financing arrangements, and up to five years for long-term equipment financing arrangements.  These guarantees would require payment from the Company only in the event of default on payment by the respective debtor.  In some cases, particularly for guarantees related to equipment financing, the Company has collateral or recourse provisions to recover and sell the equipment to reduce any losses that might be incurred in connection with the guarantees.  However, any proceeds received from the liquidation of these assets may not cover the maximum potential loss under these guarantees.      

Eastman Kodak Company (“EKC”) also guarantees potential indebtedness to banks and other third parties for some of its consolidated subsidiaries.  The maximum amount guaranteed is $267 million, and the outstanding amount for those guarantees is $245 million.  Of this outstanding amount, $107 million is recorded within Short-term borrowings and current portion of long-term debt, and Long-term debt, net of current portion.   Additionally, $12 million is recorded within Other current liabilities and Other long-term liabilities.  The remaining $126 million of outstanding guarantees represent parent guarantees providing financial assurance to third parties that the Company’s subsidiaries will fulfill their future performance or financial obligations under various contracts, and d o not represent recorded liabilities.  These guarantees expire in 2010 through 2019.  Pursuant to the terms of the Company's Amended Credit Agreement, obligations of the Borrowers to the Lenders under the Amended Credit Agreement, as well as secured agreements in an amount not to exceed $100 million, are guaranteed by the Company and the Company’s U.S. subsidiaries and included in the above amounts.   

During the fourth quarter of 2007, EKC issued a guarantee to Kodak Limited (the “Subsidiary”) and the Trustees (the “Trustees”) of the Kodak Pension Plan of the United Kingdom (the “Plan”).  Under that arrangement, EKC guaranteed to the Subsidiary and the Trustees the ability of the Subsidiary, only to the extent it becomes necessary to do so, to (1) make contributions to the Plan to ensure sufficient assets exist to make plan benefit payments, and (2) make contributions to the Plan such that it will achieve full funded status by the funding valuation for the period ending December 31, 2015.  On October 12, 2010, the 2007 guarantee was replaced by a new guarantee from EKC to the Subsidiary and the Trustees.  The new guarantee continues to guarantee the Subsidiary’s ab ility to make contributions as set forth in the 2007 guarantee but extends the full funding date to December 31, 2022.  The new guarantee expires (a) upon the conclusion of the funding valuation for the period ending December 31, 2022 if  the Plan achieves full funded status or on payment of the balance if the Plan is underfunded by no more than 60 million British pounds by that date, (b) earlier in the event that the Plan achieves full funded status for two consecutive funding valuation cycles which are typically performed at least every three years, or (c) June 30, 2024 on payment of the balance in the event that the Plan is underfunded by more than sixty million pounds upon conclusion of the funding valuation for the period ending December 31, 2022.  The amount of potential future contributions is dependent on the funding status of the Plan as it fluctuates over the term of the guarantee and the United Kingdom Pension Regulator's approval of a funding plan agreed to by the Su bsidiary and the Trustees to close the funding gap identified by the Plan’s most recent local statutory funding valuation agreed to in March 2009.  The funded status of the Plan (calculated in accordance with U.S. GAAP) is included in Pension and other postretirement liabilities presented in the Consolidated Statement of Financial Position.

 
15

 
 
Warranty Costs

The Company has warranty obligations in connection with the sale of its products and equipment.  The original warranty period is generally one year or less.  The costs incurred to provide for these warranty obligations are estimated and recorded as an accrued liability at the time of sale.  The Company estimates its warranty cost at the point of sale for a given product based on historical failure rates and related costs to repair.  The change in the Company's accrued warranty obligations balance, which is reflected in Other current liabilities in the accompanying Consolidated Statement of Financial Position, was as follows:

(in millions)

Accrued warranty obligations as of December 31, 2009
  $ 61  
Actual warranty experience during 2010
    (59 )
2010 warranty provisions
    36  
Accrued warranty obligations as of September 30, 2010
  $ 38  
         

The Company also offers its customers extended warranty arrangements that are generally one year, but may range from three months to three years after the original warranty period.  The Company provides repair services and routine maintenance under these arrangements.  The Company has not separated the extended warranty revenues and costs from the routine maintenance service revenues and costs, as it is not practicable to do so.  Therefore, these revenues and costs have been aggregated in the discussion that follows.  Costs incurred under these arrangements for the nine months ended September 30, 2010 amounted to $126 million.  The change in the Company's deferred revenue balance in relation to these extended warranty and maintenance arrangements from December 31, 2009 to September 30, 2010, 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, 2009
  $ 130  
New extended warranty and maintenance arrangements in 2010
    320  
Recognition of extended warranty and maintenance arrangement revenue in 2010
    (320 )
Deferred revenue on extended warranties as of September 30, 2010
  $ 130  
         

NOTE 9:  RESTRUCTURING AND RATIONALIZATION LIABILITIES

The Company has engaged in restructuring programs in response to significant changes in the business and economic climates in which it operates. Recent restructuring programs included the 2004-2007 Program which was aimed at reducing and realigning our global workforce and assets in order to successfully navigate the transformation from a traditional to a digital imaging company, and the 2009 Program which focused on additional cost reductions to more appropriately size the organization as a result of the economic downturn.  In addition, the Company recognizes the need to continually rationalize its workforce and streamline its operations in the face of ongoing business and economic changes.  As a result, there may be supplemental provisions for new initiatives, as well as changes in estimates to amounts previously re corded, as payments are made or actions are completed.  The actual charges for restructuring and ongoing rationalization initiatives are recorded in the period in which the Company commits to a formalized restructuring or ongoing rationalization plan, or executes the specific actions contemplated by the plans and all criteria for liability recognition under the applicable accounting guidance have been met.

 
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Restructuring and Ongoing Rationalization Reserve Activity

The activity in the accrued balances and the non-cash charges and credits incurred in relation to restructuring initiatives and ongoing rationalization activities for the three and nine months ended September 30, 2010 were as follows:

         
Exit
   
Fixed Assets &
             
   
Severance
   
Costs
   
Inventory
   
Accelerated
       
(in millions)
 
Reserve
   
Reserve
   
Write-downs
   
Depreciation
   
Total
 
                               
Balance as of December 31, 2009
  $ 68     $ 27     $ -     $ -       95  
                                         
Q1 2010 charges
    5       8       -       1       14  
Q1 2010 utilization/cash payments
    (32 )     (5 )     -       (1 )     (38 )
Q1 2010 other adjustments & reclasses  (1)
    (1 )     -       -       -       (1 )
Balance as of March 31, 2010
    40       30       -       -       70  
                                         
Q2 2010 charges
    10       1       -       -       11  
Q2 2010 utilization/cash payments
    (15 )     (7 )     -       -       (22 )
Q2 2010 other adjustments & reclasses  (2)
    (7 )     -       -       -       (7 )
Balance as of June 30, 2010
    28       24       -       -       52  
                                         
Q3 2010 charges  
    21       3       2       3       29  
Q3 2010 utilization/cash payments
    (8 )     (4 )     (2 )     (3 )     (17 )
Q3 2010 other adjustments & reclasses  (3)
    (13 )     -       -       -       (13 )
Balance as of September 30, 2010
  $ 28     $ 23     $ -     $ -     $ 51  
                                         


(1) 
The $(1) million reflects foreign currency translation adjustments.  
(2) 
The $(7) million includes $(6) million for severance-related charges for pension plan curtailments, settlements, and special termination benefits, which are reflected in Pension and other postretirement liabilities and Other long-term assets in the Consolidated Statement of Financial Position.  The remaining $(1) million reflects foreign currency translation adjustments.
(3) 
The $(13) million includes $(15) million for special termination benefits, which are reflected in Other long-term assets in the Consolidated Statement of Financial Position.  The remaining $2 million reflects foreign currency translation adjustments.

The $29 million of charges for the third quarter of 2010 includes $3 million of charges for accelerated depreciation and $2 million for inventory write-downs, which were reported in Cost of goods sold in the accompanying Consolidated Statement of Operations.  The remaining costs incurred of $24 million, including $21 million of severance costs and $3 million of exit costs, were reported as Restructuring costs, rationalization and other in the accompanying Consolidated Statement of Operations.  The severance and exit costs reserves require the outlay of cash, while accelerated depreciation and inventory write-downs represent non-cash items.  

The third quarter 2010 severance costs related to the elimination of approximately 325 positions, including approximately 275 manufacturing and 50 administrative positions.  The geographic composition of these positions includes approximately 300 in the United States and Canada, and 25 throughout the rest of the world.

The charges of $29 million recorded in the third quarter of 2010 included $13 million applicable to FPEG, $2 million applicable to GCG, $1 million applicable to CDG, and $13 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.

 
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For the nine months ended September 30, 2010, the $54 million of charges includes $4 million of charges for accelerated depreciation and $2 million for inventory write-downs, which were reported in Cost of goods sold in the accompanying Consolidated Statement of Operations.  The remaining costs incurred of $48 million, including $36 million of severance costs and $12 million of exit costs, were reported as Restructuring costs, rationalization and other in the accompanying Consolidated Statement of Operations for the nine months ended September 30, 2010.  The severance and exit costs reserves require the outlay of cash, while accelerated depreciation and inventory write-downs represent non-cash items.  

The severance costs for the nine months ended September 30, 2010 related to the elimination of approximately 650 positions, including approximately 500 manufacturing and 150 administrative positions.  The geographic composition of these positions includes approximately 425 in the United States and Canada, and 225 throughout the rest of the world.

The charges of $54 million recorded in the first three quarters of 2010 included $23 million applicable to FPEG, $10 million applicable to GCG, $2 million applicable to CDG, and $19 million that was applicable to manufacturing, research and development, and administrative functions, which are shared across all segments.

As a result of these initiatives, severance payments will be paid during periods through 2011 since, in many 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 2011 and beyond.

NOTE 10:  RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

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

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(in millions)
 
2010
   
2009
   
2010
   
2009
 
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
 
Major defined benefit plans:
                                               
  Service cost
  $ 12     $ 4     $ 13     $ 4     $ 36     $ 12     $ 37     $ 11  
  Interest cost
    66       43       72       46       198       131       227       132  
  Expected return on plan
  assets
    (118 )     (52 )     (123 )     (55 )     (356 )     (156 )     (363 )     (152 )
  Amortization of:
                                                               
     Recognized net actuarial
      loss    
    1       10       1       4       3       27       3       8  
  Pension (income) expense
   before special termination
   benefits, curtailments, and
   settlements
    (39 )     5       (37 )     (1 )     (119 )     14       (96 )     (1 )
  Special termination
   benefits
    15       -       14       -       21       1       61       -  
  Curtailment (gains)
   losses   
    -       -       -       -       -       (1 )     1       -  
  Settlement losses
    -       -       -       -       -       1       -       -  
Net pension (income) expense
    (24 )     5       (23 )     (1 )     (98 )     15       (34 )     (1 )
Other plans including
  unfunded plans
    -       2       -       (1 )     -       8       -       -  
Total net pension (income) expense from continuing operations
  $ (24 )   $ 7     $ (23 )   $ (2 )   $ (98 )   $ 23     $ (34 )   $ (1 )
                                                                 

For the three months ended September 30, 2010 and 2009, $15 million and $14 million, respectively, of special termination benefits charges were incurred as a result of the Company's restructuring actions.  For the nine months ended September 30, 2010 and 2009, $22 million and $61 million, respectively, of special termination benefits charges were incurred as a result of the Company’s restructuring actions.  These charges have been included in Restructuring costs, rationalization and other in the Consolidated Statement of Operations.  Curtailment (gains) losses for the major funded and unfunded U.S. and Non-U.S. defined benefit plans totaling $(1) million and $1 million for the nine months ended September 30, 2010 and 2009, respectively, were also incurred as a result of the Company’s restructur ing actions and, therefore, have been included in Restructuring costs, rationalization and other in the Consolidated Statement of Operations for those respective periods.       

 
18

 
 
The Company made contributions (funded plans) or paid benefits (unfunded plans) totaling approximately $42 million relating to its major U.S. and non-U.S. defined benefit pension plans for the nine months ended September 30, 2010.  The Company expects its contribution (funded plans) and benefit payment (unfunded plans) requirements for its major U.S. and non-U.S. defined benefit pension plans for the balance of 2010 to be approximately $77 million.  

Postretirement benefit costs for the Company's U.S., United Kingdom and Canada postretirement benefit plans, which represent the Company's major postretirement plans, includes:

   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(in millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Service cost
  $ -     $ -     $ -     $ -  
Interest cost
    18       23       54       71  
Amortization of:
                               
   Prior service credit
    (19 )     (17 )     (57 )     (51 )
   Recognized net actuarial loss    
    7       6       21       16  
Other postretirement benefit cost before curtailments and settlements  
    6       12       18       36  
  Curtailment loss
    -       1       -       1  
Total net postretirement benefit expense
  $ 6     $ 13     $ 18     $ 37  
                                 

The Company paid benefits totaling approximately $120 million relating to its U.S., United Kingdom and Canada postretirement benefit plans for the nine months ended September 30, 2010.  The Company expects to pay benefits of approximately $37 million for these postretirement plans for the balance of 2010.

There were no significant remeasurements of the Company’s major pension or postretirement benefit plans for the quarter ended September 30, 2010.

The Kodak Retirement Income Plan (”KRIP”) is the major U.S. defined benefit pension plan.  During the fourth quarter of 2008, the Kodak Retirement Income Plan Committee (“KRIPCO,” the committee that oversees KRIP) approved a change to KRIP’s asset portfolio with the intention of re-assessing the asset allocation and completing a new asset and liability study in early 2009.  The Company originally assumed an 8.0% expected long-term rate of return on plan asset assumption (“EROA”) for 2009 based on the asset allocation at December 31, 2008.  During the first quarter of 2009, as intended, KRIPCO again approved a change in the asset allocation for the KRIP.  A new asset and liability study was completed and resulted in an 8.75% EROA.  As the KRIP was remeasured as of March 31, 2009, the Company’s long-term assumption for EROA for the remainder of 2009 was updated to reflect this change in asset allocation.  The Company’s EROA assumption for KRIP for 2010 is 8.75%.           

NOTE 11:  EARNINGS PER SHARE

Basic earnings per share computations are based on the weighted-average number of shares of common stock outstanding during the year.  As a result of the net loss from continuing operations presented for the three and nine months ended September 30, 2010 and 2009, the Company calculated diluted earnings per share using weighted-average basic shares outstanding for those periods, as utilizing diluted shares would be anti-dilutive to loss per share.  Weighted-average basic shares outstanding for the three months ended September 30, 2010 and 2009 were 268.5 and 268.2 million, respectively.  Weighted-average basic shares outstanding for the nine months ended September 30, 2010 and 2009 were 268.4 and 268.2 million, respectively.   

 
19

 
 
The following potential shares of the Company’s common stock were not included in the computation of diluted earnings per share for
the three and nine months ended September 30, 2010 and 2009 because the Company reported a net loss from continuing operations; therefore, the effects would be anti-dilutive:

(in millions of shares)
 
As of September 30,
 
   
2010
   
2009
 
             
Total employee stock options outstanding
    18.7       22.6  
Total unvested share-based awards outstanding
    9.4       3.0  
   Total
    28.1       25.6  
                 

None of the Company’s outstanding stock options would have been dilutive if the Company had reported earnings from continuing operations primarily because their exercise prices exceeded the average market price of the Company’s common stock for all periods presented.

Diluted earnings per share calculations could also reflect up to 54.3 million shares related to the assumed conversion of approximately $411 million in outstanding convertible notes (the “Convertible Securities”) and warrants to purchase 40 million common shares (the “Warrants”), if dilutive.  The Company’s diluted loss per share amounts exclude the effects of the Convertible Securities and Warrants, as they were anti-dilutive for all periods presented.    

NOTE 12:  SHAREHOLDERS' EQUITY

The Company has 950 million shares of authorized common stock with a par value of $2.50 per share, of which 391 million shares had been issued as of September 30, 2010 and December 31, 2009.  Treasury stock at cost consisted of approximately 122 million and 123 million shares as of September 30, 2010 and December 31, 2009, respectively.

Comprehensive Loss

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
(in millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Net loss
  $ (43 )   $ (111 )   $ (92 )   $ (653 )
Realized and unrealized gain (loss) from hedging activity, net of tax and reclassifications
    (3 )     -       (5 )     14  
Currency translation adjustments
    39       12       55       -  
Pension and other postretirement benefit plan obligation activity, net of tax
    (3 )     (626 )     (154 )     (1,170 )
Total comprehensive loss, net of tax
  $ (10 )   $ (725 )   $ (196 )   $ (1,809 )
                                 

NOTE 13:  SEGMENT INFORMATION   

Current Segment Reporting Structure

The Company has three reportable segments: Consumer Digital Imaging Group (“CDG”), Film, Photofinishing and Entertainment Group (“FPEG”), and Graphic Communications Group (“GCG”).  The balance of the Company's continuing operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other.  A description of the segments is as follows.   

 
20

 
 
Consumer Digital Imaging Group Segment (“CDG”):  CDG encompasses digital still and video cameras, digital devices such as picture frames, kiosks, APEX drylab systems, and related consumables and services, consumer inkjet printing systems, Kodak Gallery products and services, and imaging sensors.  CDG also includes the licensing activities related to the Company's intellectual property in digital imaging products.   

Film, Photofinishing and Entertainment Group Segment (“FPEG”):  FPEG encompasses consumer and professional film, one-time-use cameras, aerial and industrial film, and entertainment imaging products and services.   In addition, this segment also includes paper and output systems, and photofinishing services.  This segment provides consumers, professionals, cinematographers, and other entertainment imaging customers with film-related products and services.     

Graphic Communications Group Segment (“GCG”): GCG serves a variety of customers in the creative, in-plant, data center, commercial printing, packaging, newspaper and digital service bureau market segments with a range of software, media and hardware products that provide customers with a variety of solutions for prepress equipment, workflow software, analog and digital printing, and document scanning.  Products and related services includeworkflow software and digital controllers; digital printing, which includes commercial inkjet and electrophotographic products, including equipment, consumables and service; prepress consumables; prepress equipment and packaging solutions; business solutions and consulting services; and document scanners.

All Other:  This category included the results of the Company’s display business, up to the date of sale of assets of this business in the fourth quarter of 2009.     

Segment financial information is shown below:

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
(in millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Net sales from continuing operations:
                       
                         
Consumer Digital Imaging Group
  $ 670     $ 535     $ 2,008     $ 1,407  
Film, Photofinishing and Entertainment Group
    431       572       1,328       1,668  
Graphic Communications Group
    657       674       1,924       1,947  
All Other
    -       -       -       2  
  Consolidated total
  $ 1,758     $ 1,781     $ 5,260     $ 5,024  
                                 
 

 
 
21

 

   
Three Months Ended
 September 30,
   
Nine Months Ended
 September 30,
 
(in millions)
 
2010
   
2009
   
2010
   
2009
 
                         
Earnings (loss) from continuing operations before interest expense, other income (charges), net and income taxes:
                       
                         
Consumer Digital Imaging Group
  $ 82     $ (89 )   $ 387     $ (345 )
Film, Photofinishing and Entertainment Group
    20       47       65       106  
Graphic Communications Group
    (19 )     10       (41 )     (78 )
All Other
    1       (4 )     (1 )     (10 )
  Total of segments
    84       (36 )     410       (327 )
Restructuring costs, rationalization and other
    (29 )     (35 )     (54 )     (197 )
Other operating income (expenses), net
    3       (10 )     1       (13 )
Legal contingencies and settlements
    -       -       (10 )     (6 )
Negative goodwill reversal
    -       -       -       7  
Loss on early extinguishment of debt, net
    -       -       (102 )     -  
Interest expense
    (38 )     (27 )     (117 )     (75 )
Other income (charges), net
    8       9       4       8  
Consolidated earnings (loss) from continuing operations before income taxes
  $ 28     $ (99 )   $ 132     $ (603 )
                                 


(in millions)  
 
As of
September 30,
2010
   
As of
December 31,
2009
 
             
Segment total assets:
           
             
Consumer Digital Imaging Group
  $ 1,312     $ 1,203  
Film, Photofinishing and Entertainment Group
    1,859       1,992  
Graphic Communications Group
    1,667       1,737  
   Total of segments
    4,838       4,932  
Cash and marketable securities
    1,399       2,031  
Deferred income tax assets
    692       728  
Consolidated total assets
  $ 6,929     $ 7,691  
                 
 

 
 
22

 
 
NOTE 14:  FINANCIAL INSTRUMENTS

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

     
Assets
 
(in millions)
   
September 30, 2010
   
December 31, 2009
 
 
Balance Sheet Location
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
                           
Marketable securities:
                         
    Available-for-sale (1)
Other long-term assets
  $ 9     $ 9     $ 7     $ 7  
    Held-to-maturity (2)
Other current assets and Other long-term assets
    -       -       8       9  
                                   
Derivatives designated as hedging instruments:
                                 
    Commodity contracts (1)
Receivables, net
    1       1       1       1  
                                   
Derivatives not designated as hedging instruments:  
                                 
    Foreign exchange contracts (1)
Receivables, net
    16       16       7       7  
                                   
                                   
     
Liabilities
 
(in millions)
   
September 30, 2010
   
December 31, 2009
 
 
Balance Sheet Location
 
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
                                   
Long-term borrowings, net of current portion (2)
Long-term debt, net of current portion
  $ 1,189     $ 1,172     $ 1,129     $ 1,142  
                                   
Derivatives not designated as hedging instruments:  
                                 
    Foreign exchange contracts (1)
Other current liabilities
    24       24       11       11  
    Foreign exchange contracts (1)
Other long-term liabilities
    1       1       6       6  
                                   

(1)  Recorded at fair value.
(2)  Recorded at historical cost.

Long-term debt is generally used to finance long-term investments, while short-term borrowings (excluding the current portion of long-term debt) are used to meet working capital requirements.  The carrying value of the current portion of long-term debt approximates its fair value.  The Company does not utilize financial instruments for trading or other speculative purposes.

Fair value

The fair values of marketable securities are determined using quoted prices in active markets for identical assets (Level 1 fair value measurements).  Fair values of the Company’s forward contracts are determined using significant other observable inputs (Level 2 fair value measurements), and are based on the present value of expected future cash flows (an income approach valuation technique) considering the risks involved and using discount rates appropriate for the duration of the contracts.  Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer.  There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2010.  
 

 
 
23

 
 
Fair values of long-term borrowings are determined by reference to quoted market prices, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates.  The carrying values of cash and cash equivalents, trade receivables, short-term borrowings and payables (which are not shown in the table above) approximate their fair values.

Foreign exchange

Foreign exchange gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in Other income (charges), net in the accompanying Consolidated Statement of Operations.  The net effects of foreign currency transactions, including changes in the fair value of foreign exchange contracts, are shown below:

(in millions)
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net gain (loss)
  $ 5     $ 10     $ (6 )   $ (11 )
                                 


Derivative financial instruments

The Company, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates, commodity prices, and interest rates, which may adversely affect its results of operations and financial position.  The Company manages such exposures, in part, with derivative financial instruments.

Foreign currency forward contracts are used to mitigate currency risk related to foreign currency denominated assets and liabilities, especially those of the Company’s International Treasury Center.  Silver forward contracts are used to mitigate the Company’s risk to fluctuating silver prices.  The Company’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs.

The Company’s financial instrument counterparties are high-quality investment or commercial banks with significant experience with such instruments.  The Company manages exposure to counterparty credit risk by requiring specific minimum credit standards and diversification of counterparties.  The Company has procedures to monitor the credit exposure amounts.  The maximum credit exposure at September 30, 2010 was not significant to the Company.

In the event of a default under the Company’s Amended Credit Agreement, or a default under any derivative contract or similar obligation of the Company, the derivative counterparties would have the right, although not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value, but with liability positions netted against asset positions with the same counterparty.  At September 30, 2010, the Company had open derivative contracts in liability positions with a total fair value of $25 million.
 
 
 
24

 

 
The location and amounts of pre-tax gains and losses related to derivatives reported in the Consolidated Statement of Operations are shown in the following tables:

Derivatives in Cash Flow Hedging Relationships
 
Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
   
Gain (Loss) Reclassified from Accumulated OCI Into Cost of Goods Sold (Effective Portion)
   
Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
(in millions)
 
For the three months
ended September 30,
   
For the three months
ended September 30,
   
For the three months
ended September 30,
 
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
 
                                     
Commodity contracts
  $ -     $ 1     $ 1     $ 2     $ -     $ -  
Foreign exchange contracts
    (2 )     (1 )     -       -       -       -  
                                                 
   
For the nine months
 ended September 30,
   
For the nine months
 ended September 30,
   
For the nine months
 ended September 30,
 
      2010       2009       2010       2009       2010       2009  
                                                 
Commodity contracts
  $ 4     $ 15     $ 7     $ 1     $ -     $ -  
Foreign exchange contracts
    (2 )     (1 )     -       -       -       -  
                                                 


Derivatives Not Designated as Hedging Instruments
Location of Gain or (Loss) Recognized in Income on Derivative
 
Gain (Loss) Recognized in Income on Derivative
 
(in millions)
   
For the three months
ended September 30,
   
For the nine months
 ended September 30,
 
     
2010
   
2009
   
2010
   
2009
 
                           
Foreign exchange contracts
Other income (charges), net
  $ (7 )   $ (11 )   $ 24     $ 24  
                                   

Foreign currency forward contracts

The Company’s foreign currency forward contracts used to mitigate currency risk related to existing foreign currency denominated assets and liabilities are not designated as hedges, and are marked to market through net (loss) earnings at the same time that the exposed assets and liabilities are remeasured through net (loss) earnings (both in Other income (charges), net).  The notional amount of such contracts open at September 30, 2010 was approximately $1.4 billion.  The majority of the contracts of this type held by the Company are denominated in euros, British pounds and Hong Kong dollars.    

A subsidiary of the Company entered into intercompany foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to forecasted foreign currency denominated intercompany sales.  The value of the notional amounts of such contracts open at September 30, 2010 was $22 million.  At September 30, 2010, that subsidiary had cash flow hedges for the British pound against the euro with maturity dates ranging from October 2010 to January 2011.  At September 30, 2010, the fair value of all open foreign currency forward contracts hedging foreign currency denominated intercompany sales was a net unrealized gain of $1 million (pre-tax), recorded in accumulated other comprehensive (loss) income.  If this amount were to be realized, all of it would be reclassified into cost of goods sold during the next twelve months.  Nothing related to closed foreign currency contracts hedging foreign currency denominated intercompany sales was deferred in accumulated other comprehensive (loss) income.  Amounts are reclassified into cost of goods sold as the inventory transferred in connection with the intercompany sales is sold to third parties, all within the next twelve months.  During the third quarter of 2010, a pre-tax gain of less than $1 million was reclassified from accumulated other comprehensive (loss) income to cost of goods sold.  Hedge ineffectiveness was insignificant.  
 
 
 
25

 

 
A subsidiary of the Company entered into intercompany foreign currency forward contracts that are designated as cash flow hedges of exchange rate risk related to forecasted foreign currency denominated purchases.  The value of the notional amounts of such contracts open at September 30, 2010 was $49 million.  At September 30, 2010, that subsidiary had cash flow hedges for the U.S. dollar against the euro with maturity dates ranging from October 2010 to January 2011.  At September 30, 2010, the fair value of all open foreign currency forward contracts hedging foreign currency denominated purchases was a net unrealized loss of $3 million (pre-tax), recorded in accumulated other comprehensive (loss) income.  If this amount were to be realized, all of it would be reclassified into cost of goods sold during the next twelve months.  Nothing related to closed foreign currency contracts hedging foreign currency denominated purchases was deferred in accumulated other comprehensive (loss) income.  Amounts are reclassified into cost of goods sold as the inventory transferred in connection with the purchases is sold to third parties, all within the next twelve months.  During the third quarter of 2010, a pre-tax loss of less than $1 million was reclassified from accumulated other comprehensive (loss) income to cost of goods sold.  Hedge ineffectiveness was insignificant.  

Silver forward contracts

The Company enters into silver forward contracts that are designated as cash flow hedges of commodity price risk related to forecasted purchases of silver.  The value of the notional amounts of such contracts open at September 30, 2010 was $2 million.  Hedge gains and losses related to these silver forward contracts are reclassified into cost of goods sold as the related silver-containing products are sold to third parties.  These gains or losses transferred to cost of goods sold are generally offset by increased or decreased costs of silver purchased in the open market.  The amount of existing gains and losses at September 30, 2010 to be reclassified into earnings within the next 12 months is a net gain of $2 million.  At September 30, 2010, the Company had hedges of forecasted purchas es through October 2010.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company’s key goals for 2010 are:
·  
Improve segment earnings
·  
Accelerate digital revenue growth
·  
Continue to invest in new markets in need of transformation
·  
Exploit benefits of operating leverage
·  
Drive positive cash flow before restructuring

During the first nine months of 2010, the economy continued to recover, albeit at varying rates around the world.  Asia continues to lead the way in the global recovery.  In the U.S., consumers remain cautious, contributing to a continued softness in demand for the Company’s consumer products, which are largely discretionary in nature.  Sales and earnings of the Company’s consumer businesses are linked to the timing of holidays, vacations, and other leisure or gifting seasons.  Continued weakness in consumer spending has resulted in price pressures, which have had an impact in the Company’s CDG segment.  The Company has worked with its suppliers to mitigate the impact of industry-wide electronic components supply constraints on its full year digital revenue growth.  ; Additionally, we continue to have success with our intellectual property licensing programs.  As print demand recovers, the GCG segment continues to see increased volumes for printing consumables and digital printing equipment.  This increased demand, combined with productivity improvements, has resulted in improved profitability for the segment in spite of pricing pressures caused by industry overcapacity.  Sales within the FPEG segment decreased in the first three quarters of 2010 as compared with the prior year period, reflecting continued secular declines.

For the remainder of 2010, the Company will continue to focus on leveraging its expanding portfolio of digital and traditional businesses, and will maintain its focus on operational efficiency to deliver on its revenue, earnings, and cash flow goals for the year.  The Company believes that the actions taken during 2009 have helped to mitigate the impacts of the challenges noted above to its results in 2010 and position it well for the future.  In addition, the Company is monitoring the impact of both commodity prices and foreign exchange, and will continue to pursue operational and financial counter-measures to partially mitigate any potential adverse impacts to the Company’s results.
 
 
 
26

 

 
In the first quarter of 2010, the Company issued $500 million of 9.75% senior secured notes due March 1, 2018.  The net proceeds of this issuance were used to repurchase all of the 10.5% senior secured notes due 2017 ($300 million) and to fund the tender of $200 million of the Company’s 7.25% senior notes due 2013.  These financing transactions provide the Company with increased financial flexibility resulting from extended maturity dates.  The next significant debt maturity is in 2013, and the majority of the Company’s debt is due in 2017 and beyond.

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law in the United States.  This legislation extends health care coverage to many uninsured individuals and expands coverage to those already insured.  The Company is continuing to assess the potential impacts that this legislation may have on future results of operations, cash flows or financial position related to our health care benefits and postretirement health care obligations.  One provision that will impact certain companies significantly is the change in the tax deductibility of the Medicare Part D subsidy available from the U.S. Government to companies that provide qualifying prescription drug coverage to retirees.  This provision does not impact the Company, as the Company does not receive this subsidy.

Kodak Operating Model and Reporting Structure

The Company has three reportable segments: Consumer Digital Imaging Group (“CDG”), Film, Photofinishing and Entertainment Group (“FPEG”), and Graphic Communications Group (“GCG”).  Within each of the Company’s reportable segments are various components, or Strategic Product Groups (“SPGs”).  Throughout the remainder of this document, references to the segments’ SPGs are indicated in italics.  The balance of the Company's continuing operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other.  A description of the segments is as follows:   

Consumer Digital Imaging Group Segment (“CDG”):  This segment provides a full range of digital imaging products and service offerings to consumers.  CDG encompasses the following SPGs.  Products and services included within each SPG are identified below.

Digital Capture and Devices includes digital still and pocket video cameras, digital picture frames, imaging essentials, branded license products, imaging sensors, and licensing activities related to the Company’s intellectual property in digital imaging products.

Consumer Inkjet Systems includes consumer inkjet printers and related ink and media consumables.

Retail Systems Solutions includes kiosks, APEX drylab systems, and related consumables and services.

Consumer Imaging Services includes Kodak Gallery products and photo sharing services.

Film, Photofinishing and Entertainment Group Segment (“FPEG”):  This segment provides consumers, professionals, cinematographers, and other entertainment imaging customers with film-related products and services.  FPEG encompasses the following SPGs.  Products and services included within each SPG are identified below.

Film Capture includes consumer and professional film and one-time-use cameras.

Traditional Photofinishing includes paper and output systems and photofinishing services.

Entertainment Imaging includes entertainment imaging products and services.   

Industrial Films includes aerial and industrial film products and components sales.

Graphic Communications Group Segment (“GCG”): GCG serves a variety of customers in the creative, in-plant, data center, commercial printing, packaging, newspaper and digital service bureau market segments with a range of software, media and hardware products that provide customers with a variety of solutions for prepress equipment, workflow software, analog and digital printing, and document scanning.  GCG encompasses the following SPGs.  Products and services included within each SPG are identified below.
 
 
 
27

 

 
Prepress Solutions includes digital and traditional prepress equipment, consumables including plates, chemistry and media, related services, and packaging solutions.

Digital Printing Solutions includes high-speed, high-volume commercial inkjet, and color and black-and-white electrophotographic printing equipment and related consumables and services.

Business Services and Solutions includesworkflow software and digital controllers, document scanning products and services and related maintenance offerings.  Also included in this SPG are the activities related to the Company’s business solutions and consulting services.
 
All Other:  This category included the results of the Company’s display business, up to the date of sale of assets of this business in the fourth quarter of 2009.

Net Sales from Continuing Operations by Reportable Segment and All Other

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(dollars in millions)
             
%
   
Foreign Currency
               
%
   
Foreign Currency
 
   
2010
   
2009
   
Change
   
Impact*
   
2010
   
2009