# EASTMAN KODAK CO (KODK) FY 2021 MD&A Verbatim Item 7 Management's Discussion and Analysis from EASTMAN KODAK CO's 10-K for fiscal year 2021. SEC filing source: https://www.sec.gov/Archives/edgar/data/31235/000156459022010405/kodk-10k_20211231.htm Accession: 0001564590-22-010405 Filing date: 2022-03-15 Report date: 2021-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/KODK/ All MD&A years: /company/KODK/mda/ Next year: /company/KODK/mda/fy2022/ (FY 2022) ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the results of operations and financial condition of Kodak and should be read in conjunction with the consolidated financial statements and notes thereto included in Part II, Item 8. “Financial Statements and Supplementary Data” (“Item 8”) of this Annual Report on Form 10-K.  All references to Notes relate to Notes to the Financial Statements in Item 8. CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report on Form 10-K includes "forward–looking statements" as that term is defined under the Private Securities Litigation Reform Act of 1995. Forward–looking statements include statements concerning Kodak’s plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, liquidity, investments, financing needs and business trends and other information that is not historical information. When used in this document, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “predicts,” “forecasts,” “strategy,” “continues,” “goals,” “targets” or future or conditional verbs, such as “will,” “should,” “could,” or “may,” and similar words and expressions, as well as statements that do not relate strictly to historical or current facts, are intended to identify forward–looking statements. All forward–looking statements, including management’s examination of historical operating trends and data, are based upon Kodak’s current expectations and assumptions. Forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results to differ materially from historical results or those expressed in or implied by such forward-looking statements. Important factors that could cause actual events or results to differ materially from the forward-looking statements include, among others, the risks and uncertainties described in more detail in this report on Form 10–K under the headings “Business,” “Risk Factors,” “Legal Proceedings” and/or “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Liquidity and Capital Resources,” and in other filings the Company makes with the SEC from time to time, as well as the following: [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to improve and sustain its operating structure, cash flow, profitability and other financial results;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to achieve strategic objectives, cash forecasts, financial projections, and projected growth;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to achieve the financial and operational results contained in its business plans;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to comply with the covenants in its various credit facilities;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to fund continued investments, capital needs and restructuring payments and service its debt and Series B Preferred Stock and Series C Preferred Stock;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The performance by third parties of their obligations to supply products, components or services to Kodak and Kodak\u2019s ability to address supply chain disruptions and continue to obtain raw materials and components available from single or limited sources of supply, which may be adversely affected by the COVID-19 pandemic;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The impact of the global economic environment or medical epidemics such as the COVID-19 pandemic; including the restrictions and other actions taken in response to the COVID-19 pandemic, and Kodak\u2019s ability to effectively mitigate or recoup associated increased costs of materials, labor, shipping and operations;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The impact of the investigations, litigation and claims arising out of the circumstances surrounding the announcement on July 28, 2020, by the U.S. International Development Finance Corporation of the signing of a non-binding letter of interest to provide a subsidiary of Kodak with a potential loan to support the launch of an initiative for the manufacture of pharmaceutical ingredients for essential generic drugs;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The impacts of the war in Ukraine and the international response thereto on our business and operations, including the cost of and availability of aluminum and other raw materials and components, shipping costs, transit times and energy costs;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Changes in foreign currency exchange rates, commodity prices, interest rates and tariff rates;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to effectively anticipate technology and industry trends and develop and market new products, solutions and technologies, including products based on its technology and expertise that relate to industries in which it does not currently conduct material business;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to effectively compete with large, well-financed industry participants;"]] [[/GREPCENT_TABLE]] 30 [[GREPCENT_TABLE]] [["","\u2022","Continued sufficient availability of borrowings and letters of credit under the Amended ABL Credit Agreement and L/C Facility Agreement, Kodak\u2019s ability to obtain additional financing if and as needed and Kodak\u2019s ability to provide or facilitate financing for its customers;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak\u2019s ability to effect strategic transactions, such as acquisitions, strategic alliances, divestitures and similar transactions, or to achieve the benefits sought to be achieved from such strategic transactions; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","The potential impact of force majeure events, cyber-attacks or other data security incidents that could disrupt or otherwise harm Kodak\u2019s operations."]] [[/GREPCENT_TABLE]] Future events and other factors may cause Kodak’s actual results to differ materially from the forward–looking statements. All forward–looking statements attributable to Kodak or persons acting on its behalf apply only as of the date of this report on Form 10-K and are expressly qualified in their entirety by the cautionary statements included in this document. Kodak undertakes no obligation to update or revise forward–looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events, except as required by law. The following Management’s Discussion and Analysis provides a historical and prospective narrative on the Company’s financial condition and results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020.  The discussion of the Company’s financial condition and results of operations for the year ended December 31, 2020 compared to the same period in 2019 is included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in the Company’s Annual Report on Form 10–K for the year ended December 31, 2020. EXECUTIVE OVERVIEW Kodak experienced a substantial recovery of customer demand and volumes in 2021 when compared to the prior year, which was largely impacted by the COVID-19 pandemic, resulting in revenue growth across all segments.  Consolidated revenues in the year ended December 31, 2021 were $1.150 billion, an improvement of $121 million (12%) from 2020.  Currency impacted revenue favorably in 2021 compared to 2020 ($16 million).   Traditional Printing’s revenues, which accounted for 57% of Kodak’s total revenues in 2021, improved by $67 million (11%) compared to 2020.  Volume for SONORA Process Free Plates improved by 31% compared to the prior year period.  Digital Printing revenues improved $8 million (3%) in 2021 with revenues for PROSPER annuities growing by 21% when compared to the prior year period.  Advanced Materials and Chemicals revenue improved $40 million (23%) from 2020 to 2021.   Impact of COVID-19 and Other Global Events: The ongoing global impacts associated with the COVID-19 pandemic and other global events continue to impact Kodak’s operations.  Kodak is experiencing supply chain disruptions, shortages in materials and labor, and increased labor, material and distribution costs. Kodak has implemented numerous measures to mitigate these challenges, including increasing safety stock on certain sole-sourced materials, increasing lead-times, providing suppliers with longer forecasts of future demand and certifying additional sources or substitute materials where possible.  While Kodak has been able to meet current demand and has implemented numerous measures to mitigate these challenges, the full impact of the COVID-19 pandemic on Kodak’s operations and financial performance remains uncertain and will depend on the duration of the COVID-19 pandemic, including vaccination coverage, infection rates, as well as other factors such as the duration of supply chain disruptions and the ability to secure raw materials and components.   Kodak continues to work closely with government and health officials in the jurisdictions where it operates to protect employees worldwide, with particular measures in place for those working in plants and distribution facilities. The manufacturing facilities are operating at close to normal capacity.  None of Kodak’s manufacturing facilities were ordered to close by governmental authorities. In response to the COVID-19 pandemic in 2020, Kodak reduced operating costs, largely beginning in the second quarter of 2020, through the use of temporary furloughs, pay cuts (approximately $25 million in 2020) for its employees and direct government assistance around the world reimbursing certain salary and benefits of employees (approximately $8 million in 2020).  The furloughs and pay cuts were maintained throughout 2020 and largely ended in January 2021.  The direct government assistance largely ended at the end of 2020. 31 Many of the customers within the Traditional Printing and Digital Printing segments continued to operate during the COVID-19 pandemic but at decreased volumes.  Manufacturing volumes were reduced, primarily in 2020, in response to the decline in customer demand, but saw some recovery of volumes starting in the later part of 2020 and continued improvement in customer demand during 2021.  However, certain markets in the printing industry are expected to take longer to recover to pre-pandemic levels which makes the duration and extent of demand declines uncertain.   Kodak is monitoring the rapidly evolving events surrounding the war in Ukraine.  As the worldwide supply of aluminum and electronic components is expected to decrease as suppliers divert from Russian sources, this may further constrain Kodak’s ability to secure these materials directly from the Company’s suppliers and Kodak may face increased costs and manufacturing and shipping delays.  Kodak is anticipating increased costs for energy and transportation as a result of the conflict.  While the operations of Kodak’s Russian subsidiary are not material to the Company’s financial statements (less than 1% of total consolidated revenues for 2021), the military conflict in Ukraine and the international response has disrupted Kodak’s ability to operate the Russian subsidiary in the ordinary course, affecting its ability to pay vendors and employees, receive amounts owed from customers in Russia and deliver product.  The extent to which the military conflict in Ukraine will impact the global economy and Kodak’s business and operations remains uncertain. Both the Traditional Printing and Digital Printing segments have been impacted by supply chain disruptions, travel restrictions, higher raw material costs and increased labor costs.  To mitigate the impact of higher aluminum, energy and packaging costs, Traditional Printing segment implemented surcharges on purchases of plates largely beginning in the latter part of the second quarter of 2021 that continue to be periodically reviewed and adjusted accordingly.  Both segments have implemented numerous measures to mitigate the supply chain disruptions while meeting current demand, but Kodak expects the ability to continue to secure raw materials and components, and the ability to offset higher raw material costs through surcharges for the Traditional Printing segment, will remain a challenge throughout 2022.   Advanced Materials and Chemicals segment experienced adverse impacts from the COVID-19 pandemic in 2020, most notably in Motion Picture, where the industry was heavily impacted and productions in affected regions were suspended.  Each of the segment’s product lines was impacted by lowered demand and travel restrictions.  The segment saw a recovery of customer demand starting in the later part of 2020 for Motion Picture film and other Advanced Materials and Chemicals product lines, which continued in 2021 with volume improvements compared with the prior year period.  Advanced Materials and Chemicals has experienced supply chain disruptions and shortages associated with raw materials as well as labor shortages in certain manufacturing areas. The segment has implemented numerous measures to mitigate these challenges while meeting current demand, however, the duration and extent of supply chain disruptions and labor shortages remain unclear. Business Overview and Strategy: Segments within the print industry and the film industry face competition from digital substitution.  Kodak’s strategy is to: [[GREPCENT_TABLE]] [["","\u2022","Focus product investment in core competency areas of print, advanced materials and chemicals, leveraging Kodak\u2019s proprietary technologies to deliver technologically advanced products in the product goods packaging, graphic communications and functional printing markets;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Grow revenues through a focus on customers across Kodak\u2019s print divisions, increasing overall share and profitability;"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Promote the use of film and expand the applications of Kodak\u2019s film and chemicals to best utilize the existing infrastructure; and"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Continue to streamline processes to drive cost reductions and improve operating leverage."]] [[/GREPCENT_TABLE]] A discussion of opportunities and challenges related to Kodak’s strategy follows: [[GREPCENT_TABLE]] [["","\u2022","Traditional Printing\u2019s digital plate products include traditional digital plates and KODAK SONORA Process Free Plates. SONORA Process Free Plates allow Kodak customers to skip the plate processing step prior to mounting plates on a printing press. This improvement in the printing process is intended to save time and costs for customers. Also, SONORA Process Free Plates reduce the environmental impact of the printing process because they eliminate the use of chemicals (including solvents), water and power that is otherwise required to process a traditional plate. The segment is experiencing challenges from higher prices and availability of raw materials, digital substitution and competitive pricing pressures. Kodak seeks to mitigate the impact of increases in manufacturing costs, including aluminum prices, through a combination of surcharges and price increases, improved production efficiency and cost reduction initiatives. In addition, Kodak seeks to offset the impact of long-term market dynamics on pricing and volume pressures through innovations in Kodak product lines."]] [[/GREPCENT_TABLE]] 32 [[GREPCENT_TABLE]] [["","\u2022","In Digital Printing, the PROSPER business is expected to grow as the legacy VERSAMARK business continues to decline as a percentage of the segment\u2019s total revenue. The Prosper Inkjet Systems business is expected to continue to build profitability, excluding the negative impacts during the COVID-19 pandemic. Investment in the next generation technology, Ultrastream, is focused on the ability to place Ultrastream writing systems in Kodak branded presses and in various original equipment manufacturers in applications ranging from commercial print to packaging. The Electrophotographic Printing Solutions business expects to introduce a new printer in 2022, ASCEND, aimed at the retail, point of purchase and packaging markets."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Film and related component manufacturing operations and Kodak Research Laboratories utilize capacity at Eastman Business Park (\u201cEBP\u201d), which helps cost absorption for both Kodak operations and tenants at Eastman Business Park."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Kodak plans to capitalize on its intellectual property through new business or licensing opportunities, focusing on opportunities in smart material applications and printed electronics markets and also pursuing certain opportunities in 3D printing materials."]] [[/GREPCENT_TABLE]] Advanced Materials and Chemicals Growth Initiatives Opportunities: Based on Kodak’s deep expertise in chemistry and strengths in deposition and coating processes that come from decades of experience in film manufacturing, Kodak is working on new initiatives within the Advanced Materials and Chemicals segment. Electric Vehicle (“EV”)/Energy Storage Battery Material Manufacturing Coating of substrates is a critical aspect of manufacturing materials for batteries and Kodak plans to capitalize on its expertise in coating technology to develop opportunities in this area. [[GREPCENT_TABLE]] [["","\u2022","Current activity:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Over the past several years, Kodak has been using its pilot coating facility to work with battery developers to coat their materials on substrates for EV/energy storage batteries and fuel cells. Based on potential commercial opportunities, Kodak is assessing full-scale production feasibility."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","More recently, Kodak has been working with a battery manufacturer to repurpose a full-scale production coating machine to manufacture coated substrates for cathode and anode assembly in the EV/energy storage battery market. Kodak has begun providing coated material to this manufacturer from initial production and is in the process of increasing production levels. The maximum capacity of the repurposed coating machine in its current configuration is up to 80 million square meters per year."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","\u2022","Additional opportunities:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak will continue to explore opportunities to apply its extensive coating expertise to produce U.S.-manufactured components for battery assembly through potential investments in and strategic relationships with battery companies and the potential acquisition or licensing of battery technology. However, material expansion of Kodak\u2019s battery-related business would require material capital improvements to install additional full-scale production coating machines."]] [[/GREPCENT_TABLE]] Light-Blocking Technology Kodak plans to leverage a proprietary technology initially developed for electrophotographic toners to commercialize a carbon-less fabric coating designed to offer superior light management, from complete blackout to selective light filtering, and coating compatibility with an unmatched range of fabrics. [[GREPCENT_TABLE]] [["","\u2022","Current activity:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak has successfully developed and tested a product branded KODALUX for blinds and drapery coating applications. There has been significant interest in the KODALUX product from major hospitality businesses."]] [[/GREPCENT_TABLE]] 33 [[GREPCENT_TABLE]] [["","o","Kodak is completing the installation and commissioning of its proprietary fabric coating plant in Eastman Business Park, located in Rochester, NY. Kodak expects the coating facility to come online and start supplying product in the second half of 2022."]] [[/GREPCENT_TABLE]] Transparent Antennas Kodak plans to leverage its proprietary copper micro-wire technologies and high-resolution printing expertise to contract-manufacture custom transparent antennas for automotive, commercial construction, and other applications requiring excellent radio frequency (“RF”) and optical performance. The integration of antennas is growing worldwide due to the rapid expansion of 5G and an overall increase in RF communications, and the ubiquity of glass surfaces makes transparent antennas attractive for multiple end-use markets.  [[GREPCENT_TABLE]] [["","\u2022","Current activity:"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak is working with multiple customers in several market segments at different stages of the commercialization process for antenna products."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak is making a modest investment in manufacturing infrastructure in 2022 to meet the needs of RF antenna customers."]] [[/GREPCENT_TABLE]] Reagent Manufacturing Kodak plans to capitalize on its existing chemical manufacturing expertise, including current production of unregulated Key Starting Materials for pharmaceuticals, to implement an expansion into manufacturing Diagnostic Test Reagent solutions. [[GREPCENT_TABLE]] [["","\u2022","Current activity"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak is in the early stages of developing a test reagent manufacturing facility for producing reagents used in laboratory tests. Renovation to convert an existing clean room to a Current Good Manufacturing Practices (\u201ccGMP\u201d) facility is underway."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","o","Kodak\u2019s initial objective is to enter the domestic Balanced Buffer market due to the domestic supply chain crisis and regulatory requirements. Once the Kodak cGMP facility is operational, it will provide a pathway for Kodak to manufacture limited volumes of a variety of regulated chemicals and materials for pharmaceutical/healthcare applications."]] [[/GREPCENT_TABLE]] 34 RESULTS OF OPERATIONS [[GREPCENT_TABLE]] [["","","Year Ended December 31,","","","% of","","","Year Ended December 31,","","","% of","","","$ Change vs."],["","","2021","","","Sales","","","2020","","","Sales","","","2020"],["Revenues","","$","1,150","","","","","","","$","1,029","","","","","","","$","121"],["Cost of revenues","","","986","","","","","","","","894","","","","","","","","92"],["Gross profit","","","164","","","","14","%","","","135","","","","13","%","","","29"],["Selling, general and administrative expenses","","","177","","","","15","%","","","172","","","","17","%","","","5"],["Research and development costs","","","33","","","","3","%","","","34","","","","3","%","","","(1",")"],["Restructuring costs and other","","","6","","","","1","%","","","17","","","","2","%","","","(11",")"],["Other operating income, net","","","(6",")","","","-1","%","","","(14",")","","","-1","%","","","8"],["Loss from continuing operations before interest expense, pension income excluding service cost component, loss on early extinguishment of debt, other (income) charges, net and income taxes","","","(46",")","","","(4","%)","","","(74",")","","","(7","%)","","","28"],["Interest expense","","","33","","","","3","%","","","12","","","","1","%","","","21"],["Pension income excluding service cost component","","","(102",")","","","(9","%)","","","(98",")","","","(10","%)","","","(4",")"],["Loss on early extinguishment of debt","","","\u2014","","","","\u2014","","","","2","","","","0","%","","","(2",")"],["Other (income) charges, net","","","(5",")","","","(0","%)","","","386","","","","38","%","","","(391",")"],["Earnings (loss) from continuing operations before income taxes","","","28","","","","2","%","","","(376",")","","","(37","%)","","","404"],["Provision for income taxes","","","4","","","","0","%","","","168","","","","16","%","","","(164",")"],["Earnings (loss) from continuing operations","","","24","","","","2","%","","","(544",")","","","(53","%)","","","568"],["Earnings from discontinued operations, net of income taxes","","","\u2014","","","","\u2014","","","","3","","","","0","%","","","(3",")"],["NET EARNINGS (LOSS)","","$","24","","","","2","%","","$","(541",")","","","(53","%)","","$","565"]] [[/GREPCENT_TABLE]] Revenues For the year ended December 31, 2021, revenues improved approximately $121 million compared with the same period in 2020.  Volume increases within Traditional Printing ($49 million), Advanced Materials and Chemicals ($29 million), Digital Printing ($5 million), Brand ($2 million) and Other ($4 million), improved pricing in Advanced Materials and Chemicals ($9 million) and Traditional Printing ($7 million), and favorable foreign currency ($16 million) drove the revenue improvement. See segment discussions for additional details. Gross Profit Gross profit for 2021 improved approximately $29 million compared with the same period in 2020, primarily due to increased volume in Advanced Materials and Chemicals and Brand ($10 million and $2 million, respectively), favorable pricing in Traditional Printing and Advanced Materials and Chemicals ($9 million and $8 million, respectively), improved manufacturing costs ($11 million) driven by more favorable cost absorption from improved volume, a decrease in employee benefit reserves ($5 million) and lower depreciation and amortization expenses ($7 million), partially offset by higher aluminum costs ($20 million), volume declines in Digital Printing ($4 million) and unfavorable foreign currency ($2 million).  See segment discussions for additional details. Selling, General and Administrative Expenses Consolidated SG&A for 2021 increased $5 million driven by higher consulting and other costs in 2021 ($10 million) primarily associated with the internal and external investigations and related litigation that started in the third quarter of 2020 and higher administrative expenses ($6 million) primarily due to savings from temporary furloughs and pay cuts in 2020 ($7 million) that largely ended in January 2021.  Offsetting these impacts were lower stock compensation expense recognized in the current year period ($8 million) and a decrease in employee benefit reserves ($2 million).  Temporary government assistance programs in 2020 provided a savings of approximately $3 million which did not reoccur in 2021. Research and Development Costs Consolidated R&D expenses decreased $1 million in 2021.   35 Restructuring Costs and Other These costs, as well as restructuring costs reported in Cost of revenues, are discussed under the "Restructuring Costs and Other" section in this MD&A and Note 18, “Restructuring Costs and Other”. Interest Expense The increase in interest expense in 2021 of $21 million primarily reflects the impact of the financing transactions entered into during the first quarter of 2021.  Refer to Note 8, “Debt and Finance Leases” for further information. Other Operating (Income) Expense, Net For details, refer to Note 15, “Other Operating (Income) Expense, Net.” Other (Income) Charges, Net The change in Other (income) charges, net in 2020 was primarily driven by the change in the fair value of the embedded conversion features derivative liability associated with the Convertible Notes issued in 2019 (the “2019 Convertible Notes”) at the time of their conversion due to the volatility of the Company’s stock in the third quarter of 2020.  Refer to Note 13, “Financial Instruments” and Note 16, “Other (Income) Charges, Net”. Pension Income For details, refer to Note 19, “Retirement Plans.” Provision for Income Taxes The change in Provision for income taxes for the year ended December 31, 2020 was driven by the $167 million provision associated with the establishment of a valuation allowance on deferred tax assets outside the U.S. in 2020.  Refer to Note 17, “Income Taxes”. DETAILED RESULTS OF OPERATIONS Net Revenues from Continuing Operations by Reportable Segment [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020"],["(in millions)"],["Traditional Printing","","$","659","","","$","592"],["Digital Printing","","","249","","","","241"],["Advanced Materials and Chemicals","","","212","","","","172"],["Brand","","","15","","","","13"],["Total of reportable segments","","","1,135","","","","1,018"],["Other","","","15","","","","11"],["Consolidated total","","$","1,150","","","$","1,029"]] [[/GREPCENT_TABLE]] Kodak’s segment measure of profit and loss is an adjusted earnings before interest, taxes, depreciation and amortization (“Operational EBITDA”).  As demonstrated in the table below, Operational EBITDA represents the earnings (loss) from continuing operations before income taxes excluding non-service cost components of pension and other postemployment benefits income; depreciation and amortization expense; restructuring costs; stock-based compensation expense; consulting and other costs; idle costs; other operating income, net (unless otherwise indicated); interest expense; loss on early extinguishment of debt and other income (charges), net. Kodak’s segments are measured using Operational EBITDA both before and after allocation of corporate selling, general and administrative expenses (“SG&A”).  The segment earnings measure reported is after allocation of corporate SG&A as this most closely aligns with U.S. GAAP.  Research and development activities not directly related to the other segments are reported within the Advanced Materials and Chemicals segment. 36 Segment Operational EBITDA and Consolidated Income (Loss) from Continuing Operations Before Income Taxes [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(in millions)","","2021","","","2020"],["Traditional Printing","","$","9","","","$","21"],["Digital Printing","","","(5",")","","","(10",")"],["Advanced Materials and Chemicals","","","(6",")","","","(23",")"],["Brand","","","13","","","","11"],["Other","","","2","","","","1"],["Depreciation and amortization","","","(31",")","","","(37",")"],["Restructuring costs and other","","","(6",")","","","(17",")"],["Stock-based compensation","","","(7",")","","","(15",")"],["Consulting and other costs (1)","","","(19",")","","","(9",")"],["Idle costs (2)","","","(2",")","","","(3",")"],["Other operating income, net, excluding income from transition services agreement (3)","","","6","","","","7"],["Interest expense (4)","","","(33",")","","","(12",")"],["Pension income excluding service cost component (4)","","","102","","","","98"],["Loss on early extinguishment of debt (4)","","","\u2014","","","","(2",")"],["Other income (charges), net (4)","","","5","","","","(386",")"],["Consolidated earnings (loss) from continuing operations before income taxes","","$","28","","","$","(376",")"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Consulting and other costs are professional services and internal costs associated with corporate strategic initiatives, investigations and litigation."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Consists of costs such as security, maintenance and utilities required to maintain land and buildings in certain locations not used in any Kodak operations and the costs, net of any rental income received, of underutilized portions of certain properties."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","$6 million of income from the transition services agreement with the purchaser of Kodak\u2019s Flexographic Packaging Business (\u201cFPD\u201d) was recognized in the year ended December 31, 2020. No income was recognized in the year ended December 31, 2021. The income was reported in Other operating (income) expense, net in the Consolidated Statement of Operations. Other operating (income) expense, net is typically excluded from the segment measure. However, the income from the transition services agreement was included in the segment measure."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","As reported in the Consolidated Statement of Operations."]] [[/GREPCENT_TABLE]] Kodak decreased workers’ compensation reserves by approximately $4 million in 2021 driven by changes in discount rates.  Kodak increased employee benefit reserves by approximately $4 million in 2020 reflecting an increase in workers’ compensation reserves ($7 million) partially offset by a decrease in postemployment benefit reserves ($3 million). The decrease in reserves in 2021 impacted gross profit by approximately $3 million and SG&A by approximately $1 million.  The increase in reserves in 2020 impacted gross profit and SG&A each by approximately $2 million. TRADITIONAL PRINTING SEGMENT Revenues [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Revenues","","$","659","","","$","592","","","$","67"],["Operational EBITDA","","","9","","","","21","","","","(12",")"],["Operational EBITDA as a % of revenues","","","1","%","","","4","%"]] [[/GREPCENT_TABLE]] 37 Revenues The increase in Traditional Printing revenues of approximately $67 million primarily reflected improved volume in Prepress Solutions consumables and equipment ($49 million and $3 million, respectively) as the prior year period was impacted by the COVID-19 pandemic, improved pricing in Prepress Solutions consumables ($9 million) and favorable foreign currency ($11 million).  The favorable impacts were partially offset by volume declines in Prepress Solutions service ($3 million) and unfavorable product mix in Prepress Solutions equipment ($2 million). Operational EBITDA Traditional Printing Operational EBITDA declined approximately $12 million primarily due to higher aluminum costs ($20 million), higher administrative expenses ($8 million) primarily due to savings from temporary furloughs and pay cuts in the prior year period, lower margins on Prepress Solutions equipment ($1 million) and unfavorable foreign currency ($4 million). The unfavorable impacts were partially offset by improved manufacturing costs ($9 million) primarily due to more favorable cost absorption, volume and pricing improvements ($3 million and $9 million, respectively) in Prepress Solutions consumables and a reduction in employee benefit reserves ($2 million). DIGITAL PRINTING SEGMENT [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Revenues","","$","249","","","$","241","","","$","8"],["Operational EBITDA","","","(5",")","","","(10",")","","","5"],["Operational EBITDA as a % of revenues","","","-2","%","","","-4","%"]] [[/GREPCENT_TABLE]] Revenues The increase in Digital Printing revenues of approximately $8 million primarily reflected volume improvements and improved pricing ($8 million and $3 million, respectively) in Prosper consumables and service, improved volume in Electrophotographic Printing Solutions equipment ($7 million) and favorable foreign currency ($4 million).  The improvements, which were largely due to the impact of COVID-19 pandemic in the prior year period, were partially offset by volume declines and less favorable pricing in Prosper components ($4 million and $2 million, respectively), volume declines in Versamark consumables and service ($4 million) and less favorable pricing in Electrophotographic Printing Solutions ($4 million). Operational EBITDA The improvement in Digital Printing Operational EBITDA of $5 million was driven by lower manufacturing costs ($3 million), improved volume and product mix in Prosper consumables and service (each $3 million), improved volume in Prosper equipment ($2 million), improved pricing in Software ($2 million), reduction in employee benefit reserves ($3 million) and favorable foreign currency ($2 million).  The favorable impacts were partially offset by volume declines and unfavorable pricing in Prosper components (each $2 million), lower volume in Software and Versamark service and consumables ($2 million and $1 million), as well as lower margins on Electrophotographic Printing Solutions equipment as well as unfavorable pricing (each $2 million). ADVANCED MATERIALS AND CHEMICALS SEGMENT [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Revenues","","$","212","","","$","172","","","$","40"],["Operational EBITDA","","","(6",")","","","(23",")","","","17"],["Operational EBITDA as a % of revenues","","","-3","%","","","-13","%"]] [[/GREPCENT_TABLE]] 38 Revenues The improvement in Advanced Materials and Chemicals revenues of approximately $40 million is the result of volume improvements and higher pricing in Industrial Film and Chemicals ($26 million and $8 million, respectively) as well as volume improvements in Motion Picture ($12 million) due to the impact of COVID-19 pandemic in the prior year period as well as favorable foreign currency ($1 million).  Partially offsetting these favorable impacts were volume declines in Consumer Inkjet Solutions ($1 million) as the final build of inventory was sold in the first half of 2020. Additionally, the prior year period included revenues from KSB ($8 million), a business which was sold in December 2020. Operational EBITDA Advanced Materials and Chemicals Operational EBITDA improved approximately $17 million reflecting favorable volume and higher prices in Industrial Film and Chemicals ($7 million and $8 million, respectively), volume improvements in Motion Picture ($5 million), and a reduction in employee benefit reserves ($3 million).  Partially offsetting these favorable impacts was higher administrative expenses ($2 million) primarily due to temporary furloughs and pay cuts in the prior year period and higher manufacturing costs ($3 million). BRAND SEGMENT [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","$ Change"],["Revenues","","$","15","","","$","13","","","$","2"],["Operational EBITDA","","","13","","","","11","","","","2"],["Operational EBITDA as a % of revenues","","","87","%","","","85","%"]] [[/GREPCENT_TABLE]] Brand revenues and Operational EBITDA improved approximately $2 million reflecting higher volumes in 2021. RESTRUCTURING COSTS AND OTHER 2021 Restructuring actions taken in 2021 were initiated to reduce Kodak’s cost structure as part of its commitment to drive sustainable profitability and included various targeted reductions in manufacturing, service, sales and other administrative functions. As a result of these actions, for the year ended December 31, 2021 Kodak recorded $6 million of charges which were reported as Restructuring costs and other in the accompanying Consolidated Statement of Operations. Kodak made cash payments related to restructuring of approximately $10 million for the year ended December 31, 2021. The restructuring actions implemented in 2021 are expected to generate future annual cash savings of approximately $12 million. These savings are expected to reduce future annual Cost of revenues and SG&A expenses by $6 million each.  Kodak expects the majority of the annual savings to be in effect by the end of the second quarter of 2022 as actions are completed.  See Note 18, “Restructuring Costs and Other” in the Notes to Financial Statements for additional information on Kodak’s restructuring actions. LIQUIDITY AND CAPITAL RESOURCES Management’s Assessment of Liquidity Kodak ended the year with a cash balance of $362 million, an increase of $166 million from December 31, 2020.  The financing transactions entered into during the first quarter of 2021 provided additional liquidity to the Company to fund on-going operations and obligations, invest in growth opportunities in Kodak’s businesses of print and advanced materials and chemicals and for corporate infrastructure investments expected to contribute to improvements in cash flow.  Kodak’s plans to return to sustainable positive cash flow include growing revenues profitably, reducing operating expenses, continuing to simplify the organizational structure, generating cash from selling and leasing underutilized assets and implementing ways to reduce cash collateral needs.  Kodak believes the expected cash provided from operating activities, together with the current levels of cash and cash equivalents, available borrowing capacity under the Amended ABL Credit Agreement, available borrowing resources under the Term Loan Credit Agreement and additional liquidity measures will be sufficient to meet the Company’s short-term and long-term cash requirements, as further described below. 39 Current Overview: Kodak’s products are sold and serviced in numerous countries across the globe with more than half of sales generated outside the U.S.  Global economic conditions remain highly volatile due to impacts of the on-going COVID-19 pandemic and other global events.  The conversion of accounts receivable to cash improved during 2021 but collection risk remains high.  Kodak businesses are experiencing supply chain disruptions, shortages in materials and labor, and increased labor, commodity and distribution costs.  Kodak has implemented numerous measures to mitigate the economic impacts of the COVID-19 pandemic and other global events, including reducing operating costs, largely beginning in the second quarter of 2020, through the use of temporary furloughs and pay reductions, adjusting manufacturing volumes to meet changing expectations around production requirements and implementing surcharges on purchases of plates.  The furloughs and pay-cuts largely ended in January 2021.  While manufacturing volumes have improved, the economic uncertainty surrounding the COVID-19 pandemic and other global events represents a continuing element of complexity in Kodak’s plans to return to sustainable positive cash flow.  The Company cannot predict the duration and scope of the COVID-19 pandemic, the severity of the virus, the emergence and spread of new variants of the virus, as well as other factors such as the ability to continue to secure raw materials and components, the impact of rising costs of raw materials, or how quickly and to what extent normal economic and operating conditions can resume.   Cash Flow: Cash, cash equivalents and restricted cash balances were as follows: [[GREPCENT_TABLE]] [["","","As of December 31,"],["(in millions)","","2021","","","2020"],["Cash, cash equivalents and restricted cash","","$","423","","","$","256"]] [[/GREPCENT_TABLE]] Cash Flow Activity [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["(in millions)","","2021","","","2020","","","Year-Over-Year Change"],["Cash flows from operating activities:"],["Net cash used in operating activities","","$","(47",")","","$","(35",")","","$","(12",")"],["Cash flows from investing activities:"],["Net cash used in investing activities","","","(20",")","","","(13",")","","","(7",")"],["Cash flows from financing activities:"],["Net cash provided by financing activities","","","238","","","","10","","","","228"],["Effect of exchange rate changes on cash and restricted cash","","","(4",")","","","4","","","","(8",")"],["Net increase (decrease) in cash, cash equivalents and restricted cash","","$","167","","","$","(34",")","","$","201"]] [[/GREPCENT_TABLE]] Operating Activities Net cash used in operating activities increased $12 million for the year ended December 31, 2021 as compared with the prior year primarily due to lower reductions of accounts receivable, increased investment in inventory in 2021 and lower cash earnings partially offset by decreases in cash used for accounts payable. Investing Activities Net cash used in investing activities increased $7 million for the year ended December 31, 2021 as compared to the prior year due to increased capital investment in 2021 as well as higher proceeds received in 2020 from sales of assets and a return on an equity investment. Financing Activities Net cash provided by financing activities improved $228 million in the year ended December 31, 2021 as compared to the prior year driven by net proceeds of $247 million received from the current year refinancing transactions and lower preferred stock cash dividend payments ($15 million) partially offset by proceeds received from stock option exercises ($33 million) in the prior year period. 40 Sources of Liquidity Available liquidity includes cash balances and the unused portion of the Amended ABL Credit Agreement.  The amount of available liquidity is subject to fluctuations and includes cash balances held by various entities worldwide.  At December 31, 2021 and 2020, approximately $250 million and $99 million, respectively, of cash and cash equivalents were held within the U.S. and approximately $112 million and $97 million, respectively, of cash and cash equivalents were held outside the U.S.  Cash balances held outside of the U.S. are generally required to support local country operations, may have high tax costs or other limitations that delay the ability to repatriate, and therefore may not be readily available for transfer to other jurisdictions.  Kodak utilizes cash balances outside the U.S. to fund needs in the U.S. through the use of intercompany loans.  As of December 31, 2021 and 2020 outstanding intercompany loans to the U.S. were $418 million and $449 million, respectively, which includes short-term intercompany loans from Kodak’s international finance center of $119 million and $150 million. In China, where approximately $42 million and $34 million, respectively, of cash and cash equivalents were held as of December 31, 2021 and 2020, there are limitations related to net asset balances that impact the ability to make cash available to other jurisdictions in the world.  On May 12, 2020, a Chinese subsidiary of Kodak transferred approximately $70 million to a U.S. subsidiary of Kodak in an inter-company transaction. Amended and Restated ABL Credit Agreement On February 26, 2021, the Company entered into an amendment to the ABL Credit Agreement (as amended in 2021, the “Amended ABL Credit Agreement”).  The Amended ABL Credit Agreement amended the ABL Credit Agreement to, among other things, (i) extend the maturity date to February 26, 2024 or the date that is 90 days prior to the earliest scheduled maturity date or mandatory redemption date of any of the Company’s Term Loans, 2021 Convertible Notes, Series B Preferred Stock, Series C Preferred Stock or any refinancings of any of the foregoing and (ii) decrease the aggregate amount of commitments from $110 million to $90 million.   Commitments under the Amended ABL Credit Agreement continue to be able to be used in the form of revolving loans or letters of credit.  The Company had issued approximately $46 million letters of credit under the Amended ABL Credit Agreement as of December 31, 2021 and $90 million letters of credit under the ABL Credit Agreement as of December 31, 2020. Letter of Credit Facility Agreement On February 26, 2021, the Company entered into a Letter of Credit Facility Agreement (the “L/C Facility Agreement”, and together with the Term Loan Credit Agreement and the Amended ABL Credit Agreement the “Credit Agreements”). Pursuant to the L/C Facility Agreement, the L/C Lenders committed to issue letters of credit on the Company’s behalf in an aggregate amount of up to $50 million, provided the Company posts cash collateral in an amount greater than or equal to 103% of the aggregate amount of letters of credit issued and outstanding at any given time (the “L/C Cash Collateral”). The term of the L/C Facility Agreement is three years, subject to the same automatic springing maturity as the Amended ABL Credit Agreement.  The Company had issued approximately $44 million letters of credit under the L/C Facility Agreement as of December 31, 2021. The balance on deposit in the L/C Cash Collateral account as of December 31, 2021 is approximately $45 million, of which $14 million was deposited into the L/C Cash Collateral account from proceeds of the financing transactions described herein and the remainder of which was cash collateral previously used to secure letters of credit under the ABL Credit Agreement. Under both the Amended ABL Credit Agreement and the L/C Facility Agreement the Company is required to maintain Minimum Liquidity of at least $80 million, which is tested at the end of each quarter.  Minimum Liquidity was $250 million at December 31, 2021.  If Minimum Liquidity falls below $80 million an Event of Default would occur and the Agent has the right to declare the obligation of each Lender to make Revolving Loans and of the Issuing Banks to issue Letters of Credit to be terminated, and declare the Revolving Loans, all interest thereon and all other amounts payable under the Amended ABL Credit Agreement to be due and payable.   Under the ABL Credit Agreement, the Amended ABL Credit Agreement and the L/C Facility Agreement the Company is required to maintain Excess Availability above 12.5% of lender commitments ($11.25 million and $13.75 million at December 31, 2021 and 2020, respectively), which is tested at the end of each month.  Excess Availability was $27 million and $20 million as of December 31, 2021 and 2020, respectively.  If Excess Availability falls below 12.5% of lender commitments a Fixed Charge Coverage Ratio Trigger Event would occur.  During any Fixed Charge Coverage Ratio Trigger Event, the Company would be required to maintain a Fixed Charge Coverage Ratio of greater than or equal to 1.0 to 1.0. 41 If Excess Availability falls below 12.5% of lender commitments, Kodak may, in addition to the requirement to be in compliance with the minimum Fixed Charge Coverage Ratio, become subject to cash dominion control.  Since Excess Availability was greater than 12.5% of lender commitments at December 31, 2021 and 2020, Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0. The Amended ABL Credit Agreement removed Eligible Cash from the Borrowing Base.  Therefore, amounts funded into the Eligible Cash account will no longer increase Excess Availability for purposes of compliance reporting.  As of December 31, 2020, to maintain Excess Availability of greater than 12.5% of lender commitments, Kodak funded $35 million to the Eligible Cash account held with the ABL Credit Agreement Administrative Agent, which was classified as Restricted Cash in the Consolidated Statement of Financial Position. Kodak intends to continue to maintain Excess Availability above the minimum threshold.  The borrowing base is supported by Eligible Receivables, Eligible Inventory and Eligible Equipment.  As noted above, since Excess Availability was greater than 12.5% of lender commitments Kodak was not required to have a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0.  As of December 31, 2021 Fixed Charges (as defined in the ABL Credit Agreement) exceeded EBITDA by approximately $32 million, therefore the Fixed Charges Coverage Ratio was less than 1.0 to 1.0. Excess Cash Flow On an annual basis, the Company will prepay, within 10 business days following the filing of annual Form 10-K, outstanding Loans in an amount equal to Excess Cash Flow (“ECF”) as defined in the Term Loan Credit Agreement provided no such prepayment is required if such prepayment would cause U.S. liquidity to be less than $85 million.  For the year ended December 31, 2021 ECF was a negative amount, therefore no prepayment is required in 2022. Available Borrowing Resources The Term Loan Credit Agreement includes a commitment to provide delayed draw term loans in an aggregate principal amount of $50 million on or before February 26, 2023.  As of December 31, 2021, the Company has not drawn down any of the delayed draw term loans.    Other Collateral Requirements The New York State Workers’ Compensation Board (“NYSWCB”) requires security deposits related to self-insured workers’ compensation obligations.  The security deposit required by NYSWCB is based on actuarial calculations of the Company’s obligations and company specific factors such as its declining workforce and reducing exposure.  The NYSWCB calculation also includes a financial contingency based on the employer’s credit rating and a calculation of unallocated loss adjustment expenses.  In 2020 the NYSWCB waived both of these charges to provide employers relief while they managed the economic impacts of the COVID-19 pandemic.  In 2021 the NYSWCB waived the financial contingency based on the Company’s credit rating. The waived security deposit was $17 million in 2020 and increased to $39 million in 2021.  After excluding the waived amount for 2021, the increase to the security deposit required by NYSWCB is $19 million.  The Company has agreed to post additional collateral of approximately $4 million over a five-year period, starting in 2021, to satisfy the security deposit obligation. The collateral obligation can be satisfied by issuing letters of credit or through other means.  The additional collateral requirement for 2021 was funded in November 2021 by issuing letters of credit. The security deposit required by NYSWCB will be re-calculated annually.  Therefore, the amount of additional collateral required may change each year. As a result of the Company’s current credit ratings, during the second quarter of 2020 two surety bond holders notified the Company they required approximately $9 million of incremental collateral.  The Company reduced the surety bond value by approximately $9 million in July 2020 with an equivalent increase to an existing letter of credit with the New York Workers’ Compensation board.  The Company could be required to provide up to $3 million of letters of credit to the issuers of certain surety bonds in the future to fully collateralize the bonds. Other Sources/Uses of Cash Related to Financing Transactions and Stock Options The holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4% per annum.  All dividends have been declared and paid when due.  Due to exercises of stock options primarily by ex-employees, the Company received approximately $33 million, net of tax payments, in 2020. 42 Defined Benefit Pension and Postretirement Plans Kodak made contributions (funded plans) or paid net benefits (unfunded plans) totaling approximately $16 million relating to its non-U.S. defined benefit pension and postretirement benefit plans in 2021.  For 2022, the forecasted contribution (funded plans) and net benefit payment (unfunded plans) requirements for its Non-U.S. defined benefit pension and postretirement plans are approximately $16 million.  Kodak does not expect to make any cash contributions for its U.S. pension plans in 2022. Capital Expenditures Cash flows from investing activities included $21 million for capital expenditures for the year ended December 31, 2021.  Kodak expects approximately $45 million to $60 million of cash flows for investing activities from capital expenditures for the year ending December 31, 2022.  The expected increase in capital expenditures in 2022 is driven by investments in growth initiatives and back-office automation.  U.S. International Development Finance Corporation Non-Binding Letter of Interest On July 28, 2020, the U.S. International Development Finance Corporation signed a non-binding letter of interest to provide a subsidiary of the Company with a potential $765 million loan to support the launch of Kodak Pharmaceuticals, an initiative that would manufacture pharmaceutical ingredients for essential generic drugs.  The DFC Loan would be for facility upgrades and construction, provide working capital, and finance other necessary direct expenditures supporting the launch of Kodak Pharmaceuticals.  The signing of the letter of interest indicated Kodak’s successful completion of the DFC’s initial screening, which would be followed by standard due diligence conducted by the DFC before financing would be formally committed.  The application process for the DFC Loan was put on hold when investigations were commenced with respect to the circumstances surrounding the DFC Announcement.  While the letter of interest with the DFC has never been formally terminated and the Company has not received any communication from the DFC rejecting its application, given the time that has elapsed and the changes in administration at the federal government and the DFC the Company is operating on the basis that the DFC Loan as envisioned at the time of the DFC Announcement will not proceed.   The Company remains interested in working with the DFC and other governmental agencies to leverage its assets and technology to on-shore manufacturing of pharmaceutical and other healthcare materials.  As described under “Overview” above, the Company is also continuing to explore expanding further into the pharmaceutical space on a smaller scale than contemplated by the DFC Loan using other sources of capital, including a portion of the capital raised by the Company on February 26, 2021. Contractual Obligations The impact that contractual obligations are expected to have on Kodak's cash flow in future periods is as follows: [[GREPCENT_TABLE]] [["","","","","","","As of December 31, 2021"],["(in millions)","","Total","","","2022","","","2023","","","2024","","","2025","","","2026","","","2027+"],["Long-term debt (1)","","$","322","","","$","1","","","$","2","","","$","1","","","$","1","","","$","308","","","$","9"],["Interest payments on debt (2)","","","109","","","","26","","","","26","","","","24","","","","24","","","","5","","","","4"],["Operating lease obligations","","","86","","","","18","","","","20","","","","11","","","","7","","","","6","","","","24"],["Purchase obligations (3)","","","49","","","","23","","","","16","","","","7","","","","3","","","","\u2014","","","","\u2014"],["Convertible preferred stock cash dividends (7)","","","17","","","","4","","","","4","","","","4","","","","4","","","","1","","","","\u2014"],["Total (4) (5) (6)","","$","583","","","$","72","","","$","68","","","$","47","","","$","39","","","$","320","","","$","37"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Primarily represents the maturity values of Kodak's long-term debt obligations as of December 31, 2021. The loans made under the Term Credit Agreement become due on February 26, 2026. The 2021 Convertible Notes become due on May 28, 2026. The loans made under the Term Credit Agreement receive 4% paid-in-kind interest at maturity. The 2021 Convertible Notes receive 5% paid-in-kind interest at maturity. The paid-in-kind interest for both the Term Credit Agreement and the 2021 Convertible Notes is included in the principal amount due. The contractual obligations do not reflect any contingent mandatory annual principal prepayments that may be required to be made upon achieving certain excess cash flow targets, as defined in the Term Credit Agreement. Refer to Note 8, \"Debt and Finance Leases\" in the Notes to Financial Statements."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Includes cash interest payments on the Term Credit Agreement, the RED-Rochester LLC debt and commitment fees for the Amended ABL Credit Agreement and the L/C Facility Agreement."]] [[/GREPCENT_TABLE]] 43 [[GREPCENT_TABLE]] [["(3)","Purchase obligations include agreements related to raw materials, supplies, production and administrative services, as well as marketing and advertising, that are enforceable and legally binding on Kodak and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Due to uncertainty regarding the completion of tax audits and possible outcomes, an estimate of the timing of payments related to uncertain tax positions and interest cannot be made. See Note 17, \u201cIncome Taxes,\u201d in the Notes to Financial Statements for additional information regarding Kodak\u2019s uncertain tax positions."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","For 2022, the Company is forecasting $16 million in contributions and net benefit payments for its Non-U.S. major defined benefit retirement plans and other postretirement benefit plans. Expected contributions are excluded from the contractual obligations table because they do not represent contractual cash outflows, as they are dependent on numerous factors which may result in a wide range of outcomes."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(6)","Because timing of their future cash outflows are uncertain, the other long-term liabilities presented in Note 7, \u201cOther Long-Term Liabilities,\u201d in the Notes to Financial Statements are excluded from this table."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(7)","On February 26, 2021, the Company issued 1,000,000 shares of 4% Series B Convertible Preferred Stock, no par value per share (the \u201cSeries B Preferred Stock\u201d) and 1,000,000 shares of 5% Series C Convertible Preferred Stock, no par value per share (the \u201cSeries C Preferred Stock\u201d). The Series B and Series C Preferred Stock have a liquidation preference of $100 per share. The holders of Series B Preferred Stock are entitled to cumulative dividends payable quarterly in cash at a rate of 4% per annum. The holder of Series C Preferred Stock is entitled to cumulative dividends payable quarterly in additional shares of Series C Preferred Stock. If holders of the Series B and Series C Preferred stock convert their shares into common stock, dividends will decrease."]] [[/GREPCENT_TABLE]] The Company is required to redeem all shares not converted prior to the fifth anniversary of the initial issuance at $100 per share plus the amount of any accrued and unpaid dividends.  Due to uncertainty regarding the number of shares that will be redeemed, the redemption amount has not been included in the above table. Refer to Note 9, "Redeemable, Convertible Preferred Stock" in the Notes to Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Preparation of the Company’s Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  Significant accounting policies used in the preparation of the Consolidated Financial Statements are more fully described in Note 1, “Basis of Presentation and Significant Accounting Policies”.  The accounting policies most critical to the preparation of the consolidated financial statements and require the most difficult, subjective or complex judgments are described below.     Revenue Recognition Kodak's revenue transactions include sales of products, software, services, integrated solutions, intellectual property licensing and real estate management activities.  Complex multiple element arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting, including the allocation of transaction price to the various performance obligations and determination of the stand-alone selling price of each performance obligation.  When the stand-alone selling price is not directly observable, it is estimated based on management judgment considering available data such as internal margin objectives, pricing strategies, market/competitive conditions, historical profitability data, as well as other observable inputs. For equipment sales, revenue recognition may depend on completion of installation based on the type of equipment, level of customer specific customization and other contractual terms.  In instances in which the agreement with the customer contains a customer acceptance clause, revenue is deferred until customer acceptance is obtained, provided the customer acceptance clause is considered to be substantive.   44 At the time revenue is recognized, Kodak also records reductions to revenue for customer incentive programs such as volume rebates and promotional allowances.  For those incentives that require estimation, such as for volume rebates, Kodak uses historical experience and both internal and customer data to estimate the sales incentive at the time revenue is recognized.  In the event that the actual results of these items differ from the estimates, adjustments to the sales incentive accruals are recorded.  Future market conditions and product transitions may require Kodak to increase customer incentive offers, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Valuation and Useful Lives of Long-Lived Assets, Including Goodwill and Intangible Assets Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) annually and whenever events or changes in circumstances occur that would more likely than not reduce the fair value of the reporting unit below its’ carrying amount.  As of December 31, 2021, goodwill is only recorded in the Brand and Software reporting units. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions.  Kodak estimates the fair value of its reporting units using the guideline public company method and discounted cash flow method.  To estimate fair value utilizing the guideline public company method, Kodak applies valuation multiples, derived from the operating data of publicly-traded benchmark companies, to the same operating data of the reporting units.   The valuation multiples are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”). To estimate fair value utilizing the discounted cash flow method, Kodak establishes an estimate of future cash flows for each reporting unit and discounts those estimated future cash flows to present value.  Kodak performed a quantitative test of impairment for all reporting units for its annual goodwill impairment test as of December 31, 2021.  Kodak utilized the discounted cash flow method and guideline public company method to estimate the fair value of reporting units with goodwill.   For these reporting units, Kodak selected equal weighting of the guideline public company method and the discounted cash flow method as the valuation approaches produced comparable ranges of fair value.  Fair values for the reporting units without goodwill were estimated using the discounted cash flow method only. To estimate fair value utilizing the discounted cash flow method, Kodak established an estimate of future cash flows for the period January 1, 2022 to December 31, 2026 and discounted the estimated future cash flows to present value. The expected cash flows were derived from earnings forecasts and assumptions regarding growth and margin projections, as applicable. The discount rates are estimated based on an after-tax weighted average cost of capital (“WACC”) for each reporting unit reflecting the rate of return that would be expected by a market participant.  The WACC also takes into consideration a company specific risk premium for each reporting unit reflecting the risk associated with the overall uncertainty of the financial projections.  Discount rates of 14% to 31% were utilized in the valuation based on Kodak’s best estimates of the after-tax WACC of each reporting unit. A terminal value was included for all reporting units at the end of the cash flow projection period to reflect the remaining value that the reporting unit is expected to generate.  The terminal value was calculated using either the constant growth method (“CGM”) based on the cash flows of the final year of the discrete period or the H-model, which assumes the growth during the terminal period starts at a higher rate and declines in a linear manner over a specified transition period toward a stable growth rate. Based upon the results of Kodak’s December 31, 2021 analysis, Kodak concluded that the fair value of the reporting units substantially exceeded their carrying values, therefore no impairment of goodwill was indicated.  Impairment of goodwill could occur in the future if a reporting unit’s fair value changes significantly, if Kodak’s market capitalization significantly declines, if a reporting unit’s carrying value changes materially compared with changes in its fair values, or as a result of changes in operating segments or reporting units. The carrying value of the indefinite-lived intangible asset related to the Kodak trade name is evaluated for potential impairment annually or whenever events or changes in circumstances indicate that it is more likely than not that the asset is impaired.   Kodak performed its annual test of impairment for the Kodak trade name as of December 31, 2021.  The fair value of the Kodak trade name was valued using the income approach, specifically the relief from royalty method based on the following significant assumptions: (a) forecasted revenues for the period January 1, 2022 to December 31, 2026, including a terminal year with growth rates ranging from -0.5% to 2.5%; (b) an after-tax royalty rate of 0.4% of expected net sales determined with regard to comparable market transactions and profitability analysis; and (c) discount rates ranging from 17% to 31%, which were based on the after-tax WACC. 45 Based on the results of Kodak’s December 31, 2021 assessment, the fair value of the Kodak trade name exceeded its carrying value. Impairment of the Kodak trade name could occur in the future if expected revenues decline or if there are significant changes in the discount rates or royalty rates.  A one percent increase in the discount rate and a 10% miss in expected revenues would impact the fair value of the Kodak trade name by $3 million, which would not result in an impairment. Long-lived assets other than goodwill and indefinite-lived intangible assets are evaluated for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable.  When evaluating long-lived assets for impairment, the carrying value of an asset group is compared to its estimated undiscounted future cash flows.  An impairment is indicated if the estimated future cash flows are less than the carrying value of the asset group.  The impairment is the excess of the carrying value over the fair value of the long-lived asset group.  Kodak updated its estimate of undiscounted cash flows for each asset group as of December 31, 2021.  Based on the results of the impairment tests, no impairments were recorded. The value of property, plant, and equipment is depreciated over its expected useful life in such a way as to allocate it as equitably as possible to the periods during which services are obtained from their use, which aims to distribute the value over the remaining estimated useful life of the unit in a systematic and rational manner.  An estimate of useful life not only considers the economic life of the asset, but also the remaining life of the asset to the entity.  Impairment of long-lived assets other than goodwill and indefinite lived intangible assets could occur in the future if expected future cash flows decline or if there are significant changes in the estimated useful life of the assets. Convertible Notes Embedded Conversion Features The 2021 Convertible Notes are considered more akin to debt-type instruments. The economic characteristics and risks of the embedded conversion features in the 2021 Convertible Notes were not considered clearly and closely related to the 2021 Convertible Notes.  Accordingly, these embedded features were bifurcated from the 2021 Convertible Notes and separately accounted for at fair value as a single derivative, which reduced the carrying value of the 2021 Convertible Notes.  The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other (income) charges, net in the Consolidated Statement of Operations.   The fair value of the embedded conversion features derivative is calculated using unobservable inputs (Level 3 fair measurements).  The binomial model is used to estimate the fair value of the embedded derivative which requires the input of highly subjective assumptions, including the expected volatility of Kodak’s common stock.  If factors change and different assumptions are used, the fair value of the embedded derivative liability could be materially different in the future.  Refer to Note 13, “Financial Instruments” for additional information regarding the key inputs in the determination of fair value for the embedded conversion features. The table below summarizes the expected stock price volatility and the closing stock price used as of December 31, 2021 and at inception for the 2021 Convertible Notes: [[GREPCENT_TABLE]] [["","","2021 Convertible Notes"],["Value of embedded derivative liability at December 31, 2021 (in millions)","","$","4"],["Value of embedded derivative liability at inception (in millions)","","$","12"],["Expected stock price volatility as of December 31, 2021","","","36","%"],["Expected stock price volatility at inception","","","70","%"],["Closing stock price as of December 31, 2021","","$","4.68"],["Closing stock price at inception","","$","8.62"]] [[/GREPCENT_TABLE]] 46 Taxes Kodak recognizes deferred tax liabilities and assets for the expected future tax consequences of operating losses, credit carry-forwards and temporary differences between the carrying amounts and tax basis of Kodak’s assets and liabilities. Kodak records a valuation allowance to reduce its net deferred tax assets to the amount that is more likely than not to be realized.  Kodak has considered forecasted earnings, future taxable income, the geographical mix of earnings in the jurisdictions in which Kodak operates and prudent and feasible tax planning strategies in determining the need for these valuation allowances.  As of December 31, 2021, Kodak has net deferred tax assets before valuation allowances of approximately $905 million and a valuation allowance related to those net deferred tax assets of approximately $934 million, resulting in net deferred tax liabilities of approximately $29 million. Kodak considers both positive and negative evidence, in determining whether a valuation allowance is needed by territory, including, but not limited to, whether particular entities are in three-year cumulative income positions. As of March 31, 2020, Kodak determined that it was more likely than not that deferred tax assets outside the U.S. which were not offset with valuation allowances as of March 31, 2020 would not be realized due to reductions in estimates of future profitability as a result of the COVID-19 pandemic in locations outside the U.S.  Accordingly, Kodak recorded a provision of $167 million associated with the establishment of a valuation allowance on those deferred tax assets.   Kodak may be able to make the determination that the realization of deferred tax assets in certain foreign jurisdictions is more likely than not in the future.  Kodak will continue to evaluate whether valuation allowances are needed, at a jurisdictional level, in future reporting periods. It is possible that sufficient positive evidence, including sustained profitability, may become available in future periods with respect to one or more jurisdictions to reach a conclusion that all or part of the valuation allowance with respect to such jurisdictions could be reversed. Utilization of net operating losses (“NOL”) and tax credits may be subject to limitations in the event of significant changes in stock ownership of the Company in the future. Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the utilization of NOL carryforwards, other tax carryforwards, and certain built-in losses as defined under that Section, upon an ownership change. In general terms, an ownership change may result from transactions that increase the aggregate ownership of five percent stockholders in Kodak’s stock by more than 50 percentage points over a three-year testing period.  The Company has a relatively high concentration of stockholders that hold 5% or more of the outstanding stock.  Future transactions, when combined with reported transactions within the testing period could aggregate an ownership change during the testing period in excess of 50 percentage points.   A Section 382 ownership change would significantly impair Kodak’s ability to utilize NOLs and tax credits in the U.S.  As of December 31, 2021, Kodak had available U.S. NOL carry-forwards for income tax purposes of approximately $1,389 million and unused foreign tax credits of $358 million.  Any impairment of these tax attributes would be fully offset by a corresponding decrease in Kodak’s U.S. valuation allowance, which would result in no net tax provision. Kodak has deferred tax liabilities of $20 million and $22 million for potential taxes on undistributed earnings, including foreign withholding taxes, as of December 31, 2021 and 2020, respectively. Kodak operates within multiple taxing jurisdictions worldwide and is subject to audit in these jurisdictions.  These audits can involve complex issues, which may require an extended period of time for resolution.  Management’s ongoing assessments of the outcomes of these issues and related tax positions require judgment, and although management believes that adequate provisions have been made for such issues, there is the possibility that the ultimate resolution of such issues could have an adverse effect on the earnings of Kodak.  Conversely, if these issues are resolved favorably in the future, the related provisions would be reduced, thus having a positive impact on earnings. Pension and Other Postretirement Benefits Kodak’s defined benefit pension and other postretirement benefit costs and obligations are estimated using several key assumptions.  The assumptions that have the most significant effect on the Company’s consolidated financial position and results of operations are the expected long-term rate of return on plan assets (“EROA”) and discount rates.  Actual results that differ from Kodak’s assumptions are recorded as unrecognized gains and losses as a component of accumulated other comprehensive 47 Income (loss) in shareholders’ equity and are amortized to earnings over the estimated future service period of the active participants in the plan or, if the plan is almost entirely inactive, the average remaining lifetime expectancy of inactive participants, to the extent such total net unrecognized gains and losses exceed 10% of the greater of the plan's projected benefit obligation or the calculated value of plan assets.  Significant differences in actual experience or significant changes in future assumptions would affect Kodak’s pension and other postretirement benefit costs and obligations.   Return on Plan Assets EROA is a long-term assumption, which Kodak reviews annually.  Kodak utilizes asset and liability modeling studies to adjust asset exposures to conform to its investment strategy, and to review its liability hedging program.  These studies generate forward-looking estimates of correlation, risk and return which are used in the development of the EROA. The EROA is estimated utilizing a forward-looking building block model which factors in the expected risk of each asset category, return, and correlation over a five to seven-year horizon, and weights the exposures by the strategic asset allocation.   Historical inputs are utilized in the forecasting model, including historical asset returns with adjustments based on the forward-looking view.  Kodak aggregates investments into major asset categories based on the underlying benchmark of the strategy.  Each allocation to these major asset categories is determined to accomplish unique objectives, including enhancing portfolio return, providing portfolio diversification, or hedging plan liabilities, in accordance with the overall investment strategy. The EROA, once set, is applied to the calculated value of plan assets in the determination of the expected return component of Kodak’s pension expense.  Kodak uses a calculated value of plan assets, which recognizes gains and losses in the fair value of assets over a four-year period, to calculate expected return on assets.   At December 31, 2021, the calculated value of the assets of Kodak’s major U.S. and non-U.S. defined benefit pension plans was approximately $4.1 billion and the fair value of the assets of Kodak’s major U.S. and non-U.S. defined benefit pension plans was approximately $4.7 billion.  Asset gains and losses that are not yet reflected in the calculated value of plan assets are not included in amortization of unrecognized gains and losses. Kodak’s major U.S. defined benefit pension plan accounts for substantially all of Kodak’s net pension income and represents approximately 87% of the total fair value of major plan assets as of December 31, 2021.  The following table presents actual and expected return on plan assets, as well as the corresponding percentages for Kodak’s major U.S. defined benefit pension plan: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["(in millions)"],["Actual return on plan assets","","$","716","","","$","495","","","$","514"],["Expected return on plan assets","","","167","","","","196","","","","214"],["Actual rate of return on plan assets","","","17.7","%","","","14.9","%","","","16.1","%"],["Expected rate of return on plan assets","","","5.2","%","","","6.0","%","","","6.5","%"]] [[/GREPCENT_TABLE]] The actual rate of return on Kodak’s major U.S. defined benefit pension plan for 2021 was 17.7%, higher than the expected rate of return of 5.2%, driven by higher returns for the U.S. Plan’s private equity and hedge fund portfolio. For 2020 and 2019, the actual rates of return exceeded the expected rates of return driven by strong stock and bond market performance as well as realized gains recorded from derivative investments held by the U.S. Plan.  The expected average rate of return on plan assets is a long-term, forward-looking assumption and will likely differ from the actual return in any specific year. Gains or losses from direct investments in derivative instruments by Kodak’s major U.S defined benefit pension plan can be volatile from year to year and could materially affect the fair value of plan assets.  The total net realized (losses) gains from these derivative investments that were included in the actual return on plan assets balance in the table above for the years ending December 31, 2021, 2020 and 2019 was approximately ($23) million, $159 million and $131 million, respectively.  Refer to the Derivative Instruments discussion below for additional information.   48 Approximately $3.4 billion and $3.1 billion of the total fair value of Kodak’s major U.S. defined pension plan as of December 31, 2021 and 2020, respectively, represents plan assets where the fair market value is not readily determinable and are measured using the net asset value (“NAV”) per share expedient.  Except for investments in private equity funds and real estate funds, the remaining investments have redemption rights and can be, and historically have been, redeemed by the U.S. Plan at NAV.  For private equity funds and real estate funds, the investors do not have an option to redeem their interest in these funds but rather receive distributions from time to time through the liquidation of the underlying investments in the funds. Secondary sales of a material portion of the investments in these funds are infrequent and historically, immaterial portions of these funds were sold for values not significantly different from NAV. Discount Rates: Generally, Kodak bases the discount rate assumption for its significant plans on high quality corporate bond yields in the respective countries as of the measurement date.  Specifically, for its U.S., Canadian, Euro-zone and UK plans, Kodak determines a discount rate using a cash flow model to incorporate the expected timing of benefit payments and an AA-rated corporate bond yield curve.  For Kodak’s U.S. Plan, the Citigroup Above Median Pension Discount Curve is used.  For Kodak’s non-U.S. plans, discount rates are determined by comparison to published local high-quality bond yields or indices considering estimated plan duration and removing any outlying bonds, as warranted. Changes in discount rates for Kodak’s major U.S. defined benefit plan has the most significant effect on the total projected benefit obligations for Kodak.   The table below shows the discount rates for Kodak’s major U.S. pension plan for the years shown: [[GREPCENT_TABLE]] [["","","Year Ended December 31,"],["","","2021","","","2020","","","2019"],["Discount Rates - Projected Benefit Obligation:"],["U.S. Plan","","","2.54","%","","","2.09","%","","","2.97","%"]] [[/GREPCENT_TABLE]] As discount rates reflect the market rate on the measurement date, the rates can be volatile from year to year.  The increase in the discount rate for Kodak’s major U.S. defined benefit pension plan from December 31, 2020 to December 31, 2021 resulted in a decrease in the projected benefit obligation of approximately $105 million at December 31, 2021.  The decrease in the discount rate for the U.S. Plan from December 31, 2019 to December 31, 2020 resulted in an increase in the projected benefit obligation of approximately $276 million at December 31, 2020. Sensitivity Analysis: The following table illustrates the sensitivity to a change to certain key assumptions used in the calculation of expense for the year ending December 31, 2022 and the projected benefit obligation (“PBO”) at December 31, 2021 for Kodak's major U.S. and non-U.S. defined benefit pension plans: [[GREPCENT_TABLE]] [["(in millions)","","Impact on 2022 Pre-Tax Pension Expense Increase (Decrease)","","","Impact on PBO December 31, 2021 Increase (Decrease)"],["","","U.S.","","","Non-U.S.","","","U.S.","","","Non-U.S."],["Change in assumption:"],["25 basis point decrease in discount rate","","$","(6",")","","$","\u2014","","","$","67","","","$","21"],["25 basis point increase in discount rate","","","6","","","","\u2014","","","","(65",")","","","(20",")"],["25 basis point decrease in EROA","","","8","","","","1","","","N/A","","","N/A"],["25 basis point increase in EROA","","","(8",")","","","(1",")","","N/A","","","N/A"]] [[/GREPCENT_TABLE]] Total pension income from continuing operations before special termination benefits, curtailments and settlements for the major U.S. defined benefit pension plan was $86 million for 2021 and is expected to be approximately $113 million in 2022.  Pension expense from continuing operations before special termination benefits, curtailments and settlements for the major non-U.S. defined benefit pension plans was $2 million for 2021 and is projected to be $8 million in 2022. 49 Derivative Instruments: Kodak’s major U.S. defined benefit plan utilizes derivative investments primarily to hedge liability interest rate risk to U.S. government bonds.  Kodak’s major U.S. defined benefit pension plan’s derivative portfolio consists of exchange traded futures contracts.  As of December 31, 2021 and 2020 the notional amount of these derivative instruments approximated $1.0 billion and $1.7 billion, respectively.  Daily variation margin payments are made to or received from the counterparty for changes in the market value of futures contracts and are recorded as realized gains and losses in the Gain on Plan Assets balance.  As these futures contracts have short-term maturities, the fair value of these derivative instruments at December 31, 2021 and 2020 was $10 million and ($4) million, respectively, which represents the unrealized gains and losses on these contracts.  Refer to Note 19, “Retirement Plans” in the Notes to Financial Statements for additional information. An increase in interest rates is the primary factor that could precipitate material losses in the U.S. Plan’s existing derivatives portfolio.  A 25-basis point increase in interest rates would cause a loss from the government bond derivatives of approximately $18 million.  However, as illustrated in the above table, a 25-basis point increase in the discount rate used to measure the PBO of the U.S. Plan would cause a $65 million decrease in the PBO.  Accordingly, while an increase in interest rates would expose the U.S. Plan’s derivative investments to losses, it would also likely result in an offsetting decrease the U.S. Plan’s PBO. Kodak’s major U.S. defined benefit plan invests in a diversified portfolio of hedge funds that utilize a variety of investment strategies.  The total net asset value of these hedge funds was approximately $1.8 billion and $1.5 billion as of December 31, 2021 and 2020 respectively.  Separate from the U.S. Plan’s direct investments in exchange traded futures contracts, hedge funds may utilize derivative instruments to execute their investment strategy. Any gains or losses, as well as changes in the fair value of derivative investments held by the hedge fund, are included in the hedge fund’s net asset value.  Losses could occur in the future from hedge fund investments which may result in part from the use of derivative investments by the hedge funds.  However, the maximum potential loss on any individual fund would be limited to the U.S. Plan’s investment in that fund.   Workers’ Compensation The estimated liability for workers’ compensation is based on actuarially estimated discounted cost of claims, including claims incurred but not reported.  Historical loss development factors are utilized to project the future development of incurred losses, and the amounts are adjusted based on actual claim experience, settlements, claim development trends, changes in state regulations and judicial interpretations. Changes in discount rates is the primary driver for changes in workers’ compensation reserves.  Kodak decreased workers’ compensation reserves by approximately $4 million in 2021 and increased workers’ compensation reserves by approximately $7 million in 2020 driven by changes in discount rates.  A 25 basis-point change in the discount rate would have had a $2 million impact on the expense and net liability as of December 31, 2021. Stock Compensation Kodak recorded stock compensation expense of $7 million, $15 million and $7 million for the years ended December 31, 2021, 2020 and 2019, respectively.  Compensation expense is recognized over the service or performance period for each separately vesting tranche of the award and is adjusted for actual forfeitures before vesting. Compensation cost related to restricted stock units and restricted stock awards was $5 million, $1 million and $2 million for the years ended December 31, 2021, 2020 and 2019, respectively.  The fair value of restricted stock units and restricted stock awards is based on the closing market price of the Company’s stock on the grant date.  Changes in the fair value of restricted stock units and restricted stock awards is driven by the volatility of the Company’s stock price and the number of awards issued.   50 Compensation cost related to stock options for the years ended December 31, 2021, 2020 and 2019 was $2 million, $14 million and $5 million, respectively.  Except for the awards granted on July 27, 2020, which resulted in approximately $12.6 million of compensation expense being recognized in the year ended December 31, 2020, Kodak utilizes the Black-Scholes option valuation model to estimate the fair value of stock options.  Changes in the fair value of stock options is primarily driven by the volatility of the Company’s stock price. Inventories Inventories are stated at the lower of average cost or net realizable value.  Judgment is required to assess the ultimate demand for and realizable value of inventory.  The analysis of inventory carrying values considers several factors including length of time inventory is on hand, historical sales, product shelf life, product life cycle, product category, and product obsolescence. New Accounting Pronouncements A description of new accounting pronouncements is contained in Note 1, “Summary of Significant Accounting Policies”.