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 lithographic 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.  Electronic components are used in t he manufacture of digital cameras and devices, consumer and commercial printers, and other electronic devices.  Although most electronic components are generally available from multiple sources, certain key electronic components included in the finished goods manufactured by and purchased from the Company’s third party suppliers are obtained from single or limited sources, which may subject the Company to supply risks.

 

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SEASONALITY OF BUSINESS

Sales and earnings of the CDG segment are linked to the timing of holidays, vacations and other leisure or gifting seasons.  Digital capture and consumer inkjet printing products have experienced peak sales during the last four months of the year as a result of the December holidays.  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 GCG segment generally exhibit modestly higher levels in the fourth quarter, due to seasonal customer demand linked to commercial year-end advertising processes.

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.

RESEARCH AND DEVELOPMENT

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

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,
		2010				2009				2008
Consumer Digital Imaging Group		$	148			$	146			$	205
Graphic Communications Group			152				171				221
Film, Photofinishing and Entertainment Group			19				33				49
All Other			2				6				3
Total		$	321			$	356			$	478

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, processin g 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.

 

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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, although costs could be material to a particular quarter or year, with the possible exception of matters related to the Passaic River, which are described in Note 10, "Commitments and Contingencies," in the Notes to Financial Statements.

EMPLOYMENT

At the end of 2010, the Company employed the full time equivalent of approximately 18,800 people, of whom approximately 9,600 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, 2009 filed on February 22, 2010.  Additionally, we filed with the New York Stock Exchange (“NYSE”) the CEO certification, dated June 9, 2010, 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

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

The markets in which we do business are highly competitive with large, entrenched, and well financed industry participants.  In certain markets where Kodak is a relatively new entrant, we have not achieved the scale of distribution that our competitors have.  In addition, 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. 0; If our products, 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.

 

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If our commercialization and manufacturing processes fail to prevent product reliability and quality issues, our product launch plans may be delayed, our financial results may be adversely impacted, and our reputation may be harmed.

In developing, commercializing and manufacturing our products and services, we must adequately address reliability and other quality issues, 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 develop and commercialize with rapid advances in technologies, the occurrence of defects may increase, particularly with the introduction of new product lines.  Unanticipated issues with product performance may delay product launch plans which could result in additional expenses, lost revenue and earnings.  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.  Product reliability and 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.  Product quality issues can also result in recalls, warranty, or other service obligations and litigation.

If we are unsuccessful with our strategic investment decisions, 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, specifically, consumer inkjet, commercial inkjet (including our Prosper line of products based upon the Company’s Stream technology), packaging solutions, and workflow software and services.  We believe each of these businesses has significant growth potential.  The introduction of successful innovative products and the achievement of scale are necessary for us to grow these businesses, improve margins and achieve our financial objectives.  If we are unsuccessful in growing our investment businesses as planned, our financial performance could be adversely affected.

If we cannot effectively anticipate technology trends and develop and market new products to respond to changing customer preferences, our revenue, earnings and cash flow, could be adversely affected.

We must develop and introduce new products and services in a timely manner to keep pace with technological developments and achieve customer acceptance.  If we are unable to anticipate new technology trends, for example in consumer electronics, and develop improvements to our current technology to address changing customer preferences, this could adversely affect our revenue, earnings and cash flow.  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.

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, global financial markets have been experiencing volatility.  Consumer discretionary spending may not return to pre-recession levels in certain geographies.  Continued 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.  While the company is seeking to increase sales in markets that have already experienced an economic recovery such as Asia, there is no guarantee that anticipated economic growth levels in those markets will continue in the future, or that the company will succeed in expanding sales in these markets.  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 liquidity, including our ability to use credit lines, 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.

 

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If we cannot attract, retain and motivate key employees, our revenue and earnings 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 and engineering professionals, and qualified sales representatives, particularly in our targeted growth markets, is critical to our future.   The market for experienced 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 compensa tion 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 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 chan ges 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 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.

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.  Our ability to execute our intellectual property licensing strategies, including litigation strategies, such as our legal actions against Apple Inc. and Research in Motion Limited, could also affect our revenue and earnings.  Additionally, the uncertainty around the timing, outcome and

 

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magnitude of our intellectual property-related litigation (including our legal action against Apple Inc. and Research in Motion Limited before the International Trade Commission), 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 noncomplian ce 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.  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.

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, the Euro and other major currencies.  In addition, our products contain silver, aluminum, petroleum based or other commodity-based raw materials, the prices of which have been and may continue to 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.

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 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 or performance problems with 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 quart er.  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 concentrat ed our credit and operational risk and could result in an adverse impact on our financial performance.

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

We have outsourced a significant portion of our overall worldwide manufacturing, logistics, customer support and administrative operations 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 electronic 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.

We may be required to recognize additional impairments in the value of our goodwill and/or other long-lived assets, 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.  Additionally, our other long-lived assets are evaluated for impairments whenever events or changes in circumstances indicate the carrying value may not be recoverable.  Either of these situations may occur for

 

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various reasons including changes in actual or expected income or cash.  We continue to evaluate current conditions to assess whether any impairment exists.   Impairments could occur in the future if market or interest rate environments deteriorate, expected future cash flows of our reporting units decline, silver prices increase significantly, or if reporting unit carrying values change materially compared with changes in respective fair values.

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.  Additionally, if 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 compl iance 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.

Our future results could be harmed if we are unsuccessful in our efforts to expand sales in emerging markets.

Because we are seeking to expand our sales and number of customer relationships outside the United States, and specifically in emerging markets in Asia, Latin America and Eastern Europe, 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, anti-corruption, labor, 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.

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.

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.  

 

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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 tr ansactions 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.

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

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.  A breach of any of the covenants contained in our Credit Agreement or our other financing arrangements, or our inability to comply with the required financial ratio in our Credit Agreement, when applicable, could result in an event of default under the Credit Agreement or our other financing arrangements, subject to applicable grace and cure periods.  If any event of default occurs and we are not able either to cure it or obtain a waiver from the requisite lenders under the Credit Agreement and noteholders under our other financing arrangements, the administrative agent of t he Credit Agreement may, and at the request of the requisite lenders shall, and the trustee or the requisite noteholders under our other financing arrangements may, and at the request of the requisite noteholders shall, declare all of our outstanding obligations under the Credit Agreement and our other financing arrangements, respectively, together with accrued interest and fees, to be immediately due and payable, and the agent under the Credit Agreement may, and at the request of the requisite lenders shall, terminate the lenders' commitments under the Credit Agreement and cease making further loans, and if applicable, the agent and/or trustee could institute foreclosure proceedings against our pledged assets.

Continued investment, capital needs, restructuring payments and servicing our debt require 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, litigation, regulatory and other factors that are beyond our control.  We cannot assure you that:

·	our businesses  will generate sufficient cash flow from operations;

·	our plans to generate cash proceeds through the sale of non-core assets will be successful;

·	we will be able to repatriate or move cash to locations where and when it is needed;

·	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 raising additional capital; reducing or delaying capital expenditures, product development efforts, strategic acquisitions, and investments and alliances; selling assets; restructuring or refinancing our debt; 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 sati sfy 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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ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

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

Operations of the CDG segment are located in Rochester, New York; Atlanta, Georgia; Emeryville, California; San Diego, California; China; and Singapore.  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.

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.

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 the United Kingdom 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.

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

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 permis sive 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.  Refer to Note 10, “Commitments and Contingencies,” in the Notes to Financial Statements for additional information.

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 the Northern District of Texas.  The suit, Research in Motion Limited and Research in Motion Corporation v. Eastman Kodak Company, 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.  A Markman Hearing was held on March 23, 2010.  The Court has not yet issued its Markman decision.  The Court rescheduled to August 2011 a trial on merits which was originally scheduled for December 2010.  The Company intends to vigorously defend itself.

On January 14, 2010 the Company filed a complaint with the International Trade Commission (ITC) against Apple Inc. and Research in Motion Limited (RIM) for infringement of patents related to digital camera technology.  In the Matter of Certain Mobile Telephones and Wireless Communication Devices Featuring Digital Cameras and Components Thereof, the Company is seeking a limited exclusion order

 

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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.  A Markman Hearing was held in May 2010 and an initial determination was issued by the Administrative Law Judge in June 2010, which determination is being reviewed by the Commission.  A hearing on the merits occurred in September 2010.  In December 2010, as a result of a re-examination proceeding initiated by RIM and other parties, the U.S. Patent and Trademark Office affirmed the validity of the same patent claim at issue in the ITC investigation.  On January 24, 2011, the Company receive d notice that the Administrative Law Judge (ALJ) had issued an initial determination recommending that the Commission find the patent claim at issue invalid and not infringed.  The Company has petitioned the Commission to review the initial determination of the ALJ.  A final determination by the Commission is expected by May 23, 2011.

On January 14, 2010 the Company filed two suits against Apple Inc. in the Federal District Court in the Western District of New York (Eastman Kodak Company v. Apple Inc.) claiming infringement of patents related to digital cameras and certain computer processes.  The Company is seeking unspecified damages and other relief.  The case related to digital cameras has been stayed pending the ITC action referenced above.  On April 15, 2010, Apple Inc. filed a counterclaim against Kodak claiming infringement of patents related to digital cameras and all-in-one printers.  The Company intends to vigorously defend itself.

On April 15, 2010, Apple Inc. filed a complaint in the ITC against Kodak asserting infringement of patents related to digital cameras.  In the Matter of Certain Digital Imaging Devices and Related Software, Apple is seeking a limited exclusion order preventing importation of infringing devices.  A hearing on the merits before an Administrative Law Judge was concluded on February 2, 2011 and an initial determination is expected by May 18, 2011.  On April 15, 2010 Apple also filed in Federal District Court in the Northern District of California (Apple Inc. v. Eastman Kodak Company) a complaint asserting infringement of the same patents asserted in the ITC.  The Company intends to vigorously defend itself.

On August 26, 2010, Apple filed a claim in California State Court (Santa Clara) claiming ownership of the Kodak patent asserted by Kodak against Apple in the ITC action referenced above.  This action has been removed to Federal District Court in the Northern District of California.  The Court has subsequently stayed this action.  The Company intends to vigorously defend itself.

The Company and its subsidiaries are involved in various lawsuits, claims, investigations and proceedings, including commercial, customs, employment, environmental, and health and safety matters, which are being handled and defended in the ordinary course of business.  In addition, the Company is subject to various assertions, claims, proceedings and requests for indemnification concerning intellectual property, including patent infringement suits involving technologies that are incorporated in a broad spectrum of the Company’s products.  These matters are in various stages of investigation and litigation, and are being vigorously defended.  Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial co ndition 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.

 

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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	53		Senior Vice President	2002		2005
Philip J. Faraci	55		President and Chief Operating Officer	2005		2007
Pradeep Jotwani	56		Senior Vice President	2010		2010
Brad W. Kruchten	50		Senior Vice President	2002		2009
Antoinette P. McCorvey	53		Chief Financial Officer and Senior Vice President	2007		2010
Gustavo Oviedo	58		Vice President	2007		2011
Antonio M. Perez	65		Chairman of the Board, Chief Executive Officer	2003		2005
Laura G. Quatela	53		General Counsel  and Senior Vice President	2006		2011
Eric H. Samuels	43		Chief Accounting Officer and Corporate Controller	2009		2009
Terry R. Taber	56		Senior Vice President	2008		2010

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. Jotwani, who joined the Company on September 29, 2010.

The executive officers' biographies follow:

Robert L. Berman

Mr. 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.  He is a member of the Eastman Kodak Company Executive Council.  He is responsible for the design and implementation of all human resources strategies, policies, and processes throughout the corporation.  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 his current 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 28 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.

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 three major digital businesses:  the Consumer Digital Imaging Group (CDG), the Graphic Communications Group (GCG), and the Film, Photofinishing and Entertainment Group (FPEG).  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.

 

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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.

Pradeep Jotwani

Pradeep Jotwani joined Kodak in September 2010 as President, Consumer Digital Imaging Group, Chief Marketing Officer, and Senior Vice President.

As President, Consumer Digital Imaging Group, Mr. Jotwani is responsible for Kodak’s digital cameras, picture frames, pocket video cameras, kiosks, imaging sensors, consumer inkjet printers, and KODAK Gallery – the company’s online photo service.  As Kodak’s CMO, Mr. Jotwani is responsible for customer relationship management, brand management, business-to-business and business-to-consumer marketing, communications and public affairs, online commerce, and the company’s website, www.kodak.com.

Mr. Jotwani left Hewlett-Packard Company in 2007 as Senior Vice President, Supplies, Imaging and Printing Group.  Under his direction, the business was the industry-leading supplier.  Prior to that assignment, he was President of HP’s Consumer Business Organization, which he formed.  This organization represented HP’s first formal sales and marketing organization focused specifically on the consumer market.  He also served as HP’s executive sponsor for Customer Relationship Management (CRM) and founded hpshopping.com, the company’s e-commerce store.

After 25 years at HP, and prior to joining Kodak, Mr. Jotwani served as an operating executive at a private equity firm, participated on several corporate boards, was a Leadership Fellow at Stanford University’s Graduate School of Business, and lent his time to a series of civic and non-profit organizations.  He continues to serve on the board of RealNetworks, Inc., a pioneer of streaming media and the provider of network-delivered digital media products and services worldwide.

Brad W. Kruchten

Brad Kruchten is currently the President of the Film, Photofinishing & Entertainment Group (FPEG).  In this capacity, he is responsible for profit and loss for 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 in July 2009.  In addition, Mr. Kruchten has responsibility for Event Imaging Solutions, which 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 managed 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.

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, Kruchten became a product line manager for Business Imaging Systems.  In this capacity, he had profit-and-loss responsibility for Retrieval products.  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.  During his tenure, Kodak introduced a number of scanner s, which made the Company the world's leading seller of high-speed production scanning.  In 2000, 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, 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.

 

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Prior to Kodak, Kruchten worked as a project engineer at Inland Steel and as a tool designer for General Motors Corp.

Antoinette P. McCorvey

 

Antoinette (Ann) McCorvey was elected Chief Financial Officer and Senior Vice President, Eastman Kodak Company, effective November 5, 2010. 

 

Ms. McCorvey is responsible for worldwide financial operations, including Corporate Financial Planning and Analysis, Treasury, Audit, Controllership, Tax, Investor Relations, Aviation, Corporate Business Development, Worldwide Information Systems, and Global Purchasing.

 

Ms. McCorvey joined Kodak in December 1999 as Director, Finance, Imaging Materials Manufacturing.  She has held assignments of increasing responsibility including Director, Finance, Global Manufacturing and Logistics; Director, Finance, Corporate Financial Planning and Analysis; and Director, Finance and Vice President, Consumer Digital Imaging Group.  In March 2007, she was appointed Director & Vice President of Investor Relations.  The Board of Directors elected her a Corporate Vice President in December 2007.

 

Prior to Kodak, Ms. McCorvey had a 20-year career with Monsanto/Solutia.  Her last assignment at Solutia, Inc. (the former Chemical Company of Monsanto) was Vice President/General Manager of Nylon, Plastics, Polymers and Industrial Fibers.

 

Gustavo Oviedo

Gustavo Oviedo was named Chief Customer Officer and General Manager, Worldwide Regional Operations effective January 1, 2011.

Previously, Mr. Oviedo was General Manager, Worldwide Sales and Customer Operations, Consumer Digital Imaging and Graphic Communications Groups.  In this role, he oversaw worldwide sales and customer support for the Company's Consumer Digital Imaging (CDG) and Graphic Communications (GCG) Groups.  He was responsible for the United States and Canada, (US&C) European, African and Middle Eastern (EAMER) and Asia Pacific Regions (APR).

From March 2007 to December 2008, Mr. Oviedo was Asia Pacific Region Managing Director, Eastman Kodak Company.  He also served as Managing Director, Asia Pacific Region for Kodak’s Graphic Communications Group, a position he assumed in 2006 following Kodak's acquisition of Kodak Polychrome Graphics (KPG).  In this role, Mr. Oviedo was responsible for the entire Kodak business and strategic product portfolio in the region.  The Board of Directors elected him a Corporate Vice President in December 2007.

Mr. Oviedo’s international career spans more than 25 years working in the United States, Latin America, Asia and Europe, and includes deep industrial operations management experience.  Before joining Kodak (KPG), he spent over 20 years with Schneider Electric, a leader in electromechanical and electronic products, where he held positions of increasing responsibility in regional management and his portfolio included distribution, logistics, sales and marketing, business development, and strategic mergers & acquisitions.

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 several years, Kodak introduced an array of new digital technologies and products for consumer and commercial applications that generated approximately $5.4 billion in revenue in 2010.  Those include, among others, consumer inkjet printers, pocket video cameras, sensors for digital products, and dry labs for printing at retail, as well as offset-class commercial inkjet presses, high-volume digital production presses, digital controllers, workflow software solutions, and digital plates for commercial printing and packaging.  The result is a new Kodak — a compan y where digital products account for 75 percent of revenue.

 

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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 HP’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 HP’s inkjet imaging business for five years.  During that time, the installed base of HP’s inkjet printers grew from 17 million to 100 million worldwide, with revenue totaling more than $10 billion.

After HP, 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.

Laura G. Quatela

 

Laura G. Quatela was named General Counsel and elected a Senior Vice President effective January 1, 2011.  Ms. Quatela was appointed Chief Intellectual Property Officer in January 2008 and retains this role in tandem with her new duties leading the Company's Legal organization.  As Chief Intellectual Property Officer, she is responsible for IP strategy and policy, the Senior IP Strategy Council, and external IP affairs.   

 

Previously, Ms. Quatela was Managing Director, Intellectual Property Transactions, and was responsible for directing strategic cross-licensing and royalty-bearing licensing activities for the Company, including developing licensing strategy, negotiating and structuring licenses, and managing IP valuations and investments.  In August 2006, the Board of Directors elected Ms. Quatela a Vice President of the Company.

 

She joined Kodak in 1999 and held various positions in the Marketing, Antitrust, Trademark & Litigation staff in the Company’s Legal department.  She was promoted to Director of Corporate Commercial Affairs, Vice President Legal and Assistant General Counsel in 2004.

 

From August 2002 to December 2003, Ms. Quatela served as Director, Finance Transformation and Vice President, Finance & Administration.  In this position she led a team charged with planning and executing restructuring of Kodak’s finance functions.

 

Prior to joining Kodak, Ms. Quatela worked for Clover Capital Management, Inc., SASIB Railway GRS, and Bausch & Lomb Inc.  In private law practice, she was a defense litigator specializing in mass tort cases.

 

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 position over 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.

Terry R. Taber

Terry R. Taber joined Kodak in 1980.  In January 2009, he was named Chief Technical Officer.  The Board of Directors elected him a Corporate Vice President in December 2008, and then a Senior Vice President in December 2010.

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

 

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in Kodak’s research and development and product organizations.  During his 30 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

ITEM 5.

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 51,347 shareholders of record of common stock as of January 31, 2011.

MARKET PRICE DATA

		2010			2009
Price per share:		High	Low		High	Low
1st Quarter		$6.94	$4.12		$7.66	$2.01
2nd Quarter		$9.08	$4.33		$4.57	$2.44
3rd Quarter		$5.11	$3.49		$6.82	$2.65
4th Quarter		$5.95	$3.84		$4.74	$3.26

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 or 2010.

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, the Standard & Poor’s Midcap 400 Composite Stock Price Index, and the Standard & Poor’s Consumer Discretionary Index by measuring the changes in common stock prices from December 31, 2005, plus reinvested dividends.

 

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Copyright© 2010 Standard & Poor's, a division of The McGraw-Hill Companies Inc. All rights reserved.
(www.researchdatagroup.com/S&P.htm)
		12/05	12/06	12/07	12/08	12/09	12/10
Eastman Kodak Company		100.00	112.58	97.22	30.45	19.53	24.81
S&P 500		100.00	115.80	122.16	76.96	97.33	111.99
S&P Midcap 400		100.00	110.32	119.12	75.96	104.36	132.16
S&P Consumer Discretionary		100.00	118.64	102.97	68.48	96.77	123.53

The Company has elected to include the S&P Consumer Discretionary index in the comparison, 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 Standard & Poor’s Midcap 400 Composite Stock Price Index or the Standard & Poor’s 500 Composite Stock Price Index.

 
 

ITEM 6.  SELECTED FINANCIAL DATA

Refer to Summary of Operating Data on page 112.

 

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ITEM 7.

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, 2010.  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”), Graphic Communications Group (“GCG”) and Film, Photofinishing and Entertainment Group (“FPEG”).

The Company’s digital growth strategy is centered around exploiting our competitive advantage at the intersection of materials science and digital imaging science.  The Company has leading market positions in large markets including digital printing plates, scanners, digital still and video cameras, and kiosks.  In addition, the Company has been introducing differentiated value propositions in new growth markets that are in need of transformation.  The Company’s four growth initiatives are: consumer inkjet, within CDG, and commercial inkjet, workflow software and services, and packaging solutions within GCG.

While these four growth initiatives have largely been in an investment mode, revenue in these product lines grew 18% for the full year.  The Company will continue to gain scale in these product lines to enable a more significant and profitable contribution from them.

Competitive pricing and rising commodity costs negatively impacted results in Kodak’s more mature product lines, including Prepress Solutions, Digital Capture and Devices, and Entertainment Imaging.  The Company is addressing these challenges through a variety of means including the introduction of new differentiated products and pricing and hedging strategies.

Kodak entered into three significant intellectual property arrangements during the year.  Each of these agreements was in line with the three fundamental objectives of the Company’s intellectual property licensing program, which are design freedom, gaining access to new markets and partnerships, and generating cash and earnings.  The Company recognized revenue amounting to $838 million from these licenses in the year ended December 31, 2010.

Additionally, during 2009 and 2010, the Company took a number of financing actions designed to provide continued financial flexibility for the Company:

·

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.

·

In March of 2010, the Company issued $500 million of Senior Secured Notes due 2018.  The proceeds from this issuance were used to repurchase all $300 million of the Senior Secured Notes due 2017, and $200 million of Senior Notes due 2013.  This served as a further refinancing of the debt structure of the Company.

 

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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; integrated solutions, and intellectual property licensing.  The Company recognizes revenue when it is realized or realizable and earned.  The timing and the amount of revenue recognized from the licensing of intellectual property depend upon a variety of factors, including the specific terms of each agreement and the nature of the deliverables and obligations.  For the sale of multiple-element arrangements, including whereby equipment or intellectual property is combined in a revenue generating transaction with other elements, the Company allocates to, and recognizes revenue from, the various elements based on their fair value.  As of January 1, 2011, the Company will allocate to, and recog nize revenue from, the various elements of multiple-element arrangements based on the best estimate of selling price of a deliverable, using: vendor-specific objective evidence, third-party evidence, and estimated selling price.

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.

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

The Company tests goodwill for impairment annually on September 30, and whenever events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount.

The Company tests goodwill for impairment at a level of reporting referred to as a reporting unit.  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.  Likewise, the components of the Consumer Digital Imaging Group (CDG) are similar and, therefore, the segment meets the definition of a reporting unit.  The Graphic Communications Group (GCG) operating segment has two reporting units: the Business Services and Solutions Group (BSSG) reporting unit and the Commercial Printing reporting unit (consisting of the Prepress 

 

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Solutions and Digital Printing Solutions strategic product groups.)  The Commercial Printing reporting unit consists of components that have similar economic characteristics and, therefore, have been aggregated into a single reporting unit.

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

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

 

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.  The Company estimates the fair value of its reporting units utilizing income and market approaches through the application of discounted cash flow and market comparable methods, respectively.  To estimate fair value utilizing the income approach, the Company established an estimate of future cash flows for each reporting unit and discounted those estimated future cash flows to present value.  Key assumptions used in the income approach were: (a) expected cash flows for the period from October 1, 2010 to December 31, 2015; and (b) discount rates of 15% to 28%, which were based on the Company’s best estimates of the after-tax weighted-average cost of capital of each reporting unit.  To esti mate fair value utilizing the market comparable methodology, the Company applied valuation multiples, derived from publicly-traded benchmark companies, to operating data of each reporting unit.  Benchmark companies are selected for each reporting unit based on comparability of the underlying business and economics, and if they could potentially purchase the reporting unit.  Key assumptions used in the market approach include the selection of appropriate benchmark companies and the selection of an appropriate market value multiple for each reporting unit based on a comparison of the reporting unit with the benchmark companies as of the impairment testing date.  Both the income and market approaches estimate fair values based on ability to generate earnings and are, therefore, meaningful in estimating the fair value of each of the Company’s reporting units.  The use of each methodology also provides corroboration for the other methodology.  Consistent wit h prior years, with the exception of the FPEG reporting unit, the Company determined fair value of each of its reporting units using 50% weighting for each valuation methodology as we believe that each methodology provides equally valuable information.  The Company determined fair value for the FPEG reporting unit using only the income approach due to the unique circumstances of the film and photofinishing industry.

Based upon the results of the Company’s September 30, 2010 analysis, no impairment of goodwill was indicated.

A 20 percent change in estimated future cash flows or a 10 percentage point change in discount rate would not have caused a goodwill impairment to be recognized by the Company for any of its reporting units as of September 30, 2010.  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.

The Company’s long-lived assets other than goodwill 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

 

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asset group.  The impairment is the excess of the carrying value over the fair value of the long-lived asset group.

In December 2010, the FASB issued ASU No. 2010-28, "When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying amounts," which amends ASC Topic 350, "Intangibles - Goodwill and Other."  ASU No. 2010-28 requires entities that have a reporting unit with a negative carrying value to assess whether qualitative factors indicate that it is more likely than not that an impairment of goodwill exists,  and if an entity concludes that it is more likely than not that an impairment exists, the entity must measure the goodwill impairment.  This update is effective January 1, 2011 for the Company.  The FPEG reporting unit had a negative carrying amount as of September 30, 2010 for purposes of the annual goodwill impairment test.  

 

Due to the continuing challenging business conditions facing FPEG including a sustained fourth quarter escalation in commodity prices (the price of silver increased 39%, or $8.56 per troy ounce from the September 30, 2010 closing price to $30.63 per troy ounce at the December 31, 2010 closing price), and ongoing declines in the FPEG business caused by digital substitution, the Company evaluated the long-lived assets of FPEG’s film business and paper and output systems business for impairment, and updated its goodwill impairment analysis of the FPEG reporting unit as of December 31, 2010.  Based on this evaluation, with the exception of goodwill, the Company concluded that there were no impairments of FPEG’s long-lived assets.

Certain assumptions used to determine the fair value and carrying amount of the FPEG reporting unit for purposes of the goodwill impairment test were revised, as of December 31, to reflect: (1) reductions in future expected cash flows due to the actual results for the fourth quarter of 2010 and revised forecasts for 2011 and later years; and (2) revision of which liabilities would be considered in determining the fair value of the reporting unit, as the updated cash flows could no longer support all of the previously allocated liabilities.  Based on its updated analysis, the Company concluded that there was an impairment of goodwill related to the FPEG reporting unit of $626 million as of December 31, 2010.

 

As a result of the updated goodwill impairment analysis and the impairment charge recorded in the fourth quarter of 2010 for FPEG, ASU No. 2010-28 will not have an impact on the Company. 

In conjunction with the fourth quarter impairment analysis, the Company reviewed its estimates of the remaining useful lives of FPEG’s long-lived assets.  This analysis indicated that overall the assets will continue to be used in these businesses for a longer period than anticipated in 2008, the last time that depreciable lives were adjusted for these assets.  As a result, the Company revised the useful lives of certain existing production machinery and equipment, and manufacturing-related buildings effective January 1, 2011.  These assets, many of which were previously set to fully depreciate by 2012 to 2013, were changed to depreciate with estimated useful lives ending from 2014 to 2017.  This change in useful lives reflects the Company’s current estimate of future periods to be benef ited from the use of the property, plant, and equipment.

The estimated effect of this change for the year ended December 31, 2011 is a reduction in depreciation expense of $38 million, $32 million of which will be recognized in Cost of sales as a benefit to earnings from continuing operations, and $6 million of which will be capitalized as a reduction in inventories.  The estimated net impact of this change is an increase in fully diluted earnings per share of $.12.

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 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 geographical 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, 2010, the Company has net deferred tax assets before valuation allowances of approximately $3.1 billion and a valuation allowance related to those net deferred tax assets of approximately $2.3 billion, resulting in net deferred tax assets of approximately $0.8 billion.  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.  During the fourth quarter of 2010, based on additional positive evidence regarding past earnings and projected future taxable income from operating activities, the Company determined that it is more likely than not that a portion of the deferred tax assets outside the U.S. would be realized and accordingly, recorded a tax benefit of $154 million associated with the release of the valuation allowance on those deferred tax assets.

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

 

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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.  Management’s ongoing assessments of the more-likely-than-not outcomes of these issues and related tax positions require judgment, and although management believes that adequate provisions have been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of 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 t he 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, 2010, the calculated value of the assets of the Company’s major U.S. and Non-U.S. defined benefit pension plans was approximately $8.1 billion and the fair value was approximately $7.5 billion.  Asset gains and losses that are not yet reflected in the calculated value o f plan assets are not included in amortization of unrecognized gains and losses.

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.  The weighted average EROA for major U.S. and non-U.S. defined benefit pension plans used to determine net pension (income) expense was 8.73% and 7.76%, respectively, for the year ended December 31, 2010.

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 Canadian 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.

 

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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, 2011 and the projected benefit obligation (“PBO”) at December 31, 2010 for the Company's major U.S. and non-U.S. defined benefit pension plans:

(in millions)		Impact on 2011 Pre-Tax Pension Expense Increase (Decrease)			Impact on PBO December 31, 2010 Increase (Decrease)
		U.S.	Non-U.S.		U.S.	Non-U.S.
Change in assumption:
25 basis point decrease in discount rate		$                 7	$                 4		$            123	$             126
25 basis point increase in discount rate		(7)	(4)		(118)	(119)
25 basis point decrease in EROA		13	7		N/A	N/A
25 basis point increase in EROA		(13)	(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 decrease from $158 million in 2010 to approximately $60 million in 2011, due primarily to an increase in amortization of actuarial losses.  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 $19 million in 2010 to approximately $40 million in 2011.  Holding current assumptions constant, net pension income is expected to continue to decline into 2012.

Additionally, the Company expects the expense, before curtailment and settlement gains and losses of its major other postretirement benefit plans, to decrease to approximately $20 million in 2011 as compared with $25 million for 2010.

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 cost s 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.

 

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KODAK OPERATING MODEL AND REPORTING STRUCTURE

For 2010, the Company had three reportable segments: Consumer Digital Imaging Group (“CDG”), Graphic Communications Group (“GCG”), and Film, Photofinishing and Entertainment Group (“FPEG”).  Within each of the Company’s reportable segments are various components, or Strategic Product Groups (“SPGs”).  Throughout the remainder of this document, references to the segments’ SPGs are indicated in italics.  The balance of the Company's continuing operations, which individually and in the aggregate do not meet the criteria of a reportable segment, are reported in All Other.  A description of the segments is as follows:

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

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

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

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

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

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

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

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

Business Services and Solutions includesworkflow software and digital controllers, document scanning products and services and related maintenance offerings.  Also included in this SPG are the activities related to the Company’s business solutions and consulting services.

 

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

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

Traditional Photofinishing includes paper and output systems and photofinishing services.

Entertainment Imaging includes entertainment imaging products and services.   

Industrial Materials includes aerial and industrial film products, film for the production of printed circuit boards, and specialty chemicals.

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

 

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DETAILED RESULTS OF OPERATIONS

Net Sales from Continuing Operations by Reportable Segment and All Other (1)

		For the Year Ended December 31,
(in millions)		2010				Change				Foreign Currency Impact				2009				Change				Foreign Currency Impact				2008
Consumer Digital Imaging Group
Inside the U.S.		$	1,781				+10	%			0	%		$	1,618				-11	%			0	%		$	1,811
Outside the U.S.			958				-4				-2				1,001				-22				-4				1,277
Total Consumer Digital Imaging Group			2,739				+5				-1				2,619				-15				-2				3,088
Graphic Communications Group
Inside the U.S.			810				-3				0				831				-20				0				1,036
Outside the U.S.			1,871				-1				0				1,895				-18				-3				2,298
Total Graphic Communications Group			2,681				-2				0				2,726				-18				-2				3,334
Film, Photofinishing and Entertainment   Group
Inside the U.S.			397				-22				0				508				-39				0				835
Outside the U.S.			1,370				-22				0				1,749				-19				-4				2,152
Total Film, Photofinishing and   Entertainment Group			1,767				-22				0				2,257				-24				-3				2,987
All Other
Inside the U.S.			-												5												7
Outside the U.S.			-												(1	)											-
Total All Other			-												4												7
Consolidated
Inside the U.S.			2,988				+1				0				2,962				-20				0				3,689
Outside the U.S.			4,199				-10				-1				4,644				-19				-4				5,727
Consolidated Total		$	7,187				-6	%			0	%		$	7,606				-19	%			-2	%		$	9,416

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

 

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Earnings (Loss) 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)		2010				Change				2009				Change				2008
Consumer Digital Imaging Group		$	331				+846	%		$	35				+120	%		$	(177	)
Graphic Communications Group			(26	)			+38				(42	)			-235				31
Film, Photofinishing and Entertainment Group			64				-60				159				-19				196
All Other			-				+100				(13	)			+24				(17	)
Total			369				+165				139				+321				33
Restructuring costs, rationalization and other			(78	)							(258	)							(149	)
Postemployment benefit changes			-								-								94
Other operating income (expenses), net			(619	)							88								(766	)
Adjustments to contingencies and legal     reserves/settlements			(8	)							3								(33	)
Interest expense			(149	)							(119	)							(108	)
Loss on early extinguishment of debt			(102	)							-								-
Other income (charges), net			26								30								55
Loss from continuing operations before income taxes		$	(561	)			-379	%		$	(117	)			+87	%		$	(874	)

 

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RESULTS OF OPERATIONS - CONTINUING OPERATIONS

CONSOLIDATED

(dollars in millions)		For the Year Ended
		December 31,
		2010				% of Sales				% Change				2009				% of Sales				% Change				2008				% of Sales
Net sales		$	7,187								-6	%		$	7,606								-19	%		$	9,416
Cost of sales			5,236								-10	%			5,838								-19	%			7,247
Gross profit			1,951				27.1	%			10	%			1,768				23.2	%			-18	%			2,169				23.0	%
Selling, general and administrative expenses			1,277				18	%			-2	%			1,302				17	%			-19	%			1,606				17	%
Research and development costs			321				4	%			-10	%			356				5	%			-26	%			478				5	%
Restructuring costs, rationalization and other			70								-69	%			226								61	%			140
Other operating expenses (income), net			619								803	%			(88	)							111	%			766
Loss from continuing operations before interest expense, other income (charges), net and income taxes			(336	)			-5	%							(28	)			0	%							(821	)			-9	%
Interest expense			149								25	%			119								10	%			108
Loss on early extinguishment of debt, net			102												-												-
Other income (charges), net			26								-13	%			30								-45	%			55
Loss from continuing operations before income taxes			(561	)							-379	%			(117	)							87	%			(874	)
Provision (benefit) for income taxes			114								-1	%			115								178	%			(147	)
Loss from continuing operations			(675	)			-9	%			-191	%			(232	)			-3	%			68	%			(727	)			-8	%
(Loss) earnings from discontinued operations, net of income taxes			(12	)											17												285
Extraordinary item, net of tax			-												6												-
NET LOSS			(687	)											(209	)											(442	)
Less: Net earnings   attributable to     noncontrolling interests			-												(1	)											-
NET LOSS ATTRIBUTABLE TO EASTMAN KODAK COMPANY		$	(687	)							-227	%		$	(210	)							52	%		$	(442	)

		For the Year Ended
		December 31,								Change vs. 2009
		2010 Amount				Change vs. 2009				Volume				Price/Mix				Foreign Exchange				Manufacturing and Other Costs
Total net sales		$	7,187				-5.5	%			-5.2	%			0.0	%			-0.3	%			n/a
Gross profit margin			27.1	%		3.9pp					n/a			1.0pp				0.1pp				2.8pp

		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

 

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Revenues

For the year ended December 31, 2010, net sales decreased compared with the same period in 2009 primarily due to volume declines in the FPEG segment (-6%).  Favorable price/mix in the CDG segment (+2%) was largely offset by unfavorable price/mix in the GCG segment

(-2%).

For the year ended December 31, 2009, net sales decreased compared with 2008 primarily due to volume declines within all three segments (FPEG: -6%, GCG: -5% and CDG: -3%) driven by lower demand as a result of the global economic slowdown which began in the fourth quarter of 2008 as well as continued secular declines in the FPEG segment.  Unfavorable price/mix also impacted sales equally across all three segments (-3 %).  Foreign exchange negatively impacted sales equally across all three segments due to a stronger U.S. dollar.

Included in revenues were non-recurring intellectual property licensing agreements in the CDG segment.  These licensing agreements contributed $838 million, $435 million and $227 million to revenues in 2010, 2009 and 2008, respectively.  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 positive impact on the results of operations.

Gross Profit

The increase in gross profit margin as a percentage of sales from 2009 to 2010 was primarily driven by manufacturing and other cost reductions within the CDG (+2 pp) and GCG (+1 pp) segments.  Also contributing to the increase in gross profit margin was favorable price/mix in the CDG segment (+2 pp), partially offset by unfavorable price/mix in the GCG segment (-1 pp).

Gross profit margin as a percent of sales for 2009 was essentially flat as compared with 2008.  Driving the slight increase in gross profit margin were cost improvements (+5 pp), largely driven by ongoing cost reduction efforts within CDG (+4 pp) and FPEG (+1 pp).  Largely offsetting these increases were unfavorable price/mix (-4 pp), which impacted all segments, but was most prominent in CDG (-2 pp), and unfavorable foreign exchange (-1 pp).

Included in gross profit were non-recurring intellectual property licensing agreements in the CDG segment.  These licensing agreements contributed $838 million, $435 million and $227 million to gross profit for non-recurring agreements in 2010, 2009 and 2008, respectively.

Selling, General and Administrative Expenses

The decrease in consolidated selling, general and administrative expenses (SG&A) from 2009 to 2010 of 2% was attributable to decreases in SG&A in the FPEG segment (-7%) primarily driven by cost reduction actions, partially offset by increases in SG&A in the CDG and GCG segments (5%) primarily due to increased advertising costs.

The decrease in consolidated SG&A expenses from 2008 to 2009 of 19% was primarily the result of company-wide cost reduction actions implemented in 2009 in response to economic conditions.

Research and Development Costs

The decrease in consolidated research and development (R&D) costs from 2009 to 2010 of 10% was primarily driven by the rationalization and refocusing of investments.

The decrease in consolidated R&D costs from 2008 to 2009 of 26% was primarily the result of focused cost reduction efforts.

 

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Restructuring Costs, Rationalization and Other

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

Other Operating Expenses (Income), Net

The other operating expenses (income), net category includes gains and losses on sales of assets and businesses and certain impairment charges.  The amount for 2010 primarily reflects a $626 million goodwill impairment charge related to the FPEG segment.  The amount for 2009 primarily reflects a gain of approximately $100 million on the sale of assets of the Company’s organic light emitting diodes (OLED) group, as described further below.  The amount for 2008 primarily reflects a $785 million goodwill impairment charge related to the GCG segment.

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.  According ly, $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 for the year ended December 31, 2009.

Interest Expense

The increase in interest expense for 2010 as compared with 2009 was primarily attributable to higher weighted-average effective interest rates on the Company’s outstanding debt, resulting from the refinancing of a portion of the Company’s debt portfolio in the third quarter of 2009 (as discussed below) and first quarter of 2010.

The increase in interest expense in 2009 as 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.

Loss on Early Extinguishment of Debt, Net

On March 5, 2010, the Company issued $500 million of aggregate principal amount of 9.75% senior secured notes due March 1, 2018.  The net proceeds of this issuance were used to repurchase all of the $300 million of 10.5% senior secured notes due 2017 previously issued to Kohlberg, Kravis, Roberts & Co. L.P. (the “KKR Notes”) and $200 million of 7.25% senior notes due 2013 (collectively the “Notes”).  The Company recognized a net loss of $102 million on the early extinguishment of the Notes in the first quarter of 2010, representing the difference between the carrying values of the Notes and the costs to repurchase.  This difference between the carrying values and costs to repurchase was primarily due to the original allocation of the proceeds received from the issuance of the KK R Notes to Additional paid-in-capital for the value of the detachable warrants issued to the holders of the KKR Notes.

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 from 2008 to 2009 was primarily attributable to a decrease in interest income due to lower interest rates and lower cash balances in 2009 as compared with 2008, partially offset by the favorable impact of legal settlements in 2009.  The change in other income (charges), net from 2009 to 2010 was not significant.

 

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Income Tax Provision

(dollars in millions)		For the Year Ended
		December 31,
		2010				2009				2008
Loss from continuing operations before income taxes		$	(561	)		$	(117	)		$	(874	)
Provision (benefit) for income taxes		$	114			$	115			$	(147	)
Effective tax rate			(20.3	)%			(98.3	)%			16.8	%

The change in the Company’s effective tax rate from continuing operations for 2010 as compared with 2009 is primarily attributable to: (1) a pre-tax goodwill impairment charge of $626 million that resulted in a tax benefit of only $2 million due to the limited amount of tax deductible goodwill that existed as of December 31, 2010; (2) a benefit associated with the release of deferred tax asset valuation allowances in certain jurisdictions outside of the U.S. during 2010; (3) incremental withholding taxes related to non-recurring licensing agreements entered into during 2010 as compared with 2009; (4) changes to the geographical mix of earnings from operations outside the U.S.; (5) losses generated in the U.S. and in certain jurisdictions outside the U.S. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized; and (6) changes in audit reserves and settlements.

The change in the Company’s effective tax rate from continuing operations for 2009 as compared with 2008 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. for which no benefit was recognized due to management’s conclusion that it was more likely than not that the tax benefits would not be realized; (4) the impact of previously established valuation allowances in jurisdictions with current earnings; (5) the geographical mix of earnings from op erations 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.

CONSUMER DIGITAL IMAGING GROUP

(dollars in millions)		For the Year Ended
		December 31,
		2010				% of Sales				% Change				2009				% of Sales				% Change				2008				% of Sales
Total net sales		$	2,739								5	%		$	2,619								-15	%		$	3,088
Cost of sales			1,729								-12	%			1,955								-22	%			2,495
Gross profit			1,010				36.9	%			52	%			664				25.4	%			12	%			593				19.2	%
Selling, general and administrative expenses			531				19	%			10	%			483				18	%			-15	%			565				18	%
Research and development costs			148				5	%			1	%			146				6	%			-29	%			205				7	%
Earnings (loss) from continuing operations before interest expense, other income (charges), net and income taxes		$	331				12	%			846	%		$	35				1	%			120	%		$	(177	)			-6	%

 

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		For the Year Ended
		December 31,								Change vs. 2009
		2010 Amount				Change vs. 2009				Volume				Price/Mix				Foreign Exchange				Manufacturing and Other Costs
Total net sales		$	2,739				4.6	%			-1.0	%			6.3	%			-0.7	%			n/a
Gross profit margin			36.9	%		11.5pp					n/a			5.9pp				-0.1pp				5.7pp

		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 2010 revenue increase as compared with the same period in 2009 was primarily due to an increase in revenues from non-recurring intellectual property licensing agreements (+15%) as noted in more detail below, partially offset by unfavorable price/mix in the other components of Digital Capture and Devices due to pricing pressures in the industry (-7%).  Volume improvements in Consumer Inkjet Systems (+3%) also contributed to the revenue increase which management believes is reflective of how the Company’s value proposition continues to resonate with customers. Partially offsetting these increases were volume declines in Retail Systems Solutions (-4%), primarily due to the expiration of a significant customer contract in 2009.  

CDG’s 2009 revenue declines as compared with 2008 reflect the global economic downturn which began in the fourth quarter of 2008.  The decrease in revenue was primarily driven by volume declines within Digital Capture and Devices (-11%) as a result of weak consumer discretionary spending.  Unfavorable price/mix within Digital Capture and Devices (-3%) also contributed to the CDG revenue decline, resulting from pricing pressures related to the overall economic conditions as noted above.  Partially offsetting these declines was an increase in volumes for Consumer Inkjet Systems (+2%), < /font>which management believes is reflective of favorable consumer response to the Company’s unique value proposition.  Unfavorable foreign exchange (-2%) also contributed to the decline.

Included in revenues were non-recurring intellectual property licensing agreements within Digital Capture and Devices.  These licensing agreements contributed $838 million, $435 million and $227 million to revenues in 2010, 2009 and 2008, respectively.

Gross Profit

The increase in gross profit margin as a percentage of sales from 2009 to 2010 for CDG was primarily attributable to the increase in non-recurring intellectual property licensing revenues (+10 pp) included in price/mix within Digital Capture and Devices, as noted in more detail below.  This was partially offset by unfavorable price/mix in the other components of Digital Capture and Devices (-2 pp), largely related to competitive pricing pressures, and by price/mix declines within Retail Systems Solutions (-1 pp) primarily due to the expiration of a significant customer contract in 2009.  Cost im provements, primarily within Digital Capture and Devices (+4 pp) and Consumer Inkjet Systems (+2 pp), positively impacted gross profit margin as a percent of sales and were largely the result of supplier cost reductions and improved product life cycle management.  

 

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The increase in gross profit margin as a percentage of sales from 2008 to 2009 for CDG was primarily attributable to significantly lower product costs, particularly within Consumer Inkjet Systems (+7 pp) as a result of new product platforms, and Digital Capture and Devices (+5 pp), resulting from supplier cost reductions and improved product life cycle management.  Partially offsetting these improvements were unfavorable price/mix (-7 pp), largely attributable to the pricing pressures within Digital Capture and Devices as mentioned above, and unfavorable foreign exchange (-1 pp). 

Included in gross profit were non-recurring intellectual property licensing agreements within Digital Capture and Devices.  These licensing agreements contributed $838 million, $435 million and $227 million to gross profit in 2010, 2009 and 2008, respectively.

Selling, General and Administrative Expenses

The increase in SG&A expenses from 2009 to 2010 of 10% for CDG was primarily driven by increased advertising expense.

The decrease in SG&A expenses from 2008 to 2009 of 15% was primarily driven by focused cost reduction actions (-5%) implemented in 2009 to respond to the current economic conditions.

Research and Development Costs

The increase in R&D costs from 2009 to 2010 of 1% for CDG was not significant.

The decrease in R&D costs from 2008 to 2009 of 29% was primarily attributable to lower spending related to Consumer Inkjet Systems

(-10%), 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 (-15%).

GRAPHIC COMMUNICATIONS GROUP

(dollars in millions)		For the Year Ended
		December 31,
		2010				% of Sales				% Change				2009				% of Sales				% Change				2008				% of Sales
Total net sales		$	2,681								-2	%		$	2,726								-18	%		$	3,334
Cost of sales			2,012								-3	%			2,073								-15	%			2,445
Gross profit			669				25.0	%			2	%			653				24.0	%			-27	%			889				26.7	%
Selling, general and administrative expenses			543				20	%			4	%			524				19	%			-18	%			637				19	%
Research and development costs			152				6	%			-11	%			171				6	%			-23	%			221				7	%
(Loss) earnings from continuing operations before interest expense, other income (charges), net and income taxes		$	(26	)			-1	%			38	%		$	(42	)			-2	%			-235	%		$	31				1	%

 

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		For the Year Ended
		December 31,								Change vs. 2009
		2010 Amount				Change vs. 2009				Volume				Price/Mix				Foreign Exchange				Manufacturing and Other Costs
Total net sales		$	2,681				-1.7	%			3.2	%			-4.7	%			-0.2	%			n/a
Gross profit margin			25.0	%		1.0pp					n/a			-2.7pp				0.1pp				3.6pp

 

		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

The decrease in GCG net sales from 2009 to 2010 was primarily due to unfavorable price/mix in Prepress Solutions (-4%), partially offset by volume improvements across all SPGs (+3%).  The unfavorable price/mix primarily reflects competitive pricing and overcapacity within the printing industry.  The volume improvements were largely driven by growth in digital plates and computer-to-plate equipment within Prepress Solutions; commercial inkjet equipment, including PROSPER S10 imprinting systems within Digital Printing Solutions; and document imaging scanners, including the introduction of the new Kodak i4000 Series Scanners within Business Services and Solutions.    

The decrease in GCG net sales from 2008 to 2009 reflected the impact of ongoing global economic uncertainties, which depressed global print demand and associated capital investments in the printing industry.  The revenue decreases were primarily driven by volume declines in Prepress Solutions (-9%), volume declines in Business Services and Solutions (-4%), and unfavorable price/mix in Prepress Solutions (-2%), all related to the overall economic environment mentioned above.  Also contributing to the decrease was unfavorable foreign exchange in the segment (-2%).

Gross Profit

The increase in gross profit margin as a percentage of sales from 2009 to 2010 for GCG was primarily due to reduced manufacturing cost, including aluminum cost (+4 pp).  Partially offsetting this reduction in cost was unfavorable price/mix within Prepress Solutions (-3 pp) due to the reasons outlined in the Revenues discussion above. 

The decrease in gross profit margin as a percent of sales from 2008 to 2009 was attributable to unfavorable price/mix within Digital Printing Solutions (-1 pp), higher manufacturing and other costs within Prepress Solutions (-1 pp), and unfavorable foreign exchange (-1 pp).  The unfavorable price/mix in Digital Printing Solutions was primarily due to constrained demand driven by increased price pressures in the industry as capital investments continued to be depressed.  As a result of the decline in global print demand, the Company reduced production levels, which resulted in lower levels of factory cost absorption and lower utilization of service per sonnel.  This impact to manufacturing costs within Prepress Solutions (-2 pp) was partially offset by reduced aluminum commodity costs (+1 pp).        

 

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Selling, General and Administrative Expenses

The increase in SG&A expenses from 2009 to 2010 of 4% for GCG was primarily attributable to increased advertising costs.

The decrease in SG&A expenses from 2008 to 2009 of 18% was primarily attributable to focused cost reduction actions implemented in 2009 in response to economic conditions.

Research and Development Costs

The decreases in R&D costs for GCG from 2009 to 2010 and from 2008 to 2009 of 11% and 23%, respectively, were largely driven by the rationalization and refocusing of investments.

FILM, PHOTOFINISHING AND ENTERTAINMENT GROUP

(dollars in millions)		For the Year Ended
		December 31,
		2010				% of Sales				% Change				2009				% of Sales				% Change				2008				% of Sales
Total net sales		$	1,767								-22	%		$	2,257								-24	%		$	2,987
Cost of sales			1,481								-17	%			1,775								-24	%			2,335
Gross profit			286				16.2	%			-41	%			482				21.4	%			-26	%			652				21.8	%
Selling, general and administrative expenses			203				11	%			-30	%			290				13	%			-29	%			407				14	%
Research and development costs			19				1	%			-42	%			33				1	%			-33	%			49				2	%
Earnings from continuing operations before interest expense, other income (charges), net and income taxes		$	64				4	%			-60	%		$	159				7	%			-19	%		$	196				7	%

		For the Year Ended
		December 31,								Change vs. 2009
		2010 Amount				Change vs. 2009				Volume				Price/Mix				Foreign Exchange				Manufacturing and Other Costs
Total net sales		$	1,767				-21.7	%			-20.2	%			-1.5	%			0.0	%			n/a