ek2009_10k.htm


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

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

For the year ended December 31, 2009 or

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

For the transition period fromto

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
_____________

Securities registered pursuant to Section 12(b) of the Act:

 
Title of each Class
Name of each exchange on which registered
 
Common Stock, $2.50 par value
New York Stock Exchange
   
   
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes[X]No[   ]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes[  ]No[X]


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 Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T  (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes   [   ]             No    [   ]             

 

 
 

 


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[  ]


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company.  See the definitions 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]


The aggregate market value of the voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant's most recently completed second fiscal quarter, June 30, 2009, was approximately $0.8 billion.  The registrant has no non-voting common stock.  

The number of shares outstanding of the registrant's common stock as of February 11, 2010 was 268,643,869 shares of common stock.
 
DOCUMENTS INCORPORATED BY REFERENCE

PART III OF FORM 10-K

The following items in Part III of this Form 10-K incorporate by reference information from the Notice of 2010 Annual Meeting and Proxy Statement:

Item 10 - -DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Item 11 - -EXECUTIVE COMPENSATION

Item 12 - -SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Item 13 - -CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

Item 14 - -PRINCIPAL ACCOUNTING FEES AND SERVICES


 
2

 


Eastman Kodak Company
Form 10-K
December 31, 2009

Table of Contents
     
   
Page
     
     
     
Business
4
Risk Factors
10
Unresolved Staff Comments
19
Properties
19
Legal Proceedings
20
Submission of Matters to a Vote of Security Holders
22
 
Executive Officers of the Registrant
22
     
     
     
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
25
Selected Financial Data
27
Management's Discussion and Analysis of Financial Condition and Results of Operations
27
 
Liquidity and Capital Resources
54
Quantitative and Qualitative Disclosures About Market Risk
62
Financial Statements and Supplementary Data
63
 
Consolidated Statement of Operations
64
 
Consolidated Statement of Financial Position
65
 
Consolidated Statement of Shareholders' Equity
66
 
Consolidated Statement of Cash Flows
69
 
Notes to Financial Statements
71
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
135
Controls and Procedures
135
Other Information
136
     
     
Directors, Executive Officers and Corporate Governance
136
Executive Compensation
136
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
136
Certain Relationships and Related Transactions, and Director Independence
138
Principal Accounting Fees and Services
138
     
     
Exhibits, Financial Statement Schedules
138
 
139
 
140
 
141


 
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PART I
ITEM 1.  BUSINESS

Eastman Kodak Company (the “Company” or “Kodak”) helps consumers, businesses, and creative professionals unleash the power of pictures and printing to enrich their lives.  When used in this report, unless otherwise indicated, “we,” “our,” “us,” the “Company” and “Kodak” refer to Eastman Kodak Company.  The Company’s products span:

·  
Digital still and video cameras and related accessories
·  
Consumer inkjet printers and media
·  
Digital picture frames
·  
Retail printing kiosks, APEX drylab systems and related media
·  
KODAK Gallery online imaging services
·  
Prepress equipment and consumables
·  
Workflow software for commercial  printing
·  
Electrophotographic equipment and consumables
·  
Commercial inkjet printing systems
·  
Document scanners
·  
Origination and print films for the entertainment industry
·  
Consumer and professional photographic film
·  
Photographic paper and processing chemicals
·  
Wholesale photofinishing services

Kodak was founded by George Eastman in 1880 and incorporated in 1901 in the State of New Jersey.  The Company is headquartered in Rochester, New York.

The recessionary trends in the global economy, which began in 2008 and continued through much of 2009, significantly impacted the Company’s revenue.  While the rate of decline slowed significantly in the fourth quarter of 2009, the level of business activity has not returned to pre-recession levels.  During this recessionary period, the Company maintained market leading positions in large product segments and gained market share with investments into large market categories in need of transformation.  The Company ended 2009 with a more efficient cost structure and a strong cash position.  The Company believes it is entering 2010 with its most competitive digital portfolio ever, sustainable traction in new markets, value propositions that are embraced by its customers and a leaner cost structure that will help deliver profitable digital growth.
 
 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



 
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REPORTABLE SEGMENTS    

As of and for the year ended December 31, 2009, the Company reported financial information for 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 operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other.  

The following business discussion is based on the three reportable segments and All Other as they were structured as of and for the year ended December 31, 2009.  The Company's sales, earnings and assets by reportable segment for these three reportable segments and All Other for each of the past three years are shown in Note 24, “Segment Information,” in the Notes to Financial Statements.

CONSUMER DIGITAL IMAGING GROUP (“CDG”) SEGMENT

CDG's mission is to enhance people’s lives and social interactions through the capabilities of digital imaging technology, combined with Kodak’s unique consumer knowledge, brand and intellectual property.  This focus has led to a full range of product and service offerings to the consumer.  CDG’s strategy is to extend image taking, searching and organizing, sharing and printing to bring innovative new experiences to consumers – in ways that extend Kodak’s legendary heritage in ease of use.

Digital Capture and Devices: Consumer digital capture and devices include digital still and pocket video cameras, digital picture frames, and imaging essentials, as well as branded licensed products.  These product lines fuel Kodak’s participation in the imaging device and accessory markets.  Products are sold directly to retailers or distributors, and are also available to customers through the Internet at the KODAK Store (www.kodak.com) and other online providers.   In January 2010, Kodak extended its pocket video camera line, following the success of the KODAK Zi6 Pocket Video Camera, which was launched in 2009.  The line now includes the KODAK Zi8, which added an external mic jack; and the KODAK PlaySport pocket video camera, which is rugged, waterproof and is designed for action and adventure.  KODAK pocket video cameras allow consumers to take stunning high definition videos, which can be easily uploaded to YOUTUBE via a built-in USB connector.  Additionally, the Company also introduced a variety of stylish and compact digital still cameras with the unique and innovative ‘SHARE’ button that enables simple upload to YOUTUBE, FLICKR, FACEBOOK, and KODAK Gallery (“Gallery”) for archiving and gifting.  Another unique product is the KODAK Slice TouchScreen digital camera, a powerful camera and photo album in one that makes storing, sorting and sharing pictures easy with its 2 GB internal memory and Smart Find Facial Recognition Technology.

Digital Capture and Devices also includes the licensing activities related to the Company’s intellectual property in digital imaging products.  These arrangements provide the Company with design freedom, access to new markets and partnerships, and the generation of cash and income.

Kodak is a leader in the digital picture frame category.  The newest product in the line, announced at the Consumer Electronics Show in January 2010 is the KODAK Pulse digital frame.  This wireless picture frame has its own email address that receives photos automatically and allows consumers to view albums from FACEBOOK and Gallery.  The full line of frames – both standard and wireless – enable consumers to easily share and view images and videos with family and friends simply and easily.

Retail Systems Solutions: The Retail Systems Solutions group’s product and service offerings to retailers include retail kiosks and consumables, consumer and retailer software workflows, remote business monitoring, retail store merchandising and identity programs, and after sale service and support.  Consumers can make a wide variety of photo gifts, including among others, photobooks, posters and custom cards, all instantly and around the corner at a KODAK kiosk.

The DL2100 printer, which retailers can connect directly to a kiosk or Adaptive Picture Exchange ("APEX") drylab system, enables customers to make double-sided photobooks, calendars and greeting cards, almost instantly in-store.  This high-quality printer enables consumers to personalize their products with sentiments and captions and then take home a finished, personalized product.  Other popular Kodak premium products available quickly and easily in many of the world’s largest retailers include the KODAK Picture-Movie DVD, which combines original artist music with  the consumer’s own pictures and creates a powerful multimedia show playable on any DVD player, along with posters, collages and more.

 
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Consumer Inkjet Systems: Since the introduction of the KODAK All-in-One Inkjet printers in 2007, the portfolio has expanded through the introduction of a printer designed for the small office/home office market, the introduction of new ink cartridge options, and expansion into more markets.  As of January 2009, our newest wireless printers have a unique application that allows consumers to print photos in multiple sizes with the free KODAK Pic Flick App from an IPHONE or IPOD TOUCH, or photos and documents from a wifi enabled smartphone.  During 2009, we once again doubled the national installed base for our consumer inkjet printers – to more than two million units.

Online Imaging Services: KODAK Gallery is a leading online merchandise and photo sharing service.  The Kodakgallery.com site provides consumers with a secure and easy way to view, store and share their images with friends and family, and to receive Kodak prints and other creative products from their pictures, such as photo books, frames, calendars, and a host of other personalized merchandise.  Personalized photo cards are also available with original designs by popular designers including Martha Stewart, Simon and Kubuki and world-renown children’s author Eric Carle.  Products are distributed directly to consumers’ homes, or through major retailers.  The site is a chosen partner for leading companies such as ADOBE, MICROSOFT, and AMAZON.  In addition to Kodakgallery.com in the U.S., we operate seven sites across Europe.

Kodak also distributes KODAK EasyShare desktop software at no charge to consumers, which provides easy organization and editing tools, and unifies the experience between digital cameras, printers, and the KODAK Gallery services.

Imaging Sensors: Kodak's line of CCD sensors provides an attractive market opportunity, including mobile, automotive, industrial and professional imaging sectors.  Kodak has leading sensor architecture intellectual property positions.

Marketing and Competition: The Company faces competition from other online service companies, consumer electronics and printer companies in the markets in which it competes, generally competing on price, features, and technological advances.

The key elements of CDG’s marketing strategy emphasize ease of use, quality and the complete solution offered by KODAK Products and Services.  This is communicated through a combination of in-store presentation, an aggressive social media strategy; online marketing, advertising, customer relationship marketing and public relations.  The Company's advertising programs actively promote the segment’s products and services in its various markets, and its principal trademarks, trade dress, and corporate symbol are widely used and recognized.  Kodak is frequently noted by trade and business publications as one of the most recognized and respected brands in the world.

FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP (“FPEG”) SEGMENT  

This segment is composed of traditional photographic products and services including paper, film and chemistry used for consumer, professional and industrial imaging applications and those products and services used in the creation and exhibition of motion pictures.  The Company manufactures and markets films (motion picture, consumer, professional, industrial and aerial), one-time-use cameras, photographic paper and photo chemicals, and industrial components.

The market for consumer and professional films, traditional photofinishing and certain industrial and aerial films are in decline and expected to continue to decline due to digital substitution.

Motion picture and television production activities were impacted throughout most of 2009 by industry-specific labor issues, the overall economic impact on global advertising spend (broadcast commercials) and the availability of financing for independent feature filmmakers.  These factors resulted in lower film production and the use of digital technology, as expected.  However, Kodak motion picture print film showed slightly increased volumes despite a number of new digital cinema installations feeding the 3D pipeline.  Print volumes have remained strong because the exhibition market returned to growth in 2009.  Kodak benefited from this growth and gained market share due to a higher proportion of major studio release activity.

 
6

 

 
Marketing and Competition: The fundamental elements of the Company’s strategy with respect to the photographic products in this segment are to maintain a profitable and sustainable business model, serving customers for traditional products while aggressively managing our cost structure for those businesses in decline.

As our silver halide business continues to mature, we are also looking at different ways to leverage these core capabilities outside of our traditional business applications.  Opportunities exist to grow existing, nascent businesses and develop new businesses utilizing Kodak’s existing capabilities in materials science, coating technology and base manufacture.  Segments on which we are currently focusing for these opportunities include gelatin, silver and chemical components, industrial films, motion picture special effects services and event imaging services.   

The Company’s strategy for the Entertainment Imaging business is to sustain motion picture film’s position as the pre-eminent capture medium for the creation of feature films, television dramas and commercials.  Selective investments to improve film’s superior image capture and quality characteristics are part of this strategy.  Kodak has the leading share of the origination film market led by the new VISION3 family of color negative films, and the widely acclaimed OSCAR-award-winning VISION2 series.  

The distribution of motion pictures to theaters on print film is another important element of the business, one in which the Company continues to be widely recognized as the market leader.  Price competition is a bigger factor in this segment of the motion picture market, but the Company continues to maintain the leading share position, largely due to several multi-year agreements with the major studios.  

Throughout the world, most Entertainment Imaging products are sold directly to studios, laboratories, independent filmmakers or production companies.  Quality and availability are important factors for these products, which are sold in a price-competitive environment.  As the industry moves to digital formats, the Company anticipates that it will face new competitors, including some of its current customers and other electronics manufacturers.  

Film products and services for the consumer and professional markets and traditional photofinishing are sold throughout the world, both directly to retailers, and increasingly through distributors.  Price competition continues to exist in all marketplaces.  To be more cost competitive with its traditional photofinishing and film offerings, and to shift towards a variable cost model, the Company has rationalized capacity and restructured its go-to-market models in many of its traditional segments.  The Company will continue to manage this business to focus on cash flow and earnings performance in this period of ongoing revenue decline.  

GRAPHIC COMMUNICATIONS GROUP (“GCG”) SEGMENT

The Graphic Communications Group segment of Kodak is committed to helping its customers grow their businesses by offering innovative, powerful solutions that enhance production efficiency, open new revenue opportunities, and improve return on marketing investment.  The Graphic Communications Group segment serves a variety of customers in the creative, in-plant, data center, commercial printing, packaging, newspaper, and digital prepress market segments with a range of software, media, and hardware products.  Representing one of the broadest portfolios in the industry, product categories range from prepress equipment, workflow software, and digital and traditional printing to document scanning and multi-vendor services.  Products include digital and traditional prepress equipment and consumables, including plates, chemistry, and media; workflow software and controller software for driving digital output devices; color and black-and-white electrophotographic printing equipment and consumables; high-speed, high-volume commercial inkjet printing systems; high-speed production and workgroup document scanners; and micrographic peripherals and media (including micrographic films).  GCG also provides maintenance and professional services for Kodak and other manufacturers' products, as well as providing imaging services to customers.

In the third quarter of 2009, the Company acquired the scanner division of BÖWE BELL + HOWELL, which markets a portfolio of production document scanners that complements the products currently offered within the GCG segment.  Through this acquisition, Kodak expects to expand customer value by providing a wider choice of production scanners.  As Kodak has provided field service to BÖWE BELL + HOWELL scanners since 2001, this acquisition is also expected to enhance global access to service and support for channel partners and end-user customers worldwide.

 
7

 


Marketing and Competition:  Around the world, graphic communications products are sold through a variety of direct and indirect channels.  The end users of these products include businesses in the prepress, commercial printing, data center, in-plant, newspaper and packaging market segments.  The Company has developed a wide-ranging portfolio of digital products - workflow, equipment, media, and services - that combine to create a value-added complete solution to customers.  Maintenance and professional services for the Company's products are sold either through product distribution channels or directly to the end users.  In addition, a range of inkjet products for digital printing and proofing are sold through direct and indirect means.  Document scanners are sold primarily through a two-tiered distribution channel to a number of different industries.      

FINANCIAL INFORMATION BY GEOGRAPHIC AREA

Financial information by geographic area for the past three years is shown in Note 24, “Segment Information,” in the Notes to Financial Statements.

RAW MATERIALS

The raw materials used by the Company are many and varied, and are generally readily available.  Lithographic aluminum is the primary material used in the manufacture of offset printing plates.  The Company procures raw aluminum coils from several suppliers on a spot basis or under contracts generally in place over the next one to three years.  Silver is one of the essential materials used in the manufacture of films and papers.  The Company purchases silver from numerous suppliers under annual agreements or on a spot basis.  Paper base is an essential material in the manufacture of photographic papers.  The Company has a contract to acquire paper base from a certified photographic paper supplier over the next several years.   

SEASONALITY OF BUSINESS

Sales and earnings of the CDG segment are linked to the timing of holidays, vacations and other leisure or gifting seasons.  Sales of digital products are typically highest in the last four months of the year.  Digital capture and consumer inkjet printing products have experienced peak sales in this period as a result of the December holidays.  However, the economic downturn that continued through 2009 resulted in a significant decline in consumer discretionary spending that negatively impacted the Company’s digital camera and digital picture frame businesses in the CDG segment.  CDG net sales in the fourth quarter increased from 31% of CDG’s full-year revenue for 2008 to 46% of full-year revenue for 2009.  However, much of this was related to the timing of non-recurring intellectual property arrangements as compared with the prior year.  Sales are normally lowest in the first quarter due to the absence of holidays and fewer picture-taking and gift-giving opportunities during that time.

Sales and earnings of the FPEG segment are linked to the timing of holidays, vacations and other leisure activities.  Sales and earnings of traditional film and photofinishing products are normally strongest in the second and third quarters as demand is high due to heavy vacation activity and events such as weddings and graduations.  Sales of entertainment imaging film are typically strongest in the second quarter reflecting demand due to the summer motion picture season.

Sales and earnings of the GCG segment generally exhibit modestly higher levels in the fourth quarter, due to seasonal customer demand linked to commercial year-end advertising processes.  

RESEARCH AND DEVELOPMENT

Through the years, the Company has engaged in extensive and productive efforts in research and development.


 
8

 

Research and development expenditures for the Company’s three reportable segments and All Other were as follows:

(in millions)
 
For the Year Ended December 31,
 
   
2009
   
2008
   
2007
 
Consumer Digital Imaging Group
  $ 146     $ 205     $ 242  
Film, Photofinishing and Entertainment Group
    33       49       60  
Graphic Communications Group
    171       221       207  
All Other
    6       3       16  
         Total
  $ 356     $ 478     $ 525  
                         


Research and development is headquartered in Rochester, New York.  Other U.S. groups are located in Boston, Massachusetts; New Haven, Connecticut; Dayton, Ohio; and San Jose, Emeryville, and San Diego, California.  Outside the U.S., groups are located in Canada, England, Israel, Germany, Japan, China, and Singapore.  These groups work in close cooperation with manufacturing units and marketing organizations to develop new products and applications to serve both existing and new markets.

It has been the Company's general practice to protect its investment in research and development and its freedom to use its inventions by obtaining patents.  The ownership of these patents contributes to the Company's ability to provide leadership products and to generate revenue from licensing.  The Company holds portfolios of patents in several areas important to its business, including digital cameras and image sensors; network photo sharing and fulfillment; flexographic and lithographic printing plates and systems; digital printing workflow and color management proofing systems; color and black-and-white electrophotographic printing systems; commercial, and consumer inkjet printers; inkjet inks and media; thermal dye transfer and dye sublimation printing systems; digital cinema; and color negative films, processing and papers.  Each of these areas is important to existing and emerging business opportunities that bear directly on the Company's overall business performance.

The Company's major products are not dependent upon one single, material patent.  Rather, the technologies that underlie the Company's products are supported by an aggregation of patents having various remaining lives and expiration dates.  There is no individual patent expiration or group of patents expirations which are expected to have a material impact on the Company's results of operations.

ENVIRONMENTAL PROTECTION

The Company is subject to various laws and governmental regulations concerning environmental matters.  The U.S. federal environmental legislation and state regulatory programs having an impact on the Company include the Toxic Substances Control Act, the Resource Conservation and Recovery Act, the Clean Air Act, the Clean Water Act, the NY State Chemical Bulk Storage Regulations and the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (the “Superfund Law”).

It is the Company’s policy to carry out its business activities in a manner consistent with sound health, safety and environmental management practices, and to comply with applicable health, safety and environmental laws and regulations.  The Company continues to engage in programs for environmental, health and safety protection and control.

Based upon information presently available, future costs associated with environmental compliance are not expected to have a material effect on the Company's capital expenditures, results of operations or competitive position.  However, such costs could be material to results of operations in a particular future quarter or year.

Environmental protection is further discussed in Note 10, "Commitments and Contingencies," in the Notes to Financial Statements.


 
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EMPLOYMENT

At the end of 2009, the Company employed the full time equivalent of approximately 20,250 people, of whom approximately 10,630 were employed in the U.S.  The actual number of employees may be greater because some individuals work part time.

AVAILABLE INFORMATION

The Company files many reports with the Securities and Exchange Commission (“SEC”), including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.  These reports, and amendments to these reports, are made available free of charge as soon as reasonably practicable after being electronically filed with or furnished to the SEC.  They are available through the Company's website at www.Kodak.com.  To reach the SEC filings, follow the links to Investor Center, and then SEC Filings.  The Company also makes available its annual report to shareholders and proxy statement free of charge through its website.  

We have included the CEO and CFO certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to this report.  We have also included these certifications with the Form 10-K for the year ended December 31, 2008 filed on February 27, 2009.  Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO certification, dated June 5, 2009, regarding our compliance with the NYSE's corporate governance listing standards pursuant to Section 303A.12(a) of the listing standards, and indicated that the CEO was not aware of any violations of the listing standards by the Company.

ITEM 1A.  RISK FACTORS

Continued weakness or worsening of economic conditions could continue to adversely affect our financial performance and our liquidity.

The global economic recession and declines in consumption in our end markets have adversely affected sales of both commercial and consumer products and profitability for such products.  Further, the global financial markets have been experiencing volatility.  Slower sales of consumer digital products due to the uncertain economic environment could lead to reduced sales and earnings while inventory increases.  Economic conditions could also accelerate the continuing decline in demand for traditional products, which could also place pressure on our results of operations and liquidity.  As a result of the tightening of credit in the global financial markets, our commercial customers have experienced difficulty in obtaining financing for significant equipment purchases, resulting in a decrease in, or cancellation of, orders for our products and services and we can provide no assurance that this trend will not continue.  In addition, accounts receivable and past due accounts could increase due to a decline in our customers’ ability to pay as a result of the economic downturn and our treasury operations could be negatively impacted by failures of financial instrument counterparties, including banks and other financial institutions.  If the global economic weakness and tightness in the credit markets continue for a greater period of time than anticipated or worsen, our profitability and related cash generation capability could be adversely affected and, therefore, affect our ability to meet our anticipated cash needs, impair our liquidity or increase our costs of borrowing.

If we are unsuccessful with the strategic investment decisions we have made, our financial performance could be adversely affected.

We have made a decision to focus our investments on businesses in large growth markets that are positioned for technology and business model transformation, which are consumer inkjet, commercial inkjet (including our Prosper line of products based upon the Company’s Stream technology), enterprise workflow, and digital packaging printing solutions, all of which we believe have significant growth potential.  Introduction of successful innovative products and the achievement of scale are necessary for us to grow these businesses, improve margins and achieve our future financial success.  We are also continuing to build upon our leading positions in businesses that participate in large stable markets.  Our current strategic plans require significant attention from our management team and if events occur that distract management’s attention and resources, our business could be harmed.  Further, if we are unsuccessful in growing our investment businesses as planned and maintaining and building upon our leading market positions, our financial performance could be adversely affected.

 
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If we cannot effectively anticipate technology trends and develop and market new products to respond to changing customer preferences, this could adversely affect our revenues.

Due to changes in technology and customer preferences, the market for traditional film and paper products and services is in decline.  Our success depends in part on our ability to manage the decline of the market for these traditional products by continuing to reduce our cost structure to maintain profitability.  In addition, we must develop and introduce new products and services in a timely manner that keep pace with technological developments and that are accepted in the market.  Further, we may expend significant resources to develop and introduce new products that are not commercially accepted for any number of reasons, including, but not limited to, failure to successfully market our products, competition from existing and new competitors or product quality concerns.  In addition, if we are unable to anticipate and develop improvements to our current technology, to adapt our products to changing customer preferences or requirements or to continue to produce high quality products in a timely and cost effective manner in order to compete with products offered by our competitors, this could adversely affect our revenues.

The competitive pressures we face could harm our revenue, gross margins and market share.

The markets in which we do business are highly competitive, and we encounter aggressive price competition for all our products and services from numerous companies globally.  Over the past several years, price competition in the market for digital products, film products and services has been particularly intense as competitors have aggressively cut prices and lowered their profit margins for these products.  Our results of operations and financial condition may be adversely affected by these and other industry wide pricing pressures.  If our products and services and pricing are not sufficiently competitive with current and future competitors, we could also lose market share, adversely affecting our revenue and gross margins.

If we have product quality issues, our expenses may increase, our liquidity may decrease, or our reputation may be harmed, any of which could have an adverse effect on our business.

In the course of conducting our business, we must adequately address quality issues associated with our products and services, including defects in our engineering, design and manufacturing processes, as well as defects in third-party components included in our products.  Because our products are becoming increasingly sophisticated and complicated to design and build as rapid advances in technologies occur, the occurrence of defects may increase, particularly with the introduction of new product lines.  Although we have established internal procedures to minimize risks that may arise from product quality issues, there can be no assurance that we will be able to eliminate or mitigate occurrences of these issues and associated liabilities.  Finding solutions to quality issues can be expensive and we may also incur expenses in connection with, for example, product recalls and warranty or other service obligations.  We may also face lawsuits if our products do not meet customer expectations.  In addition, quality issues can impair our relationships with new or existing customers and adversely affect our brand image, and our reputation as a producer of high quality products could suffer, which could adversely affect our business as well as our financial results.

If we cannot continue to license or enforce the intellectual property rights on which our business depends, or if third parties assert that we violate their intellectual property rights, our revenue, earnings, expenses and liquidity may be adversely impacted.

We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and non-disclosure, confidentiality and other types of agreements with our employees, customers, suppliers and other parties, to establish, maintain and enforce our intellectual property rights.  Despite these measures, any of our direct or indirect intellectual property rights could, however, be challenged, invalidated, circumvented, infringed or misappropriated, or such intellectual property rights may not be sufficient to permit us to take advantage of current market trends or otherwise to provide competitive advantages, which could result in costly product redesign efforts, discontinuance of certain product offerings or other competitive harm.  Further, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States.  Therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying, infringement or use, which could adversely affect our competitive position.  Also, because of the rapid pace of technological change in the information technology industry, much of our business and many of our products rely on key technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms.

 
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We have made substantial investments in new, proprietary technologies and have filed patent applications and obtained patents to protect our intellectual property rights in these technologies as well as the interests of our licensees.  There can be no assurance that our patent applications will be approved, that any patents issued will adequately protect our intellectual property or that such patents will not be challenged by third parties.

The execution and enforcement of licensing agreements protects our intellectual property rights and provides a revenue stream in the form of up-front payments and royalties that enables us to further innovate and provide the marketplace with new products and services.  There can be no assurance that such measures alone will be adequate to protect our intellectual property.  Our ability to execute our intellectual property licensing strategies, including litigation strategies, such as our recent legal actions against Apple Inc. and Research in Motion Limited, could also affect our revenue and earnings.  Additionally, the uncertainty around the timing and magnitude of our intellectual property-related judgments and settlements could have an adverse effect on our financial results and liquidity.  Our failure to develop and properly manage new intellectual property could adversely affect our market positions and business opportunities.  Furthermore, our failure to identify and implement licensing programs, including identifying appropriate licensees, could adversely affect the profitability of our operations.

In addition, third parties may claim that we, our customers, licensees or other parties indemnified by us are infringing upon their intellectual property rights.  Such claims may be made by competitors seeking to block or limit our access to digital markets.  Additionally, in recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from large companies like ours.  Even if we believe that the claims are without merit, the claims can be time consuming and costly to defend and distract management’s attention and resources.  Claims of intellectual property infringement also might require us to redesign affected products, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our products.  Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations.  If we cannot or do not license the infringed technology at all, license the technology on reasonable terms or substitute similar technology from another source, our revenue and earnings could be adversely impacted.  Finally, we use open source software in connection with our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms.  As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms.  Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost.  We have a corporate open source governance board to monitor the use of open source software in our products and services and try to ensure that none is used in a manner that would require us to disclose the source code to the related product or service or that would otherwise breach the terms of an open source agreement.  Such use could inadvertently occur and any requirement to disclose our source code or pay damages for breach of contract could be harmful to our business results of operations and financial condition.

If we are unable to provide competitive financing arrangements to our customers or if we extend credit to customers whose creditworthiness deteriorates, this could adversely impact our revenues, profitability and financial position.

The competitive environment in which we operate may require us to provide financing to our customers in order to win a contract.  Customer financing arrangements may include all or a portion of the purchase price for our products and services.  We may also assist customers in obtaining financing from banks and other sources and may provide financial guarantees on behalf of our customers.  Our success may be dependent, in part, upon our ability to provide customer financing on competitive terms and on our customers’ creditworthiness.  The tightening of credit in the global financial markets has adversely affected the ability of our customers to obtain financing for significant purchases, which resulted in a decrease in, or cancellation of, orders for our products and services, and we can provide no assurance that this trend will not continue. If we are unable to provide competitive financing arrangements to our customers or if we extend credit to customers whose creditworthiness deteriorates, this could adversely impact our revenues, profitability and financial position.


 
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Our future pension and other postretirement plan costs and required level of contributions could be unfavorably impacted by changes in actuarial assumptions, future market performance of plan assets and obligations imposed by legislation or pension authorities  which could adversely affect our financial position, results of operations, and cash flow.

We have significant defined benefit pension and other postretirement benefit obligations.  The funded status of our U.S. and non U.S. defined benefit pension plans and other postretirement benefit plans, and the related cost reflected in our financial statements, are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic environment.  Key assumptions used to value these benefit obligations, funded status and expense recognition include the discount rate for future payment obligations, the long term expected rate of return on plan assets, salary growth, healthcare cost trend rates, and other economic and demographic factors.  Significant differences in actual experience, or significant changes in future assumptions or obligations imposed by legislation or pension authorities could lead to a potential future need to contribute cash or assets to our plans in excess of currently estimated contributions and benefit payments and could have an adverse effect on our consolidated results of operations, financial position or liquidity.

If we cannot attract, retain and motivate key employees, our business could be harmed.

In order for us to be successful, we must continue to attract, retain and motivate executives and other key employees, including technical, managerial, marketing, sales, research and support positions.  Hiring and retaining qualified executives, research professionals, and qualified sales representatives is critical to our future.  Competition for experienced employees in the industries in which we compete is intense.  The market for employees with digital skills is highly competitive and, therefore, our ability to attract such talent will depend on a number of factors, including compensation and benefits, work location and persuading potential employees that we are well positioned for success in the digital markets in which we are operating.  Given that our compensation plans are highly performance based and given the potential impact of the global economy on our current and future performance, it may become more challenging to retain key employees.  We also must keep employees focused on our strategic initiatives and goals in order to be successful.  Our past restructuring actions harm our efforts to attract and retain key employees.  If we cannot attract properly qualified individuals, retain key executives and employees or motivate our employees, our business could be harmed.

Our sales are typically concentrated in the last four months of the fiscal year, therefore, lower than expected demand or increases in costs during that period may have a pronounced negative effect on our results of operations.

The demand for our consumer products is largely discretionary in nature, and sales and earnings of our consumer businesses are linked to the timing of holidays, vacations, and other leisure or gifting seasons.  Accordingly, we have typically experienced greater net sales in the fourth fiscal quarter as compared to the other three quarters.  Developments, such as lower-than-anticipated demand for our products, an internal systems failure, increases in materials costs, or failure of one of our key logistics, components supply, or manufacturing partners, could have a material adverse impact on our financial condition and operating results, particularly if such developments occur late in the third quarter or during the fourth fiscal quarter.  Further, with respect to the Graphic Communications Group segment, equipment and consumable sales in the commercial marketplace peak in the fourth quarter based on increased commercial print demand.  Tight credit markets that limit capital investments or a weak economy that decreases print demand could negatively impact equipment or consumable sales.  In addition, our inability to achieve intellectual property licensing revenues in the timeframe and amount we anticipate could adversely affect our revenues, earnings and cash flow.  These external developments are often unpredictable and may have an adverse impact on our business and results of operations.

If we fail to manage distribution of our products and services properly, our revenue, gross margins and earnings could be adversely impacted.

We use a variety of different distribution methods to sell and deliver our products and services, including third party resellers and distributors and direct and indirect sales to both enterprise accounts and customers.  Successfully managing the interaction of direct and indirect channels to various potential customer segments for our products and services is a complex process.  Moreover, since each distribution method has distinct risks and costs, our failure to implement the most advantageous balance in the delivery model for our products and services could adversely affect our revenue, gross margins and earnings.  Due to changes in our go to market models, we are more reliant on fewer distributors than in past periods. This has concentrated our credit and operational risk and could result in an adverse impact on our financial performance.

 
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Due to the nature of the products we sell and our worldwide distribution, we are subject to changes in currency exchange rates, interest rates and commodity costs that may adversely impact our results of operations and financial position.

As a result of our global operating and financing activities, we are exposed to changes in currency exchange rates and interest rates, which may adversely affect our results of operations and financial position.  Exchange rates and interest rates in markets in which we do business tend to be volatile and at times, our sales can be negatively impacted across all of our segments depending upon the value of the U.S. dollar.  In addition, our products contain silver, aluminum, petroleum based or other commodity-based raw materials, the changes in the costs of which can be volatile.  If the global economic situation remains uncertain or worsens, there could be further volatility in changes in currency exchange rates, interest rates and commodity prices, which could have negative effects on our revenue and earnings.

We have outsourced a significant portion of our overall worldwide manufacturing, logistics and back office operations and face the risks associated with relying on third party suppliers.

We have outsourced a significant portion of our overall worldwide manufacturing, logistics, customer support and administrative operations (such as credit and collections, and general ledger accounting functions) to third parties.  To the extent that we rely on third party service providers, we face the risk that those third parties may not be able to:

• develop manufacturing methods appropriate for our products;
• maintain an adequate control environment;
• quickly respond to changes in customer demand for our products;
• obtain supplies and materials necessary for the manufacturing process; or
• mitigate the impact of labor shortages and/or disruptions.

As a result of such risks, our costs could be higher than planned and the reliability of our products could be negatively impacted.  Other supplier problems that we could face include component shortages, excess supply, risks related to duration of our contracts with suppliers for components and materials and risks related to dependency on single source suppliers on favorable terms or at all.  If any of these risks were to be realized, and assuming alternative third party relationships could not be established, we could experience interruptions in supply or increases in costs that might result in our inability to meet customer demand for our products, damage to our relationships with our customers, and reduced market share, all of which could adversely affect our results of operations and financial condition.

Our inability to effectively complete, integrate and manage acquisitions, divestitures and other significant transactions could adversely impact our business performance including our financial results.

As part of our business strategy, we frequently engage in discussions with third parties regarding possible investments, acquisitions, strategic alliances, joint ventures, divestitures and outsourcing transactions and enter into agreements relating to such transactions in order to further our business objectives.  In order to pursue this strategy successfully, we must identify suitable candidates and successfully complete transactions, some of which may be large and complex, and manage post closing issues such as the integration of acquired companies or employees and the assessment of such acquired companies’ internal controls. Integration and other risks of transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously.  If we fail to identify and complete successfully transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have an adverse effect on our revenue, gross margins and profitability.  In addition, unpredictability surrounding the timing of such transactions could adversely affect our financial results.


 
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System integration issues could adversely affect our revenue and earnings.

Portions of our information technology infrastructure may experience interruptions, delays or cessations of service in connection with systems integration or migration work that takes place from time to time.  In particular, we are in the process of completing integration of certain of our regional operations’ systems into our corporate SAP structure.  We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time consuming, disruptive and resource intensive.  Such disruption could adversely affect our ability to fulfill orders and could also interrupt other processes.  Delayed sales, higher costs or lost customers resulting from these disruptions could adversely affect our financial results and reputation.

Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

Our worldwide operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics, political or economic instability, and other natural or manmade disasters or business interruptions, for which we are predominantly self insured.  The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses.  In addition, some areas, including parts of the east and west coasts of the United States, have previously experienced, and may experience in the future, major power shortages and blackouts.  These blackouts could cause disruptions to our operations or the operations of our suppliers, distributors and resellers, or customers.  These events could seriously harm our revenue and financial condition, and increase our costs and expenses.

We may be required to recognize additional impairments in the value of our goodwill, which would increase expenses and reduce profitability.

Goodwill represents the excess of the amount we paid to acquire businesses over the fair value of their net assets at the date of the acquisition.  We test goodwill for impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  This may occur for various reasons including changes in actual or expected income or cash flows of a reporting unit.  We continue to evaluate current conditions that may affect the fair value of our reporting units to assess whether any goodwill impairment exists.  Secular declines in the results of the Film, Photofinishing and Entertainment Group segment are likely to lead to impairment of goodwill related to that segment in the future.  In addition, impairments of goodwill could occur in the future if market or interest rate environments deteriorate, expected future cash flows of our reporting units decline, or if reporting unit carrying values change materially compared with changes in respective fair values.

The private equity firm KKR may have interests that diverge from our interests and the interests of our other security holders.

KKR beneficially owns a significant equity position in the Company through its warrant holdings and may have interests that diverge from our interests and the interests of our security holders.  In addition, so long as KKR maintains beneficial ownership of specified thresholds of our shares of common stock, it will have the right to nominate up to two members of our board of directors and will be entitled to certain information rights and a right to participate in future offerings of our equity securities. KKR is in the business of investing in companies and they are not restricted from investing in our current or future competitors.  Future events may give rise to a divergence of interests between KKR and us or our other security holders.

Our failure to implement plans to reduce our cost structure in anticipation of declining demand for certain products or delays in implementing such plans could negatively affect our consolidated results of operations, financial position and liquidity.

We recognize the need to continually rationalize our workforce and streamline our operations to remain competitive in the face of an ever-changing business and economic climate.  If we fail to implement cost rationalization plans such as restructuring of  manufacturing, supply chain, marketing sales and administrative resources ahead of declining demand for certain of our products and services, our operations results, financial position and liquidity could be negatively impacted.  In 2009, we implemented a targeted cost reduction program, which we refer to as the 2009 Program, to more appropriately size the organization as a result of the economic downturn.  While most of the actions

 
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under the 2009 Program were completed in 2009, we expect some remaining actions to be completed during the first half of 2010.  If we fail to successfully execute our remaining rationalization activities under our 2009 Program, our financial performance could be adversely affected.  Additionally, if the restructuring plans are not effectively managed, we may experience lost customer sales, product delays and other unanticipated effects, causing harm to our business and customer relationships.  Finally, the timing and implementation of these plans require compliance with numerous laws and regulations, including local labor laws, and the failure to comply with such requirements may result in damages, fines and penalties which could adversely affect our business.

The implementation of new legislation or regulations or changes in existing laws or regulations could increase our cost to comply and consequently reduce our profitability.

New business legislation or regulations or changes to existing laws or regulation, including interpretations of existing regulations by courts or regulators, could adversely affect our results of operations by increasing our cost to comply.  For example, new tax, labor, health care, product safety, environmental and securities laws and regulations have been proposed and such proposals or other proposals may be enacted in the future that require us to adopt new policies, internal controls and other compliance practices or modify existing production facilities and operations.  Each of these compliance initiatives could lead to internal and external cost increases, and negatively impact our profitability.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

Because we sell our products worldwide and many of the facilities where our devices are manufactured, distributed and supported are located outside the United States, our business is subject to risks associated with doing business internationally, such as:

• supporting multiple languages;
• recruiting sales and technical support personnel with the skills to design, manufacture, sell and support our products;
• complying with governmental regulation of imports and exports, including obtaining required import or export approval for our products;
• complexity of managing international operations;
• exposure to foreign currency exchange rate fluctuations;
• commercial laws and business practices that may favor local competition;
• multiple, potentially conflicting, and changing governmental laws, regulations and practices, including differing export, import, tax, labor, 
  anti-bribery and employment laws;
• difficulties in collecting accounts receivable;
• limitations or restrictions on the repatriation of cash;
• reduced or limited protection of intellectual property rights;
• managing research and development teams in geographically disparate locations, including Canada, Israel, Japan, China, and Singapore;
• complicated logistics and distribution arrangements; and
• political or economic instability.

While we sell our products in most parts of the world, one component of our strategy is to further expand our international sales efforts.  There can be no assurance that we will be able to market and sell our products in all of our targeted international markets. If our international efforts are not successful, our business growth and results of operations could be harmed.

Our results of operations may suffer if we do not effectively manage our inventory, and we may incur inventory-related charges.

We need to manage our inventory of component parts and finished goods effectively to meet changing customer requirements. Accurately forecasting customers’ product needs is difficult.  Some of our products and supplies have in the past, and may in the future, become obsolete while in inventory due to rapidly changing customer tastes or a decrease in customer demand.  If we are not able to manage our inventory effectively, we may need to write down the value of some of our existing inventory or write off non-saleable or obsolete inventory, which would adversely affect our results of operations.  We have from time to time incurred significant inventory-related charges.  Any such charges we incur in future periods could materially and adversely affect our results of operations.


 
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We are subject to environmental laws and regulations and failure to comply with such laws and regulations or liabilities imposed as a result of such laws and regulations could have an adverse effect on our business, results of operations and financial condition.

We are subject to environmental laws and regulations in the jurisdictions in which we conduct our business, including laws regarding the discharge of pollutants, including greenhouse gases, into the air and water, the need for environmental permits for certain operations, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites, the content of our products and the recycling and treatment and disposal of our products.  If we do not comply with applicable laws and regulations in connection with the use and management of hazardous substances, then we could be subject to liability and/or could be prohibited from operating certain facilities, which could have a material adverse effect on our business, results of operations and financial condition.  In addition, failure to comply with certain regulations could result in fines and civil or criminal sanctions, third-party property damage or personal injury claims and clean up costs.  We cannot provide assurance that we have been or will be at all times in complete compliance with all environmental laws, regulations and permits.

Certain environmental laws and regulations impose liability on current or previous owners or operators of real property for the cost to investigate, remove or remediate hazardous substances.  These laws often impose liability even if the owner or operator of property did not know of, or was not responsible for, the release of such hazardous substances.  These laws and regulations also assess liability on persons who arrange for hazardous substances to be sent to disposal, reclamation or treatment facilities when such facilities are found to be contaminated.  Such persons can be responsible for cleanup costs even if they never owned or operated the contaminated facility.  At December 31, 2009, we had accrued liabilities of $102 million for various environmental matters.  The majority of this reserve relates to contamination at our Eastman Business Park site in Rochester, New York.  Certain other costs relate to liability at Superfund sites, including the Passaic River in the state of New Jersey.  While the accrued liabilities represent our current best estimate of costs for those matters, the ultimate costs could exceed that amount.

Environmental laws and regulations are complex, change frequently and have tended to become more stringent over time.  We cannot assure you that our costs of complying with current and future environmental laws and regulations and our liabilities arising from past or future releases of, or exposure to, hazardous substances (including our liability for the matters comprising our environmental reserve) will not adversely affect our business, results of operations or financial condition.

Our substantial leverage could adversely affect our ability to fulfill our debt obligations and may place us at a competitive disadvantage in our industry.

We have incurred significant debt and related interest expenses as a result of the issuance of $300 million aggregate principal amount of the 10.5% 2017 Senior Notes and $400 million of our 7.00%  Convertible Senior Notes due 2017 in September 2009 and previously issued debt.  In addition, we may incur additional debt from time to time to finance working capital, product development efforts, strategic acquisitions, investments and alliances, capital expenditures or other general corporate purposes, subject to the restrictions contained in our Credit Agreement and the indenture governing the notes and in any other agreements under which we incur indebtedness.

Our significant debt and debt service requirements could adversely affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities.  For example, our high level of debt presents the following risks:

·  
we are required to use a substantial portion of our cash flow from operations to pay principal and interest on our debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, product development efforts, acquisitions, investments and strategic alliances and other general corporate requirements as well as making it more difficult for us to make payments on the notes;
·  
our substantial leverage increases our vulnerability to economic downturns and adverse competitive and industry conditions and could place us at a competitive disadvantage compared to those of our competitors that are less leveraged;

 
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·  
our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and our industry and could limit our ability to pursue other business opportunities, borrow more money for operations or capital in the future and implement our business strategies;
·  
our level of debt and the covenants within our debt instruments may restrict us from raising additional financing on satisfactory terms to fund working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements; and
·  
covenants in our debt instruments limit our ability to pay dividends, issue new or additional debt or make other restricted payments and investments.

A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of our various outstanding notes.  Any required repayment of our indebtedness as a result of acceleration would lower our current cash on hand such that we would not have those funds available for use in our business.  In addition, we may not have sufficient cash on hand to pay all such amounts in the event of an acceleration.

If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing.  There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.

Servicing our debt requires a significant amount of cash and our ability to generate cash may be affected by factors beyond our control.

Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances, and other general corporate requirements.

Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.  We cannot assure you that:

·  
our business will generate sufficient cash flow from operations;
·  
we will realize cost savings, revenue growth and operating improvements resulting from the execution of our long-term strategic plan; or
·  
future sources of funding will be available to us in amounts sufficient to enable us to fund our liquidity needs.

If we cannot fund our liquidity needs, we will have to take actions such as reducing or delaying capital expenditures, product development efforts, strategic acquisitions, investments and alliances, selling assets, restructuring or refinancing our debt, including the notes, or seeking additional equity capital.  Such actions could further negatively impact our ability to generate cash flows.  We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all, or that they would permit us to meet our scheduled debt service obligations.  Certain of our debt instruments limit the use of the proceeds from any disposition of assets and, as a result, we may not be allowed, under those instruments, to use the proceeds from such dispositions to satisfy all current debt service obligations.  In addition, if we incur additional debt, the risks associated with our substantial leverage, including the risk that we will be unable to service our debt or generate enough cash flow to fund our liquidity needs, could intensify.


 
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Restrictions imposed by our debt instruments limit our ability to finance future operations or capital needs or engage in other business activities that may be in our interest.

Our debt instruments impose operating and other restrictions on us and our subsidiaries.  Our debt instruments also limit, among other things, the ability of us and our restricted subsidiaries to:

·  
incur additional indebtedness and issue certain preferred stock;
·  
create liens;
·  
pay dividends or make distributions in respect of our capital stock;
·  
purchase or redeem capital stock;
·  
make certain investments or other restricted payments;
·  
sell assets;
·  
enter into transactions with affiliates; and
·  
effect a consolidation or merger.

However, these limitations are subject to a number of important qualifications and exceptions.

If the excess availability under our Credit Agreement falls below $100 million for a specified period, the Credit Agreement also requires us to maintain compliance with a fixed charge coverage ratio.  Our ability to comply with this covenant may be affected by events beyond our control.

A breach of any of the covenants contained in our Credit Agreement or our inability to comply with the required financial ratio, when applicable, could result in a default under the Credit Agreement.  If an event of default occurs and we are not able to obtain a waiver from the requisite lenders under the Credit Agreement, the administrative agent of the Credit Agreement may, and at the request of the requisite lenders shall, declare all of our outstanding obligations under the Credit Agreement, together with accrued interest and fees, to be immediately due and payable, and may terminate the lenders’ commitments thereunder, cease making further loans and institute foreclosure proceedings against our assets.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

The Company's worldwide headquarters is located in Rochester, New York.  

The CDG segment of Kodak’s business in the United States is headquartered in Rochester, New York.  Kodak Gallery operations are managed from Emeryville, California.  Kodak Consumer Inkjet Systems operations are located in San Diego, California; Xiamen, China; Singapore; and Rochester, New York.  Many of CDG’s businesses rely on manufacturing assets, company-owned or through relationships with design and manufacturing partners, which are located close to end markets and/or supplier networks.

The FPEG segment of Kodak’s business is centered in Rochester, New York, where film and photographic chemicals and related materials are manufactured.  A manufacturing facility in Harrow, England produces photographic paper.  Additional manufacturing facilities supporting the business are located in Windsor, Colorado; China; Mexico; India; Brazil; and Russia.  Entertainment Imaging has business operations in Hollywood, California and Rochester, New York.

 
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Products in the GCG segment are manufactured in the United States, primarily in Rochester, New York; Dayton, Ohio; Columbus, Georgia; and Weatherford, Oklahoma.  Key manufacturing facilities outside the United States, either company-owned or through relationships with manufacturing partners, are located in the United Kingdom, Germany, Bulgaria, Mexico, China, and Japan.  During 2009, manufacturing and development facilities in Windsor, Colorado; Israel; and Canada were impacted by capacity consolidations into other sites around the world.  While these sites continued to develop or manufacture select products throughout the year, their product line focus was narrowed.       

Properties within a country may be shared by all segments operating within that country.

Regional distribution centers are located in various places within and outside of the United States.  The Company owns or leases administrative, research and development, manufacturing, marketing, and processing facilities in various parts of the world.  The leases are for various periods and are generally renewable.

ITEM 3.  LEGAL PROCEEDINGS

During March 2005, the Company was contacted by members of the Division of Enforcement of the SEC concerning the announced restatement of the Company's financial statements for the full year and all four quarters of 2003 and the first three unaudited quarters of 2004.  An informal inquiry by the staff of the SEC into the substance of that restatement is continuing.  The Company continues to fully cooperate with this inquiry, and the staff has indicated that the inquiry should not be construed as an indication by the SEC or its staff that any violations of law have occurred.  The Company has provided all the information requested by the SEC and the SEC has not requested additional information for more than three years.

On October 12, 2009, the U.S. Environmental Protection Agency commenced an administrative enforcement action against the Company under the Clean Water Act alleging violations of regulations applicable to the management, training and record keeping of certain oil storage operations at its primary manufacturing facility in Rochester, NY.  The Company and the EPA have reached an agreement in principle to settle this matter for $88,000.

The Company has been named as third-party defendant (along with approximately 200 other entities) in an action initially brought by the New Jersey Department of Environmental Protection (NJDEP) in the Supreme Court of New Jersey, Essex County against Occidental Chemical Corporation and several other companies that are successors in interest to Diamond Shamrock Corporation.  The NJDEP seeks recovery of all costs associated with the investigation, removal, cleanup and damage to natural resources occasioned by Diamond Shamrock's disposal of various forms of chemicals in the Passaic River. The damages are alleged to potentially range "from hundreds of millions to several billions of dollars."  Pursuant to New Jersey's Court Rules, the defendants were required to identify all other parties which could be subject to permissive joinder in the litigation based on common questions of law or fact.  Third-party complaints seeking contribution from more than 200 entities, which have been identified as potentially contributing to the contamination in the Passaic, were filed on February 5, 2009.  Based on currently available information, the potential monetary exposure is likely to be in excess of $100,000 but is not expected to be material.

On November 17, 2008, the Company filed a complaint with the U.S. International Trade Commission (“ITC”) against Samsung Electronics Company Ltd., Samsung Electronics America Inc., and Samsung Telecommunications America, LLC, for infringement of patents related to digital camera technology.  The hearing before the ITC was concluded on October 16, 2009 and an Initial Determination was issued by the Administrative Law Judge on December 17, 2009 finding Kodak’s asserted patents valid and infringed.  On December 22, 2009, the Company and Samsung agreed to negotiate a definitive agreement to settle the ITC proceeding and a technology cross license agreement.  On January 8, 2010, the Company and Samsung executed a settlement agreement (“Samsung Settlement”), entered into a technology cross license agreement, and filed joint motions to terminate the patent infringement proceeding pending before the ITC.  These motions were granted on February 2, 2010 and the proceeding was terminated.


 
20

 

On February 17, 2009 Samsung Electronics Company Ltd. and Samsung Electronics America Inc. filed a complaint with the ITC against the Company for infringement of certain of their patents alleged to be related to digital camera technology.  The hearing before the ITC was concluded on October 1, 2009.  Pursuant to the Samsung Settlement mentioned above, this proceeding was terminated on February 12, 2010.

On November 17, 2008, the Company commenced a lawsuit in Landgericht Düsseldorf, Germany against Samsung Electronics GmbH for infringement of a patent related to digital camera technology.  Pursuant to the Samsung Settlement mentioned above, this suit was terminated on February 3, 2010.

On November 17, 2008, the Company filed complaints against Samsung Electronics Company Ltd., Samsung Electronics America Inc., and Samsung Telecommunications America, LLC in Federal District Court in Rochester, New York, for infringement of patents related to digital camera technology.  Pursuant to the Samsung Settlement mentioned above, this suit was dismissed on February 4, 2010.

On November 17, 2008, the Company filed a complaint with the ITC against LG Electronics Inc., LG Electronics USA Inc. and LG Electronics MobileComm USA Inc. (referred to collectively as “LG”) for infringement of patents related to digital camera technology.  The hearing before the ITC was concluded on October 16, 2009.  On November 30, 2009, the Company and LG entered into an agreement settling their patent infringement lawsuits against each other (“LG Settlement”) and agreed to file a joint request for termination of patent infringement proceedings before the ITC.  This request was granted and the ITC proceeding was terminated on January 27, 2010.  Separately the Company entered into a technology cross license with LG.

On February 20, 2009 LG Electronics Inc. (Seoul, Korea) filed a complaint with the ITC against the Company for infringement of certain of their patents alleged to be related to digital camera technology.  Pursuant to the LG Settlement mentioned above, this proceeding was terminated on February 16, 2010.

On November 17, 2008 the Company filed complaints against LG Electronics Inc., LG Electronics USA Inc., and LG Electronics MobileComm USA, Inc. in Federal District Court in Rochester, New York, for infringement of patents related to digital camera technology.  Pursuant to the LG Settlement mentioned above, this suit was dismissed on December 22, 2009.

On February 20, 2009 LG Electronics Inc. (Seoul, Korea) commenced two actions against the Company in Federal District court in the Southern District of California for infringement of certain of their patents alleged to be related to digital camera technology.  Pursuant to the LG Settlement mentioned above, these suits were dismissed on December 18, 2009.

On November 20, 2008, Research in Motion Ltd. and Research in Motion Corp. (collectively “RIM”) filed a declaratory judgment action against the Company in Federal District Court in Dallas, Texas.  The suit seeks to invalidate certain Company patents related to digital camera technology and software object linking, and seeks a determination that RIM handheld devices do not infringe such patents.  On February 17, 2009, the Company filed its answer and counterclaims for infringement of each of these same patents.  The Company intends to vigorously defend itself in this matter.

On January 14, 2010 the Company filed a complaint with the ITC against Apple Inc. and Research in Motion Limited (RIM) for infringement of patents related to digital camera technology.  The Company is seeking a limited exclusion order preventing importation of infringing devices including IPHONES and camera enabled BLACKBERRY devices.  On February 16, 2010, the ITC ordered that an investigation be instituted to determine whether importation or sale of the accused Apple and RIM devices constitutes violation of the Tariff Act of 1930.

On January 14, 2010 the Company filed two suits against Apple Inc. in the Federal District Court in Rochester, New York claiming infringement of patents related to digital cameras and certain computer processes.  The Company is seeking unspecified damages and other relief.

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

 
21

 

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 flows in a particular period.  The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instructions G (3) of Form 10-K, the following list is included as an unnumbered item in Part I of this report in lieu of being included in the Proxy Statement for the Annual Meeting of Shareholders.

       
Date First Elected
       
an
 
to
       
Executive
 
Present
Name
Age
 
Positions Held
Officer
 
Office
             
Robert L. Berman
52
 
Senior Vice President
2002
 
2005
Philip J. Faraci
54
 
President and Chief Operating Officer
2005
 
2007
Joyce P. Haag
59
 
General Counsel and Senior Vice President
2005
 
2005
Brad W. Kruchten
49
 
Senior Vice President
2009
 
2009
Antonio M. Perez
64
 
Chairman of the Board, Chief Executive Officer
2003
 
2005
Eric H. Samuels
42
 
Chief Accounting Officer and Corporate Controller
2009
 
2009
Frank S. Sklarsky
53
 
Chief Financial Officer and Executive Vice President
2006
 
2006
Terry R. Taber
55
 
Vice President
2008
 
2008
             

Executive officers are elected annually in February.

All of the executive officers have been employed by Kodak in various executive and managerial positions for at least five years, except Mr. Sklarsky who joined the Company on October 30, 2006.   

The executive officers' biographies follow:

Robert L. Berman

Robert Berman was appointed to his current position in January 2002 and was elected a Vice President of the Company in February 2002.  In March 2005, he was elected a Senior Vice President by the Board of Directors.  In this capacity, he is responsible for the design and implementation of all human resources strategies, policies and processes throughout the corporation.  He is a member of the Eastman Kodak Company Executive Council, and serves on the Company’s Senior Executive Diversity and Inclusion Council and Ethics Committee.  He works closely with Kodak’s CEO, Board of Directors and Executive Compensation and Development Committee on all executive compensation and development processes for the corporation.  Prior to this position, Mr. Berman was the Associate Director of Human Resources and the Director and divisional vice president of Human Resources for Global Operations, leading the delivery of strategic and operational human resources services to Kodak’s global manufacturing, supply chain and regional operations around the world.  He has held a variety of other key human resources positions for Kodak over his 25 year career, including the Director and divisional vice president of Human Resources for the global Consumer Imaging business and the Human Resources Director for Kodak Colorado Division.


 
22

 

Philip J. Faraci

Philip Faraci was named President and Chief Operating Officer, Eastman Kodak Company, in September 2007.  As President and COO, Mr. Faraci is responsible for the day-to-day management of Kodak’s two major digital businesses: the Consumer Digital Imaging Group (“CDG”) and the Graphic Communications Group (“GCG”).  Mr. Faraci had been President of CDG and a Senior Vice President of the Company.  He joined Kodak as Director, Inkjet Systems Program in December 2004.  In February 2005, he was elected a Senior Vice President of the Company.  In June 2005, he was also named Director, Corporate Strategy & Business Development.

Prior to Kodak, Mr. Faraci served as Chief Operating Officer of Phogenix Imaging and President and General Manager of Gemplus Corporation’s Telecom Business Unit.  Prior to these roles, he spent 22 years at Hewlett-Packard, where he served as Vice President and General Manager of the Consumer Business Organization and Senior Vice President and General Manager for the Inkjet Imaging Solutions Group.

Joyce P. Haag

Joyce Haag began her Kodak career in 1981, as a lawyer on the Legal Staff.  She was elected Assistant Secretary in December 1991 and elected Corporate Secretary in February 1995.  In January 2001, she was appointed to the additional position of Assistant General Counsel.  In August 2003, she became Director, Marketing, Antitrust, Trademark and Litigation, Legal Staff andin March 2004, she became General Counsel, Europe, Africa and Middle East Region (“EAMER”).  In July 2005, she was promoted to Senior Vice President and General Counsel.

Prior to joining the Kodak Legal Staff, Ms. Haag was an associate with Boylan, Brown, Code, Fowler, Vigdor & Wilson LLP in Rochester, New York.

Brad W. Kruchten

Brad Kruchten is currently the President of the Film, Photofinishing & Entertainment Group (FPEG).  In this capacity, he is responsible for the manufacture of all silver halide products.  Mr. Kruchten was named Chief Operating Officer of FPEG in January 2009, and he was appointed President of FPEG in July 2009.  The Board of Directors elected him a Senior Vice President of the Company in July 2009.  In addition, Mr. Kruchten has responsibility for Qualex / Event Imaging Solutions, which is a wholly owned subsidiary that provides photo services to guests at theme parks and other attractions.
 
Prior to his current position, Mr. Kruchten was the worldwide General Manager for Retail Printing, and was responsible for the products and services that enable retailers to offer an integrated retail solution to analog and digital photographers.  These products and services included kiosks, paper, retail workflow software, service, and support.  Before that, Mr. Kruchten was the General Manager for the Consumer and Professional film business.  The Board of Directors elected him a Corporate Vice President in July 2002.
 
Mr. Kruchten's career at Kodak began in 1982 as a Quality Engineer.  Over his first five years, he expanded his engineering experience in the Copy Products Division as a Manufacturing Engineer and a Development/Research Engineer.  In 1986, he moved into a sales position for Copy Products, and over the next five years held a number of sales and marketing positions within Printer Products and Business Imaging Systems.  In 1993, Mr. Kruchten became a product line manager for Business Imaging Systems.  In 1998, he was named Strategic Business Unit Manager and a divisional vice president of the Capture and Services business within the Document Imaging unit.  In 2000, Mr. Kruchten was named Chief Operating Officer and vice president of the Document Imaging unit.  As COO, he led the acquisition of the Imaging division of Bell & Howell.  In 2001, Mr. Kruchten was named Site Manager, Kodak Colorado Division, and became a divisional vice president of Kodak's Global Manufacturing unit.  In 2002, he was the Chief Executive Officer of Encad Inc., a wholly owned Kodak subsidiary.
 
Prior to Kodak, Mr. Kruchten worked as a project engineer at Inland Steel and as a tool designer for General Motors Corp.

Antonio M. Perez

Since joining the Company in April 2003, Kodak’s Chairman and Chief Executive Officer, Antonio M. Perez, has led the worldwide transformation of Kodak from a business based on film to one based primarily on digital technologies.  In the past four years, Kodak introduced an array of disruptive new digital technologies and products for consumer and commercial applications that generated

 
23

 

$5.3 billion in revenues in 2009.  Those include consumer inkjet printers, CMOS sensors for digital cameras and mobile phones, dry labs and kiosks for printing at retail, as well as high-volume digital production presses and digital plates for commercial printing.  The result is a new Kodak -- a company with 70 percent of revenue coming from digital products, higher gross margin business-to-business revenues and a sustainable traditional business model.

Mr. Perez brings to the task his experience from a 25-year career at Hewlett-Packard Company, where he was a corporate vice president and a member of the company’s Executive Council.  As President of H-P’s Consumer Business, Mr. Perez spearheaded the company’s efforts to build a business in digital imaging and electronic publishing, generating worldwide revenue of more than $16 billion.

Prior to that assignment, Mr. Perez served as President and CEO of H-P’s inkjet imaging business for five years. During that time, the installed base of H-P's inkjet printers grew from 17 million to 100 million worldwide, with revenue totaling more than $10 billion.

After H-P, Mr. Perez was President and CEO of Gemplus International, where he led the effort to take the company public.  While at Gemplus, he transformed the company into the leading Smart Card-based solution provider in the fast-growing wireless and financial markets.  In the first fiscal year, revenue at Gemplus grew 70 percent, from $700 million to $1.2 billion.

Eric H. Samuels

Eric H. Samuels was appointed Corporate Controller and Chief Accounting Officer in July 2009.  Mr. Samuels previously served as the Company’s Assistant Corporate Controller and brings to his new position nearly 20 years of leadership experience in corporate finance and public accounting.  He joined Kodak in 2004 as Director, Accounting Research and Policy.

Prior to joining Kodak, Mr. Samuels had a 14-year career in public accounting during which he served as a senior manager at KPMG LLP's Department of Professional Practice (National Office) in New York City.  Prior to joining KPMG in 1996, he worked in Ernst & Young's New York City office.

Frank S. Sklarsky

Frank Sklarsky joined Kodak in October 2006 as Executive Vice President, and became the Chief Financial Officer in November 2006. 

Mr. Sklarsky is responsible for worldwide financial operations, including Financial Planning and Analysis, Treasury, Audit, Controllership, Tax, Investor Relations, Aviation, Corporate Mergers and Acquisitions, Worldwide Information Systems and Corporate Purchasing.

Prior to joining Kodak, Mr. Sklarsky was Executive Vice President and Chief Financial Officer of ConAgra Foods Inc., one of North America's leading packaged food companies.  At ConAgra, he implemented a new financial organization, significantly strengthened the balance sheet, and played a major role in building credibility with the investment community.  He also helped expand profit margins at the $14 billion company. 
 
Prior to joining ConAgra in 2004, Mr. Sklarsky was Vice President, Product Finance, at DaimlerChrysler, a position he held between 2001 and 2004.  He returned to DaimlerChrysler to assist with the company's turnaround efforts after spending more than one year as Vice President, Corporate Finance, and Vice President, Finance, of Dell’s $5 billion consumer business.  He first joined DaimlerChrysler in 1983 and held a series of increasingly responsible finance positions before leaving for Dell in 2000.  At the time of his departure for Dell, he was DaimlerChrysler’s Vice President, Corporate Financial Activities, and also led the finance functions serving procurement, product quality, cost management and worldwide manufacturing during his tenure.  Prior to DaimlerChrysler, Mr. Sklarsky, a certified public accountant, served as a Senior Accountant at Ernst & Young International from 1978 to 1981.


 
24

 

Terry R. Taber

Terry R. Taber joined Kodak in 1980.  In January 2009, he became Chief Technical Officer.  The Board of Directors elected him a Corporate Vice President in December 2008. 

Mr. Taber was previously the Chief Operating Officer of Kodak’s Image Sensor Solutions (“ISS”) business, a leading developer of advanced CCD and CMOS sensors serving imaging and industrial markets.  Prior to joining ISS in 2007, Mr. Taber held a series of senior positions in Kodak’s research and development and product organizations. During his 28 years at Kodak, Mr. Taber has been involved in new materials research, product development and commercialization, manufacturing, and executive positions in R&D and business management.

Mr. Taber’s early responsibilities included research on new synthetic materials, an area in which he holds several patents.  He then became a program manager for several film products before completing the Sloan Fellows program at the Massachusetts Institute of Technology.  He returned from MIT to become the worldwide consumer film business product manager from 1999 to 2002, and then became an Associate Director of R&D from 2002 to 2005, followed by a position as the director of Materials & Media R&D from 2005 to 2007.

PART II

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Eastman Kodak Company common stock is traded on the New York Stock Exchange under the symbol "EK."  There were 54,030 shareholders of record of common stock as of January 31, 2010.  

MARKET PRICE DATA

   
2009
 
2008
Price per share:
 
High
Low
 
High
Low
             
1st Quarter
 
$7.66
$2.01
 
$22.03
$16.31
2nd Quarter
 
$4.57
$2.44
 
$19.60
$12.20
3rd Quarter
 
$6.82
$2.65
 
$17.71
$12.80
4th Quarter
 
$4.74
$3.26
 
$15.68
$5.83
             


DIVIDEND INFORMATION

On April 30, 2009, the Company announced that its Board of Directors decided to suspend future cash dividends on its common stock effective immediately.  Consequently, there were no dividends paid during 2009.   

On May 14, and October 14, 2008, the Board of Directors declared semi-annual cash dividends of $.25 per share payable to shareholders of record at the close of business on June 1, and November 3, 2008, respectively.  These dividends were paid on July 16 and December 12, 2008.  Total dividends paid for the year ended December 31, 2008 were $139 million.  

Dividends may be restricted under the Company’s debt agreements.  Refer to Note 8, “Short-Term Borrowings and Long-Term Debt,” in the Notes to Financial Statements.

PERFORMANCE GRAPH - SHAREHOLDER RETURN

The following graph compares the performance of the Company's common stock with the performance of the Standard & Poor's 500 Composite Stock Price Index and the Dow Jones Industrial Index by measuring the changes in common stock prices from December 31, 2004, plus reinvested dividends.

 
25

 

 
 


 
Performance Graph


Copyright© 2010 Standard & Poor's, a division of The McGraw-Hill Companies Inc. All rights reserved. (www.researchdatagroup.com/S&P.htm)
Copyright© 2010 Dow Jones & Company. All rights reserved.
           
                   
   
12/04
12/05
12/06
12/07
12/08
12/09
   
                   
Eastman Kodak Company
 
100.00
74.09
83.41
72.03
22.56
14.47
   
S&P 500
 
100.00
104.91
121.48
128.16
80.74
102.11
   
Dow Jones US Industrial Average
 
100.00
101.72
121.10
131.86
89.75
110.11
   
S&P Consumer Discretionary
 
100.00
93.64
111.10
96.42
64.13
90.61
   
                   

The Company has elected to compare its total return with the S&P Consumer Discretionary index, because it believes this index is more reflective of the industries in which the Company operates, and therefore provides a better comparison of returns than the Dow Jones U.S. Industrial Average.  

Share Repurchase Program

On June 24, 2008, the Company announced that its Board of Directors authorized a share repurchase program allowing the Company, at management’s discretion, to purchase up to $1.0 billion of its common stock.  The program expired on December 31, 2009.  For the three months ended December 31, 2009, the Company made no purchases of its shares.  From the inception of the program through December 31, 2009, the Company repurchased approximately 20 million shares at an average price of $15.01 per share, for a total cost of $301 million.    


 
26

 

 
ITEM 6.  SELECTED FINANCIAL DATA

Refer to Summary of Operating Data on page 133.

MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Kodak for the three years ended December 31, 2009.  All references to Notes relate to Notes to the Financial Statements in Item 8. “Financial Statements and Supplementary Data.”

OVERVIEW

Kodak is the world’s foremost imaging innovator and generates revenue and profits from the sale of products, technology, solutions and services to consumers, businesses and creative professionals.  The Company’s portfolio is broad, including image capture and output devices, consumables and systems and solutions for consumer, business, and commercial printing applications.  Kodak has three reportable business segments, which are more fully described later in this discussion in “Kodak Operating Model and Reporting Structure.”  The three business segments are: Consumer Digital Imaging Group (“CDG”), Film, Photofinishing and Entertainment Group (“FPEG”) and Graphic Communications Group (“GCG”).

During 2009, the Company established the following key priorities for the year:
·  
Align the Company’s cost structure with external economic realities
·  
Fund core investments
·  
Transform portions of its product portfolio
·  
Drive positive cash flow before restructuring

The recessionary trends in the global economy, which began in 2008, continued to significantly affect the Company’s revenue throughout 2009.  While the rate of decline slowed significantly in the fourth quarter of 2009, the level of business activity has not returned to pre-recession levels.  However, the Company believes that the actions taken, as described below, have helped to mitigate the impacts to its results in 2009 and position it well for the future as the global economy continues to rebound.  The demand for the Company’s consumer products is largely discretionary in nature, and sales and earnings of the Company’s consumer businesses are linked to the timing of holidays, vacations, and other leisure or gifting seasons.  Continued declines in consumer spending have had an impact in the Company’s digital camera and digital picture frame businesses in the CDG segment.  This decline was more than offset by the completion, in 2009, of an anticipated nonrecurring intellectual property transaction within CDG.  In the GCG segment, lack of credit availability, combined with the weak economy, has resulted in lower capital spending by businesses, negatively impacting sales.  The Entertainment Imaging business within the FPEG segment improved in the fourth quarter of 2009 due to the recovery in demand for entertainment films.  However, the secular decline of Film Capture, also within the FPEG segment, continues to impact the traditional businesses.  In anticipation of the continuation of the recession in 2009, the Company implemented a number of actions in order to successfully accomplish the key priorities listed above.

Specifically, the Company has implemented actions to focus business investments in certain areas that are core to the Company’s strategy (see below), while also maintaining an intense focus on cash generation and conservation in 2009.  On April 30, 2009, the Company announced that its Board of Directors decided to suspend future cash dividends on its common stock effective immediately.  Further, the Company also implemented temporary compensation-related actions, which reduced compensation for the chief executive officer and several other senior executives, as well as the Board of Directors, of the Company for the rest of 2009.  In addition, U.S. based employees of the Company were required to take one week of unpaid leave during 2009.  These actions are in addition to a targeted cost reduction program announced in 2009 (the 2009 Program).  This 2009 cost reduction program is designed to more appropriately size the organization’s cost structure with its expected revenue reductions as a result of the current economic environment.  The program involves the rationalization of selling, marketing, administrative, research and development, supply chain and other business resources in certain areas

 
27

 

and the consolidation of certain facilities.  Also, the Company has initiated other actions to curb discretionary expenditures and employment-related costs, as well as to reduce capital expenditures where possible.

As previously disclosed, the Company is focusing its investments on consumer inkjet, commercial inkjet workflow software, and packaging businesses.  The Company continues to build upon its leading market positions in large and stable markets.

Additionally, during 2009 and into 2010, the Company took a number of financing actions designed to provide continued financial flexibility for the Company in this challenging economic environment.  On March 31, 2009, the Company and its Canadian subsidiary entered into an Amended and Restated Credit Agreement (the “Amended Credit Agreement”) with its lenders, which provides for an asset-based revolving credit facility of up to $500 million, under certain conditions, including up to $250 million of availability for letters of credit.  In September of 2009, the Company issued $300 million of Senior Secured Notes due 2017, with detachable warrants, and $400 million of Convertible Senior Notes due 2017.  The combined net proceeds of the two transactions, after transaction costs, discounts and fees, of approximately $650 million, were used to repurchase $563 million of the Company’s existing $575 million Convertible Senior Notes Due 2033 in October 2009, as well as for general corporate purposes.  Therefore, the new debt issuances served as a refinancing of the debt structure of the Company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The accompanying consolidated financial statements and notes to consolidated financial statements contain information that is pertinent to management’s discussion and analysis of the financial condition and results of operations.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities.

The Company believes that the critical accounting policies and estimates discussed below involve the most complex management judgments due to the sensitivity of the methods and assumptions necessary in determining the related asset, liability, revenue and expense amounts.  Specific risks associated with these critical accounting policies are discussed throughout this MD&A, where such policies affect our reported and expected financial results.  For a detailed discussion of the application of these and other accounting policies, refer to the Notes to Financial Statements in Item 8.   

REVENUE RECOGNITION

The Company's revenue transactions include sales of the following: products; equipment; software; services; equipment bundled with products and/or services and/or software; integrated solutions, and intellectual property licensing.  The Company recognizes revenue when it is realized or realizable and earned.  For the sale of multiple-element arrangements whereby equipment is combined with services, including maintenance and training, and other elements, including software and products, the Company allocates to, and recognizes revenue from, the various elements based on their fair value.  

At the time revenue is recognized, the Company also records reductions to revenue for customer incentive programs.  Such incentive programs include cash and volume discounts, price protection, promotional, cooperative and other advertising allowances and coupons.  For those incentives that require the estimation of sales volumes or redemption rates, such as for volume rebates or coupons, the Company uses historical experience and both internal and customer data to estimate the sales incentive at the time revenue is recognized.  In the event that the actual results of these items differ from the estimates, adjustments to the sales incentive accruals would be recorded.   

Incremental direct costs of a customer contract in a transaction that results in the deferral of revenue are deferred and netted against revenue in proportion to the related revenue recognized in each period if: (1) an enforceable contract for the remaining deliverable items exists; and (2) delivery of the remaining items in the arrangement is expected to generate positive margins allowing realization of the deferred costs.  Incremental direct costs are defined as costs that vary with and are directly related to the acquisition of a contract, which would not have been incurred but for the acquisition of the contract.

 
28

 


VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL AND PURCHASED INTANGIBLE ASSETS

The Company reviews the carrying value of its long-lived assets, including goodwill and purchased intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  

The Company tests goodwill for impairment at a level of reporting referred to as a reporting unit.  A reporting unit is an operating segment or one level below an operating segment (referred to as a component).  A component of an operating segment is a reporting unit if the component constitutes a business for which discrete financial information is available and segment management regularly reviews the operating results of that component.  When two or more components of an operating segment have similar economic characteristics, the components are aggregated and deemed a single reporting unit.  An operating segment is deemed to be a reporting unit if all of its components are similar, if none of its components is a reporting unit, or if the segment comprises only a single component.

The components of the Film, Photofinishing and Entertainment Group (FPEG) operating segment are similar and, therefore, the segment meets the requirement of a reporting unit.  The Consumer Digital Imaging Group (CDG) operating segment has two reporting units, the Image Sensor Solutions reporting unit and the Consumer Products reporting unit (consisting of the Digital Capture & Devices, Retail Systems Solutions, Consumer Inkjet Systems, and Consumer Imaging Services strategic product groups.).  The Graphic Communications Group (GCG) operating segment has two reporting units, the Document Imaging reporting unit and the Commercial Printing reporting unit (consisting of the Prepress Solutions, Enterprise Solutions and Digital Printing Solutions strategic product groups).  Both the Consumer Products and the Commercial Printing reporting units consist of components that have been aggregated into their respective reporting units because they have similar economic characteristics.  No other components have goodwill assigned to them.

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 a reporting unit below its carrying amount, 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 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.  The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all reporting units to its total market capitalization.  

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 flow for the period from October 1, 2009 to December 31, 2014; and (b) discount rates of 16% to 26.5%, which were based on the Company’s best estimates of the after-tax weighted-average cost of capital of each reporting unit.    

To estimate 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.

 
29

 

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 with 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 the Company believes 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 its September 30, 2009 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, 2009.  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.  An impairment of goodwill within the FPEG reporting unit is likely in the future due to the expectation of continued secular declines in the film industry.  

As of December 31, 2008, due to the continuing challenging business conditions and the significant decline in its market capitalization during the fourth quarter of 2008, the Company concluded there was an indication of possible impairment.  Certain key assumptions used to determine the fair value of each reporting unit as of December 31, 2008 were revised from September 30, 2008 analysis related to the annual goodwill impairment assessment to reflect: (a) significant reductions in future expected cash flows for the period from 2009 to 2013 due to the actual results for the fourth quarter of 2008 and revised forecasts for 2009 and later years; and (b) discount rates of 18.5% to 23.0%, which were based on the Company’s best estimates of the after-tax weighted-average cost of capital of each reporting unit, adjusted from September 30, 2008 for our latest assessment of financial risk and the increased risk associated with the Company’s future operations.  Based on its updated analysis, the Company concluded that there was an impairment of goodwill related to the Commercial Printing reporting unit within the GCG segment and, thus, recognized a pre-tax charge of $785 million in the fourth quarter of 2008.  

The fair values of reporting units within the Company’s CDG and FPEG segments and the Document Imaging reporting unit within the GCG segment were greater than their respective carrying values as of December 31, 2008, so no goodwill impairment was recorded for these reporting units.  Reasonable changes in the assumptions used to determine these fair values would not have resulted in goodwill impairments in any of these reporting units.
  
The Company’s long-lived assets, other than goodwill and indefinite-lived intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  When evaluating long-lived assets for impairment, the Company compares the carrying value of an asset group to its estimated undiscounted future cash flows.  An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset group.  The impairment is the excess of the carrying value over the fair value of the long-lived asset group.  

Due to increased uncertainty of future cash flows because of the continued impact of the secular declines in the film and photofinishing industries, the Company evaluated the long-lived assets of FPEG’s film business and paper and output systems business for impairment as of September 30, 2009.  Based on this evaluation, the Company concluded that there were no impairments within these asset groups.  

Due to continued operating losses and increased uncertainty of future cash flows because of the economic environment in the fourth quarter of 2008, the Company evaluated the long-lived assets of FPEG’s paper and output systems business and GCG’s electrophotographic solutions business for impairment.  Based on this evaluation, the Company concluded that there were no impairments within these asset groups.  

INCOME TAXES

The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of operating losses, credit carryforwards and temporary differences between the carrying amounts and tax basis of the Company's assets and liabilities.  The

 
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Company records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.  The Company has considered forecasted earnings, future taxable income, the mix of earnings in the jurisdictions in which the Company operates and prudent and feasible tax planning strategies in determining the need for these valuation allowances.  As of December 31, 2009, the Company has net deferred tax assets before valuation allowances of approximately $2.8 billion and a valuation allowance related to those net deferred tax assets of approximately $2.1 billion, resulting in net deferred tax assets of approximately $700 million.  If the Company were to determine that it would not be able to realize a portion of its net deferred tax assets in the future, for which there is currently no valuation allowance, an adjustment to the net deferred tax assets would be charged to earnings in the period such determination was made.  Conversely, if the Company were to make a determination that it is more likely than not that deferred tax assets, for which there is currently a valuation allowance, would be realized, the related valuation allowance would be reduced and a benefit to earnings would be recorded.

The Company’s tax provision (benefit) considers the impact of undistributed earnings of subsidiary companies outside of the U.S.  Deferred taxes have not been provided for the potential remittance of such undistributed earnings, as it is the Company’s policy to indefinitely reinvest its retained earnings.  However, from time to time and to the extent that the Company can repatriate overseas earnings on essentially a tax-free basis, the Company's foreign subsidiaries will pay dividends to the U.S.  

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

PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company’s defined benefit pension and other postretirement benefit costs and obligations are dependent on the Company's key assumptions.  These assumptions, which are reviewed at least annually by the Company, include the discount rate, long-term expected rate of return on plan assets (“EROA”), salary growth, healthcare cost trend rate and other economic and demographic factors.  Actual results that differ from our assumptions are recorded as unrecognized gains and losses and are amortized to earnings over the estimated future service period of the active participants in the plan or, if almost all of a plan’s participants are inactive, the average remaining lifetime expectancy of inactive participants, to the extent such total net unrecognized gains and losses exceed 10% of the greater of the plan's projected benefit obligation or the calculated value of plan assets.  Significant differences in actual experience or significant changes in future assumptions would affect the Company’s pension and other postretirement benefit costs and obligations.

The EROA assumption is based on a combination of formal asset and liability studies that include forward-looking return expectations, given the current asset allocation.  The EROA, once set, is applied to the calculated value of plan assets in the determination of the expected return component of the Company’s pension income or expense.  The Company uses a calculated value of plan assets, which recognizes changes in the fair value of assets over a four-year period, to calculate expected return on assets.  At December 31, 2009, the calculated value of the assets of the major U.S. defined benefit pension plan (the Kodak Retirement Income Plan “KRIP”) was approximately $5.6 billion and the fair value was approximately $4.6 billion.  Asset gains and losses that are not yet reflected in the calculated value of plan assets are not included in amortization of unrecognized gains and losses until they are recognized as a part of the calculated value of plan assets.  

The Company reviews its EROA assumption annually.  To facilitate this review, every three years, or when market conditions change materially, the Company’s larger plans will undertake asset allocation or asset and liability modeling studies.  In early 2008, an asset and liability modeling study for the KRIP was completed and resulted in a 9.0% EROA assumption, which is the same rate outcome as concluded by the prior study in 2005.  

During the fourth quarter of 2008, the Kodak Retirement Income Plan Committee (“KRIPCO,” the committee that oversees KRIP) reevaluated certain portfolio positions relative to current market conditions and accordingly approved a change to the portfolio to reduce risk associated with the volatility in the financial markets.  The Company originally assumed an 8.0% EROA for 2009 for the KRIP based

 
31

 

on these changes and the resulting 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 at that time to reflect the change in asset allocation.  Certain of the Company’s other pension plans also adjusted asset positions during the fourth quarter of 2008.  EROA assumptions for 2009 for those plans were similarly based on these changes and the resulting asset allocations as of the end of the year.  As with the KRIP, the asset allocations for certain of the Company’s other pension plans were reassessed during 2009 and updated.   Asset and liability studies were therefore completed for those plans during 2009.  EROA assumptions for 2010 for those plans were updated accordingly.  

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

The salary growth assumptions are determined based on the Company’s long-term actual experience and future and near-term outlook.  The healthcare cost trend rate assumptions are based on historical cost and payment data, the near-term outlook and an assessment of the likely long-term trends.

The following table illustrates the sensitivity to a change to certain key assumptions used in the calculation of expense for the year ending December 31, 2010 and the projected benefit obligation (“PBO”) at December 31, 2009 for the Company's major U.S. and non-U.S. defined benefit pension plans:

(in millions)
 
Impact on 2010
Pre-Tax Pension Expense Increase (Decrease)
   
Impact on PBO
December 31, 2009 Increase (Decrease)
 
                         
   
U.S.
   
Non-U.S.
   
U.S.
   
Non-U.S.
 
                         
Change in assumption:
                       
  25 basis point decrease in discount rate
  $ (3 )   $ 5     $ 116     $ 126  
  25 basis point increase in discount rate
    3       (4 )     (108 )     (117 )
  25 basis point decrease in EROA
    14       7       N/A       N/A  
  25 basis point increase in EROA
    (14 )     (7 )     N/A       N/A  
                                 


Total pension income from continuing operations before special termination benefits, curtailments, and settlements for the major funded and unfunded defined benefit pension plans in the U.S. is expected to increase from $134 million in 2009 to $164 million in 2010, due primarily to lower interest cost.  Pension expense from continuing operations before special termination benefits, curtailments and settlements for the major funded and unfunded non-U.S. defined benefit pension plans is projected to increase from $2 million in 2009 to $18 million in 2010, which is primarily attributable to lower discount rates and higher inflation.  Absent a recovery of asset values, net pension income will decline in future years.  

Additionally, due to changes in plan design, the Company expects the expense, before curtailment and settlement gains and losses of its major other postretirement benefit plans to decrease to approximately $26 million in 2010 as compared with $44 million for 2009.   


 
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ENVIRONMENTAL COMMITMENTS

Environmental liabilities are accrued based on undiscounted estimates of known environmental remediation responsibilities.  The liabilities include accruals for sites owned or leased by the Company, sites formerly owned or leased by the Company, and other third party sites where the Company was designated as a potentially responsible party (“PRP”).  The amounts accrued for such sites are based on these estimates, which are determined using the ASTM Standard E 2137-06, “Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters.”  The overall method includes the use of a probabilistic model that forecasts a range of cost estimates for the remediation required at individual sites.  The Company’s estimate includes equipment and operating costs for investigations, remediation and long-term monitoring of the sites.  Such estimates may be affected by changing determinations of what constitutes an environmental liability or an acceptable level of remediation.  The Company’s estimate of its environmental liabilities may also change if the proposals to regulatory agencies for desired methods and outcomes of remediation are viewed as not acceptable, or additional exposures are identified.  The Company has an ongoing monitoring and identification process to assess how activities, with respect to the known exposures, are progressing against the accrued cost estimates, as well as to identify other potential remediation issues that are presently unknown.

Additionally, in many of the countries in which the Company operates, environmental regulations exist that require the Company to handle and dispose of asbestos in a special manner if a building undergoes major renovations or is demolished.  The Company records a liability equal to the estimated fair value of its obligation to perform asset retirement activities related to the asbestos, computed using an expected present value technique, when sufficient information exists to calculate the fair value.   

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

See Note 1, “Significant Accounting Policies,” in the Notes to Financial Statements in Item 8.

KODAK OPERATING MODEL AND REPORTING STRUCTURE

For 2009, the Company had 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”):  CDG encompasses digital still and video cameras, digital devices such as picture frames, kiosks and related media, APEX drylab systems, 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, graphic arts film, 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.  As previously announced, the Company closed its Qualex central lab operations in the U.S. and Canada at the end of March 2009.   

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 include workflow software and digital controllers; digital printing, which includes commercial inkjet and electrophotographic products, including equipment, consumables and service; prepress consumables; prepress equipment; and document scanners.

 
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All Other:  All Other is composed of the Company’s display business and other small, miscellaneous businesses.  In December 2009, the Company sold assets of its display business called OLED.


DETAILED RESULTS OF OPERATIONS
Net Sales from Continuing Operations by Reportable Segment and All Other (1)

   
For the Year Ended December 31,
 
(in millions)
 
2009
   
Change
   
Foreign Currency Impact
   
2008
   
Change
   
Foreign Currency Impact
   
2007
 
                                           
Consumer Digital Imaging Group
                                         
     Inside the U.S.
  $ 1,618       -11 %     0 %   $ 1,811       -10 %     0 %   $ 2,012  
     Outside the U.S.
    1,001       -22       -4       1,277       +3       +3       1,235  
Total Consumer Digital Imaging Group
    2,619       -15       -2       3,088       -5       +1       3,247  
                                                         
Film, Photofinishing and Entertainment
Group
                                                       
     Inside the U.S.
    508       -39       0       835       -21       0       1,054  
     Outside the U.S.
    1,749       -19       -4       2,152       -17       +3       2,578  
Total Film, Photofinishing and
Entertainment Group
    2,257       -24       -3       2,987       -18       +2       3,632  
                                                         
Graphic Communications Group   
                                                       
     Inside the U.S.
    831       -20       0       1,036       -12       0       1,178  
     Outside the U.S.
    1,895       -18       -3       2,298       +3       +5       2,235  
Total Graphic Communications Group
    2,726       -18       -2       3,334       -2       +3       3,413  
                                                         
All Other          
                                                       
     Inside the U.S.
    5                       7                       10  
     Outside the U.S.
    (1 )                     -                       (1 )
Total All Other
    4                       7                       9  
                                                         
Consolidated
                                                       
     Inside the U.S.
    2,962       -20       0       3,689       -13       0       4,254  
     Outside the U.S.
    4,644       -19       -4       5,727       -5       +4       6,047  
Consolidated Total
  $ 7,606       -19 %     -2 %   $ 9,416       -9 %     +2 %   $ 10,301  
                                                         

(1)Sales are reported based on the geographic area of destination.

 
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(Loss) Earnings from Continuing Operations Before Interest Expense, Other Income (Charges), Net and Income Taxes by Reportable Segment and All Other

   
For the Year Ended December 31,
 
(in millions)
 
2009
   
Change
   
2008
   
Change
   
2007
 
                               
Consumer Digital Imaging Group
  $ 35       +120 %   $ (177 )     -941 %   $ (17 )
Film, Photofinishing and Entertainment Group
    159       -19       196       -30       281  
Graphic Communications Group
    (42 )     -235       31       -70       104  
All Other
    (13 )     +24       (17 )     +32       (25 )
     Total of segments
    139       +321       33       -90       343  
Restructuring costs, rationalization and other
    (258 )             (149 )             (662 )
Postemployment benefit changes
    -               94               -  
Other operating income (expenses), net
    88               (766 )             96  
Adjustments to contingencies and legal  
  reserves/settlements
    3               (33 )             (7 )
Interest expense
    (119 )             (108 )             (113 )
Other income (charges), net
    30               55               86  
     Loss from continuing operations before income taxes
  $ (117 )     +87 %   $ (874 )     -240 %   $ (257 )
                                         



 
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2009 COMPARED WITH 2008
RESULTS OF OPERATIONS - CONTINUING OPERATIONS

CONSOLIDATED

(in millions)
 
For the Year Ended
                   
   
December 31,
                   
                     
 
2009
   
% of Sales
   
2008
   
% of Sales
   
Increase / (Decrease)
   
% Change
 
                                     
Net sales
  $ 7,606           $ 9,416           $ (1,810 )     -19 %
Cost of goods sold
    5,838             7,247             (1,409 )     -19 %
   Gross profit
    1,768       23.2 %     2,169       23.0 %     (401 )     -18 %
Selling, general and administrative expenses
    1,302       17 %     1,606       17 %     (304 )     -19 %
Research and development costs
    356       5 %     478       5 %     (122 )     -26 %
Restructuring costs, rationalization and other                                    
    226               140               86       61 %
Other operating (income) expenses, net
    (88 )             766               (854 )     111 %
Loss from continuing operations before interest expense, other income (charges), net and income taxes
    (28 )     0 %     (821 )     -9 %     793       97 %
Interest expense
    119               108               11       10 %
Other income (charges), net
    30               55               (25 )     -45 %
Loss from continuing operations before income taxes
    (117 )             (874 )             757       87 %
Provision (benefit) for income taxes                
    115               (147 )             262       -178 %
Loss from continuing operations        
    (232 )     -3 %     (727 )     -8 %     495       68 %
Earnings from discontinued operations, net of income taxes
    17               285               (268 )     -94 %
Extraordinary item, net of tax
    6               -               6          
NET LOSS
    (209 )             (442 )             233          
  Less: Net earnings attributable to
            noncontrolling interests
    (1 )             -               (1 )        
NET LOSS ATTRIBUTABLE TO EASTMAN KODAK COMPANY
  $ (210 )           $ (442 )           $ 232       52 %
                                                 
 

 
   
For the Year Ended
                         
   
December 31,
   
Change vs. 2008
 
   
2009 Amount
   
Change vs. 2008
   
Volume
   
Price/Mix
   
Foreign Exchange
   
Manufacturing and Other Costs
 
                                     
Total net sales
  $ 7,606       -19.2 %     -14.5 %     -2.5 %     -2.2 %     n/a  
                                                 
Gross profit margin
    23.2 %  
0.2pp
      n/a    
-3.6pp
   
-1.3pp
   
5.1pp
 
                                                 

 
Revenues

For the year ended December 31, 2009, net sales decreased compared with 2008 primarily due to volume declines within all three segments driven by lower demand likely as a result of the global economic slowdown which began in the fourth quarter of 2008, particularly within Digital Capture and Devices in the CDG segment and Prepress Solutions in the GCG segment, as well as continued secular declines in Traditional Photofinishing and Film Capture in the FPEG segment.  Foreign exchange negatively impacted sales across all three segments, due to a stronger U.S. dollar.  Unfavorable price/mix was primarily driven by Digital Capture and Devices within CDG, Entertainment Imaging within FPEG, and Prepress Solutions within GCG.      

 
36

 

Gross Profit

Gross profit dollars declined in 2009, primarily due to unfavorable price/mix, which impacted all segments but was most prominent in CDG, lower sales volumes as discussed above, and unfavorable foreign exchange.  These items were partially offset by cost improvements, largely driven by ongoing cost reduction efforts within CDG and FPEG, and lower benefit costs as a result of amendments made in the third quarter of 2008 to certain of the Company’s U.S. postemployment benefit plans.  Gross profit margin as a percentage of sales increased slightly from prior year, as unfavorable price/mix (primarily within CDG) and unfavorable foreign exchange impacts (across all segments) were more than offset by lower manufacturing and other costs for the Company.   

Included in gross profit for the current year were non-recurring intellectual property licensing agreements within Digital Capture and Devices in the CDG segment.  These licensing agreements contributed approximately 5.7% of consolidated revenue to consolidated gross profit dollars in 2009, as compared with 2.4% of consolidated revenue to consolidated gross profit dollars for non-recurring agreements in 2008.  The Company expects to secure other new licensing agreements, the timing and amounts of which are difficult to predict. These types of arrangements provide the Company with a return on portions of its R&D investments, and new licensing opportunities are expected to have a continuing impact on the results of operations.

Selling, General and Administrative Expenses

The decrease in consolidated selling, general and administrative expenses (SG&A) was a result of company-wide cost reduction actions implemented in 2009 in response to current economic conditions.  

Research and Development Costs

The decrease in consolidated research and development (R&D) costs was a result of focused cost reduction efforts.

Restructuring Costs, Rationalization and Other

These costs, as well as the restructuring and rationalization-related costs reported in cost of goods sold, are discussed under the "RESTRUCTURING COSTS, RATIONALIZATION AND OTHER" section.  

Other Operating (Income) Expenses, Net

The other operating (income) expenses, net category includes gains and losses on sales of assets and businesses and certain impairment charges. The current year amount primarily reflects a gain of approximately $100 million on the sale of assets of the Company’s organic light emitting diodes (OLED) group. The prior year amount primarily reflects a $785 million goodwill impairment charge related to the GCG business.
 
In November 2009, the Company agreed to terminate its patent infringement litigation with LG Electronics, Inc., LG Electronics USA, Inc., and LG Electronics Mobilecomm USA, Inc., entered into a technology cross license agreement with LG Electronics, Inc. and agreed to sell assets of its OLED group to Global OLED Technology LLC, an entity established by LG Electronics, Inc., LG Display Co., Ltd. and LG Chem, Ltd. As the transactions were entered into in contemplation of one another, in order to reflect the asset sale separately from the licensing transaction, the total consideration was allocated between the asset sale and the licensing transaction based on the estimated fair value of the assets sold. Fair value of the assets sold was estimated using other competitive bids received by the Company. Accordingly, $100 million of the proceeds was allocated to the asset sale. The remaining gross proceeds of $414 million were allocated to the licensing transaction and reported in net sales of the CDG segment.
 
  

 
37

 

Interest Expense

The increase in interest expense in 2009 compared with 2008 was primarily due to the issuances in the third quarter of 2009 of $300 million aggregate principal amount of 10.5% Senior Secured Notes due 2017 and $400 million aggregate principal amount of 7% Convertible Senior Notes due 2017.

Other Income (Charges), Net

The other income (charges), net category primarily includes interest income, income and losses from equity investments, and foreign exchange gains and losses.  The decrease in other income (charges), net was primarily attributable to a decrease in interest income due to lower interest rates and lower cash balances in the year 2009 as compared with 2008, partially offset by the favorable impact of legal settlements in the current year.
 
Income Tax Provision (Benefit)

(dollars in millions)
 
For the Year Ended
 
   
December 31,
 
   
2009
   
2008
 
Loss from continuing operations before income taxes
  $ (117 )   $ (874 )
Provision (benefit) for income taxes
  $ 115     $ (147 )
Effective tax rate
    (98.3 )%     16.8 %


The change in the Company’s effective tax rate from continuing operations is primarily attributable to: (1) a benefit recognized upon the receipt in 2008 of the interest portion on an IRS tax refund, (2) a pre-tax goodwill impairment charge of $785 million that resulted in a tax benefit of only $4 million due to a full valuation allowance in the U.S. and limited amount of tax deductible goodwill that existed as of December 31, 2008, (3) losses generated in the U.S. and in certain jurisdictions outside the U.S. that were not benefited due to management’s conclusion that it was not more likely than not that the tax benefits would be realized, (4) the impact of previously established valuation allowances in jurisdictions with current earnings, (5) the mix of earnings from operations outside the U.S., (6) withholding taxes related to a non-recurring licensing agreement entered into in 2009; and (7) changes in audit reserves and settlements.
 

 
38

 

CONSUMER DIGITAL IMAGING GROUP

(dollars in millions)
 
For the Year Ended
             
   
December 31,
             
                     
 
2009
   
% of Sales
   
2008
   
% of Sales
   
Increase / (Decrease)
   
% Change
 
                                     
Total net sales
  $ 2,619           $ 3,088           $ (469 )     -15 %
Cost of goods sold
    1,955             2,495             (540 )     -22 %
   Gross profit
    664       25.4 %     593       19.2 %     71       12 %
Selling, general and administrative expenses
    483       18 %     565       18 %     (82 )     -15 %
Research and development costs
    146       6 %     205       7 %     (59 )     -29 %
Earnings (loss) from continuing operations before interest expense, other income (charges), net and income taxes
  $ 35       1 %   $ (177 )     -6 %   $ 212       120 %
                                                 
 
 
   
For the Year Ended
                         
   
December 31,
   
Change vs. 2008
 
   
2009 Amount
   
Change vs. 2008
   
Volume
   
Price/Mix
   
Foreign Exchange
   
Manufacturing and Other Costs
 
                                     
Total net sales
  $ 2,619       -15.2 %     -10.6 %     -2.9 %     -1.7 %     n/a  
                                                 
Gross profit margin
    25.4 %  
6.2pp
      n/a    
-7.3pp
   
-1.4pp
   
14.9pp
 


Revenues

CDG’s 2009 performance reflects the global economic downturn which began in the fourth quarter of 2008.  The demand for many of the consumer products within the CDG portfolio is discretionary in nature and consumer discretionary spending remains weak, leading to declines in CDG revenues for the year ended December 31, 2009.  

Net sales of Digital Capture and Devices, which includes consumer digital still and video cameras, digital picture frames, accessories, memory products, and intellectual property royalties, decreased 21% in the year ended December 31, 2009 as compared with the prior year, primarily reflecting lower volumes of digital cameras and digital picture frames as a result of continuing weakness in consumer demand.  Unfavorable price/mix and foreign exchange also contributed to the decline in sales.    

Net sales of Retail Systems Solutions, which includes kiosks and related media and APEX drylab systems, decreased 6% in the year ended December 31, 2009, driven by unfavorable foreign exchange and price/mix, and lower volumes.  Partially offsetting equipment volume declines were media volume increases, primarily due to increased demand outside the U.S.  The Company and one of its significant Retail Systems Solutions customers will not renew a contract that expired on September 30, 2009.  The Company plans to replace a significant portion of this volume of business, although the timing and extent is uncertain.  The Company believes this will not have a material impact on its future cash flows or liquidity.            

Net sales of Consumer Inkjet Systems, which includes inkjet printers and related consumables, increased 57% due to higher volumes for printers and ink cartridges, and favorable price/mix, partially offset by unfavorable foreign exchange and media volume declines.  The volume increases experienced by the Company during the economic downturn significantly outpaced the consumer printing industry, which management believes are reflective of favorable consumer response to the Company’s unique value proposition.  


 
39

 

Gross Profit

The increase in gross profit, both in dollars and as a percentage of sales, for CDG was primarily attributable to significantly lower product costs versus prior year, particularly within Consumer Inkjet Systems and Digital Capture and Devices.  Partially offsetting these improvements were unfavorable price/mix, largely related to digital cameras and digital picture frames, and unfavorable foreign exchange.      

Included in gross profit for the current year were non-recurring intellectual property licensing agreements within Digital Capture and Devices.  These licensing agreements contributed approximately 16.6% of segment revenue to segment gross profit dollars in 2009, as compared with 7.4% of segment revenue to segment gross profit dollars for non-recurring agreements in 2008.  The Company expects to secure other new licensing agreements, the timing and amounts of which are difficult to predict. These types of arrangements provide the Company with a return on portions of its R&D investments, and new licensing opportunities are expected to have a continuing impact on the results of operations.

A technology cross license was entered into in January 2010, and became effective in February 2010, with Samsung Electronics Co., Ltd. The Company received a non-refundable payment in December 2009 of $100 million, before applicable withholding taxes, as a deposit towards this license. The license calls for additional payments totaling $450 million throughout 2010, which will be reduced by applicable withholding taxes.  No amount related to this agreement has been recorded as revenue for 2009.

Selling, General and Administrative Expenses

The decrease in SG&A expenses for CDG was primarily driven by focused cost reduction actions implemented in 2009 to respond to the current economic conditions, partially offset by increased advertising expense within Consumer Inkjet Systems related to the introduction of new models and geographic expansion of product offerings.

Research and Development Costs

The decrease in R&D costs for CDG was primarily attributable to lower spending related to Consumer Inkjet Systems, resulting from the movement of product offerings from the development phase into the market introduction and growth phases, as well as portfolio rationalization within Digital Capture and Devices and Imaging Sensors.      


 
40

 

FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP

(dollars in millions)
 
For the Year Ended
             
   
December 31,
             
                     
 
2009
   
% of Sales
   
2008
   
% of Sales
   
Increase / (Decrease)
   
% Change
 
                                     
Total net sales
  $ 2,257           $ 2,987           $ (730 )     -24 %
Cost of goods sold
    1,775             2,335             (560 )     -24 %
   Gross profit
    482       21.4 %     652       21.8 %     (170 )     -26 %
Selling, general and administrative expenses
    290       13 %     407       14 %     (117 )     -29 %
Research and development costs
    33       1 %     49       2 %     (16 )     -33 %
Earnings from continuing operations before interest expense, other income (charges), net and income taxes
  $ 159       7 %   $ 196       7 %   $ (37 )     -19 %
                                                 
 
 
   
For the Year Ended
                         
   
December 31,
   
Change vs. 2008
 
   
2009 Amount
   
Change vs. 2008
   
Volume
   
Price/Mix
   
Foreign Exchange
   
Manufacturing and Other Costs
 
                                     
Total net sales
  $ 2,257       -24.4 %     -18.7 %     -2.9 %     -2.8 %     n/a  
                                                 
Gross profit margin
    21.4 %  
-0.4pp
      n/a    
-2.4pp
   
-1.9pp
   
3.9pp
 
                                                 
 
 
Revenues

The decrease in net sales for FPEG was driven by revenue declines across all SPGs within the segment.

Traditional Photofinishing sales decreased 24% in 2009 as compared with 2008, primarily driven by volume declines resulting from the previously announced closure of the Qualex central lab operations in the U.S. and Canada at the end of March 2009.

Net sales of Film Capture decreased 38% compared with the prior year due to secular declines in the industry.

Net sales for Entertainment Imaging decreased 18% compared with the prior year, primarily reflecting lower volumes due to (1) the uncertainty around the Screen Actors’ Guild contract, which expired in June 2008 and was not replaced until June 2009, (2) the impact of the current economic climate on film makers, resulting in lower film production and the use of digital technology, as expected, and (3) industry shifts in film release strategies and distribution.  Entertainment Imaging revenues were also impacted by unfavorable foreign exchange and price/mix.
   
Gross Profit

The decrease in FPEG gross profit in both dollars and as a percentage of sales was primarily driven by lower sales volumes as mentioned above, unfavorable price/mix within Entertainment Imaging, and unfavorable foreign exchange across all SPGs.  This was partially offset by lower benefit costs as a result of amendments made in the third quarter of 2008 to certain of the Company’s U.S. postemployment benefit plans, as well as lower raw material costs.     

 
41

 

Selling, General and Administrative Expenses

The decline in SG&A expenses for FPEG was attributable to focused cost reduction actions implemented in 2009 in response to economic conditions, as well as lower postemployment benefit costs and the aforementioned closure of Qualex operations in the U.S. and Canada.   

Research and Development Costs

The decrease in R&D costs was due to focused cost reductions as well as lower postemployment benefit costs.

GRAPHIC COMMUNICATIONS GROUP


(dollars in millions)
 
For the Year Ended
             
   
December 31,
             
                     
 
2009
   
% of Sales
   
2008
   
% of Sales
   
Increase / (Decrease)
   
% Change
 
                                     
Total net sales
  $ 2,726           $ 3,334           $ (608 )     -18 %
Cost of goods sold
    2,073             2,445             (372 )     -15 %
   Gross profit
    653       24.0 %     889       26.7 %     (236 )     -27 %
Selling, general and administrative expenses
    524       19 %     637       19 %     (113 )     -18 %
Research and development costs
    171       6 %     221       7 %     (50 )     -23 %
(Loss) earnings from continuing operations before interest expense, other income (charges), net and income taxes
  $ (42 )     -2 %   $ 31       1 %   $ (73 )     -235 %
                                                 


   
For the Year Ended
                         
   
December 31,
   
Change vs. 2008
 
   
2009 Amount
   
Change vs. 2008
   
Volume
   
Price/Mix
   
Foreign Exchange
   
Manufacturing and Other Costs
 
                                     
Total net sales
  $ 2,726       -18.2 %     -14.5 %     -1.7 %     -2.0 %     n/a  
                                                 
Gross profit margin
    24.0 %  
-2.7pp
      n/a    
-1.1pp
   
-0.8pp
   
-0.8pp
 
                                                 


Revenues

GCG’s 2009 revenue declines likely reflect the impact of ongoing global economic uncertainties, which depressed global print demand and associated capital investments in the printing industry.

The decrease in GCG net sales for 2009 was driven by volume declines and unfavorable foreign exchange across all SPGs. Unfavorable price/mix, primarily within Prepress Solutions and Digital Printing Solutions, reflects both a shift in demand toward products requiring lower levels of customer investment and increased price pressures in commercial printing due to the economic downturn in the industry, partially offset by favorable price/mix within Document Imaging.      

Net sales of Prepress Solutions decreased 20%, primarily driven by volume declines, with unfavorable price/mix and foreign exchange also contributing to the overall decrease in revenues.  The volume decreases were largely attributable to the decline in worldwide print demand, which reduced demand for plate consumables and prepress equipment.   

 
42

 


Net sales of Digital Printing Solutions decreased 12%, as price/mix, volume, and foreign exchange were all unfavorable.  For equipment revenues within the SPG, unfavorable volumes were driven by color electrophotographic equipment, while unfavorable price/mix was largely attributable to commercial inkjet equipment.  For consumables revenues within the SPG, commercial inkjet and black and white electrophotographic performance was driven by volume declines, partially offset by favorable price/mix.  Favorable color electrophotographic consumable volumes were offset by unfavorable price/mix.  Equipment and consumable performance was impacted by decreased capital investment levels in an uncertain economy and the worldwide decline in print demand, which drove a shift in equipment placements toward lower-priced models and increased competitive pricing.  
  
Net sales of Document Imaging decreased 10%, driven by lower volumes and unfavorable foreign exchange, partially offset by favorable price/mix in the scanner product lines.  The volume declines were largely attributable to decreased demand for scanning and imaging products and services associated with delays in upgrades of scanning capacity, partially offset by sales stemming from the acquisition of the scanner division of BÖWE BELL + HOWELL, which closed in the third quarter of 2009.    

Net sales of Enterprise Solutions decreased 36%, primarily due to volume declines in sales of workflow software and print controllers as a result of fewer prepress and digital printing equipment placements.

Gross Profit

Gross profit dollars declined across all SPGs in the GCG segment.  All SPGs in the segment also experienced a decrease in gross profit as a percentage of sales except for Document Imaging, as favorable price/mix in the scanner product lines offset unfavorable foreign exchange and increased costs.  The decline in global print demand negatively impacted equipment and consumables sales volumes, driving down gross profit dollars while also leading the Company to reduce its production levels.  This resulted in lower levels of factory cost absorption, and lower utilization of service personnel.  This impact was most pronounced in Prepress Solutions and Enterprise Solutions.  Constrained demand drove increased price pressures in the industry as capital investments continue to be depressed, driving unfavorable price/mix in Digital Printing Solutions.  These declines were partially offset by reduced aluminum commodity costs, and cost reductions driven by product portfolio rationalization. 

Selling, General and Administrative Expenses

The decrease in SG&A expenses for GCG was primarily attributable to focused cost reduction actions implemented in 2009 in response to economic conditions.  

Research and Development Costs

The decrease in R&D costs for GCG was largely driven by a rationalization and refocusing of investments.  

RESULTS OF OPERATIONS – DISCONTINUED OPERATIONS

Total Company earnings from discontinued operations for the year ended December 31, 2009 and 2008 of $17 million and $285 million, respectively, include a benefit for income taxes of $8 million and $288 million, respectively.   

Earnings from discontinued operations in 2009 were primarily driven by the reversal of certain foreign tax reserves which had been recorded in conjunction with the divestiture of the Health Group in 2007.

Earnings from discontinued operations in 2008 were primarily driven by a tax refund that the Company received from the U.S. Internal Revenue Service.  The refund was related to the audit of certain claims filed for tax years 1993-1998.  A portion of the refund related to past federal income taxes paid in relation to the 1994 sale of a subsidiary, Sterling Winthrop Inc., which was reported in discontinued operations.  Refer to Note 15, “Income Taxes,” in the Notes to Financial Statements for further discussion of the tax refund.   

 
43

 

For a detailed discussion of the components of discontinued operations, refer to Note 22, “Discontinued Operations,” in the Notes to Financial Statements.

EXTRAORDINARY GAIN

The terms of the purchase agreement of the 2004 acquisition of NexPress Solutions LLC called for additional consideration to be paid by the Company if sales of certain products exceeded a stated minimum number of units sold during a five-year period following the close of the transaction.  In May 2009, the earn-out period lapsed with no additional consideration required to be paid by the Company.  Negative goodwill, representing the contingent consideration obligation of $17 million, was therefore reduced to zero.  The reversal of negative goodwill reduced Property, plant and equipment, net by $2 million and Research and development expense by $7 million and resulted in an extraordinary gain of $6 million, net of tax, during the year ended December 31, 2009.

NET LOSS ATTRIBUTABLE TO EASTMAN KODAK COMPANY

The Company’s consolidated net loss attributable to Eastman Kodak Company for 2009 was $210 million, or a loss of $0.78 per basic and diluted share, as compared with a net loss attributable to Eastman Kodak Company for 2008 of $442 million, or a loss of $1.57 per basic and diluted share, representing an improvement in earnings of $232 million.  This improvement in earnings is attributable to the reasons outlined above.


 
44

 

2008 COMPARED WITH 2007

RESULTS OF OPERATIONS - CONTINUING OPERATIONS

CONSOLIDATED

(in millions)
 
For the Year Ended
                   
   
December 31,
                   
                     
 
2008
   
% of Sales
   
2007
   
% of Sales
   
Increase / (Decrease)
   
% Change
 
                                     
Net sales
  $ 9,416           $ 10,301           $ (885 )     -9 %
Cost of goods sold
    7,247             7,757             (510 )     -7 %
   Gross profit
    2,169       23.0 %     2,544       24.7 %     (375 )     -15 %
Selling, general and administrative expenses
    1,606       17 %     1,802       17 %     (196 )     -11 %
Research and development costs
    478       5 %     525       5 %