Note 20 - Financial Instruments

9 Months Ended

Sep. 30, 2023

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 20: FINANCIAL INSTRUMENTS

Kodak, as a result of its global operating and financing activities, is exposed to changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. Kodak manages such exposures, in part, with derivative financial instruments. Foreign currency forward contracts are used to mitigate currency risk related to foreign currency denominated assets and liabilities. Kodak’s exposure to changes in interest rates results from its investing and borrowing activities used to meet its liquidity needs. Kodak does not utilize financial instruments for trading or other speculative purposes.

Kodak’s foreign currency forward contracts are not designated as hedges and are marked to market through net income at the same time that the exposed assets and liabilities are remeasured through net income (both in Other charges (income), net in the Consolidated Statement of Operations). The notional amount of such contracts open at September 30, 2023 and December 31, 2022 was approximately $270 million and $308 million, respectively. The majority of the contracts of this type held by Kodak as of September 30, 2023 and December 31, 2022 are denominated in euros, Chinese renminbi and Japanese yen.

The net effect of foreign currency forward contracts in the results of operations is shown in the following table:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2023		2022		2023		2022
Net loss from derivatives not designated as hedging instruments	$	3	$	6	$	15	$	16

Kodak had no derivatives designated as hedging instruments for the three and nine months ended September 30, 2023 and 2022.

In the event of a default under any of the Company’s credit agreements, or a default under any derivative contract or similar obligation of Kodak, subject to certain minimum thresholds, the derivative counterparties would have the right, although not the obligation, to require immediate settlement of some or all open derivative contracts at their then-current fair value, but with liability positions netted against asset positions with the same counterparty.

The Company concluded that the Convertible Notes were considered more akin to a debt-type instrument and that the economic characteristics and risks of certain of the embedded conversion features were not considered clearly and closely related to the Convertible Notes. The embedded conversion features not considered clearly and closely related are the conversion at the option of the holder (“Optional Conversion”), the mandatory conversion by Kodak (“Mandatory Conversion”) and the conversion in the event of a fundamental transaction by the holder at the then applicable conversion rate (“Fundamental Change”). Accordingly, these embedded conversion features were bifurcated from the Convertible Notes and separately accounted for on a combined basis as a single derivative asset or liability. The derivative was revalued when the Convertible Notes were repaid in the third quarter of 2023.  The embedded conversion features expired on July 21, 2023 upon the repayment of the Convertible Notes.  The derivative was in a liability position at December 31, 2022 and was reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivative was being accounted for at fair value with changes in fair value included in Other charges (income), net in the Consolidated Statement of Operations. 

The Company concluded that the Series B Preferred Stock and the Series C Preferred Stock are each considered more akin to a debt-type instrument and that the economic characteristics and risks of the conversion in the event of a Fundamental Change is not considered clearly and closely related to the Series B and Series C Preferred Stock. Accordingly, this embedded conversion feature was bifurcated from both the Series B and Series C Preferred Stock and both are separately accounted for as a single derivative asset or liability.  Both derivatives were in a liability position at September 30, 2023 and December 31, 2022 and were reported in Other long-term liabilities in the Consolidated Statement of Financial Position. The derivatives are being accounted for at fair value with changes in fair value included in Other charges (income), net in the Consolidated Statement of Operations.

The net effect of the Preferred Stock and Convertible Notes embedded derivatives on the results of operations is shown in the following table:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in millions)	2023		2022		2023		2022
Net loss (gain) from Preferred Stock and Convertible Notes embedded derivatives	$	—	$	—	$	2	$	(1	)

Fair Value

Fair values of Kodak’s foreign currency forward contracts are determined using observable inputs (Level 2 fair value measurements) and are based on the present value of expected future cash flows (an income approach valuation technique) considering the risks involved and using discount rates appropriate for the duration of the contracts. The gross fair value of foreign currency forward contracts in an asset position are reported in Other current assets and the gross fair value of foreign currency forward contracts in a liability position are reported in Other current liabilities in the Consolidated Statement of Financial Position. The gross fair value of forward contracts in an asset position as of  September 30, 2023 and December 31, 2022 was $0 million and $1 million, respectively. The gross fair value of foreign currency forward contracts in a liability position as of both  September 30, 2023 and December 31, 2022 was $1 million.

Transfers between levels of the fair value hierarchy are recognized based on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between levels of the fair value hierarchy during the three and nine months ended September 30, 2023.

The fair values of the embedded conversion features derivatives were calculated using unobservable inputs (Level 3 fair measurements). The fair values of the embedded derivatives associated with the Convertible Notes and Series B and Series C Preferred Stock were calculated using a binomial lattice model.

The following tables present the key inputs in the determination of fair value for the embedded conversion features:

Convertible Notes:

	Valuation Date
	July 21,			December 31,
	2023			2022
Total value of embedded derivative liability ($ millions)	$	5		$	2
Kodak's closing stock price	$	5.26		$	3.05
Expected stock price volatility		60.00	%		50.00	%
Risk free rate		4.50	%		4.17	%
Implied credit spread on the Convertible Notes		17.75	%		26.19	%

Series B Preferred Stock:

	Valuation Date
	September 30,			December 31,
	2023			2022
Total value of embedded derivative liability ($ millions)	$	1		$	1
Kodak's closing stock price	$	4.21		$	3.05
Expected stock price volatility		55.00	%		50.00	%
Risk free rate		4.88	%		4.17	%
Implied credit spread on the preferred stock		19.32	%		27.19	%

Series C Preferred Stock:

	Valuation Date
	September 30,			December 31,
	2023			2022
Total value of embedded derivative liability ($ millions)	$	1		$	1
Kodak's closing stock price	$	4.21		$	3.05
Expected stock price volatility		55.00	%		50.00	%
Risk free rate		4.88	%		4.17	%
Implied credit spread on the preferred stock		21.32	%		29.19	%

The Fundamental Change values at issuance were calculated as the difference between the total value of the Convertible Notes, Series B or Series C Preferred Stock, as applicable, and the sum of the net present value of the cash flows if the Convertible Notes are repaid at their maturity date or Series B and Series C Preferred Stock are redeemed on their redemption date and the values of the other embedded derivatives. The Fundamental Change values reduce the value of the embedded conversion features derivative liability. Other than events that alter the likelihood of a fundamental change or reorganization event, the value of the Fundamental Change reflects the value as of the issuance date, amortized for the passage of time.

The fair values of long-term debt (Level 2 fair value measurements) are determined by reference to quoted market prices of similar instruments, if available, or by pricing models based on the value of related cash flows discounted at current market interest rates. The fair values of long-term borrowings were $364 million and $271 million at September 30, 2023 and December 31, 2022, respectively.  The carrying values of cash and cash equivalents, restricted cash and the current portion of long-term debt approximate their fair values at both September 30, 2023 and December 31, 2022.