NOTE 9: REVENUE

Revenue Recognition

Kodak’s revenue transactions include sales of products (such as components and consumables for use in Kodak and other manufacturers’ equipment and film based products); equipment; software; services; integrated solutions; and intellectual property and brand licensing. Revenue from services includes extended warranty, customer support and maintenance agreements, consulting, business process services, training and education.

Revenues are recognized when control of the promised goods or services is transferred to customers in an amount that reflects the consideration Kodak expects to be entitled to in exchange for those goods or services.

For product sales (such as plates, film, inks and other consumables) revenue is recognized when control has transferred from Kodak to the buyer, which may be upon shipment or upon delivery to the customer site, based on contract terms or legal requirements in certain jurisdictions. Service revenue is recognized using the time-based method ratably over the contractual period as it best depicts when the customer receives the benefit from the service. Service revenue for time and materials based agreements is recognized as services are performed.

Equipment is generally dependent on, and interrelated with, the underlying operating system (firm ware) and cannot function without the operating system. In these cases, the hardware and software license are accounted for as a single performance obligation. Contracts with customers may include multiple performance obligations including equipment, and optional software licenses and service agreements. Service agreements may be prepaid or paid over-time and range from three months to six years. For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. Standalone selling prices are based on the prices charged to customers or using expected cost-plus margin.

For non-complex equipment installations and software sales (Prepress, Packaging and Prosper Components and Unified Workflow Solutions businesses) revenue is recognized when control of each distinct performance obligation has transferred from Kodak to the buyer, which is generally met when the equipment or software is delivered and installed at the customer site as delivery and installation generally occur within the same period. For complex equipment installations or integrated software solutions (Prosper Presses, Electrophotographic Printing Solutions Printers, Unified Workflow Solutions) revenue is deferred until receipt of customer acceptance and control has transferred to the buyer.

Software licenses are sold both in bundled equipment arrangements as discussed above or on a stand-alone basis (Unified Workflow Solutions business). Software licenses are generally perpetual and are usually sold with post-contract support services (“PCS”) which are considered distinct performance obligations as the customer’s use of the existing software is not dependent upon future upgrades. Kodak recognizes software revenue at the time that the customer obtains control over the software which generally occurs upon installation while revenue allocated to the PCS is recognized over the service period.

In service arrangements such as consulting or business process services (Kodak Technology Solutions business) where final acceptance by the customer is required, revenue is deferred until all acceptance criteria have been met and Kodak has a legal right to payment.

Kodak’s licensing revenue is comprised of software licenses as discussed above, licenses to use functional intellectual property (patents and technical know-how) and licenses to use symbolic intellectual property (brand names and trademarks) (Consumer and Film businesses). The timing and the amount of revenue recognized from the licensing of intellectual property depends upon a variety of factors, including the nature of the performance obligations (functional vs. symbolic licenses) specific terms of each agreement, and the payment terms. Aside from software licenses discussed above, Kodak’s functional licenses generally provide the right to use functional intellectual property; therefore, non-sales/usage-based revenue is recognized when the customer has the right to use the intellectual property while sales and usage-based royalties are recognized in the period the related sales and usage occurs. Revenue for symbolic licenses such as brand licenses are recognized over time.

Deferred revenue is recorded when cash payments are received in advance of satisfying performance obligations such as deposits required in advance on equipment orders, prepaid service contracts or prepaid royalties on intellectual property arrangements. Interest expense is imputed for payments received greater than one year in advance of performance.

Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. Kodak applies the practical expedient with respect to implied financial components and only imputes interest for payment terms greater than one year.

Sales and usage-based taxes are excluded from revenues. Certain customers may receive cash-based incentives or credits, which are accounted for as variable consideration. Kodak estimates these amounts based on the expected amount to be provided to customers.

Kodak expenses sales commissions when incurred if the amortization period would be one year or less. These costs are recorded in Selling, general and administrative expenses. Kodak accrues the estimated cost of post-sale obligations, including basic product warranties, at the time of revenue recognition. Shipping and handling costs are accounted for as fulfillment costs and are included in cost of sales.

Kodak does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less or for which revenue is recognized at the amount to which Kodak has the right to invoice for services performed. Performance obligations with an original expected length of greater than one year generally consist of deferred service contracts, operating leases and licensing arrangements. As of March 31, 2018, there was approximately $75 million of remaining performance obligations. Approximately 30% of the remaining performance obligations are expected to be recognized in 2018, and 2019, 20% in 2020 and 20% thereafter.

Disaggregation of Revenue

The following tables present revenue disaggregated by major product, portfolio summary and geography.

Major product:

	Three Months Ended
	March 31, 2018
	Print Systems		Enterprise Inkjet Solutions		Flexographic Packaging Printing		Software & Solutions		Consumer & Film		Advanced Materials and 3D Technology Solutions		Eastman Business Park		Total
Plates, inks and other consumables	$	167	$	8	$	32	$	—	$	5	$	—	$	—	$	212
Ongoing service arrangements ⁽¹⁾		34		20		2		12		—		—		—		68
Total Annuities		201		28		34		12		5		—		—		280
Equipment & Software		15		3		3		4		—		—		—		25
Film and chemicals		—		—		—		—		40		—		—		40
Other ₍₂₎		—		—		—		4		3		1		4		12
Total	$	216	$	31	$	37	$	20	$	48	$	1	$	4	$	357

⁽¹⁾	Service revenue in the Consolidated Statement of Operations includes the ongoing service revenue shown above as well as revenue from project-based document management and managed print services businesses, which is included in Other above.

⁽²⁾	Other includes revenue from professional services, non-recurring engineering services, project-based document management and managed print services businesses, tenant rent and related property management services and licensing.

Product Portfolio Summary:

	Three Months Ended
	March 31, 2018
	Print Systems		Enterprise Inkjet Solutions		Flexographic Packaging Printing		Software & Solutions		Consumer & Film		Advanced Materials and 3D Printing		Eastman Business Park		Total
Growth engines ⁽¹⁾	$	35	$	18	$	29	$	20	$	3	$	1	$	—	$	106
Strategic other businesses ⁽²⁾		170		—		8		—		40		—		4		222
Planned declining businesses ⁽³⁾		11		13		—		—		5		—		—		29
	$	216	$	31	$	37	$	20	$	48	$	1	$	4	$	357

⁽¹⁾	Growth engines consist of Sonora, PROSPER, FLEXCEL NX, Software and Solutions, AM3D and brand licensing.

⁽²⁾

Strategic Other Businesses include plates, Computer to Plate (“CTP”) and related service, and Nexpress and related toner business in the Print Systems segment, non-FLEXCEL NX in the Flexographic Packaging segment, Motion Picture and Industrial Film and Chemicals in the Consumer and Film segment, Eastman Business Park and intellectual property licensing.

⁽³⁾

Planned Declining Businesses are product lines where the decision has been made to stop new product development and manage an orderly expected decline in the installed product and annuity base. These product families consist of Consumer Inkjet in the Consumer and Film segment, Versamark in the Enterprise Inkjet Systems segment and Digimaster in the Print Systems segment.

Geography:

	Three Months Ended
	March 31, 2018
	Print Systems		Enterprise Inkjet Solutions		Flexographic Packaging Printing		Software & Solutions		Consumer & Film		Advanced Materials and 3D Technology Solutions		Eastman Business Park		Total
United States	$	57	$	11	$	6	$	7	$	32	$	1	$	4	$	118
Canada		3		—		1		1		1		—		—		6
North America		60		11		7		8		33		1		4		124
Europe, Middle East and Africa		93		12		16		6		5		—		—		132
Asia Pacific		49		7		7		5		10		—		—		78
Latin America		14		1		7		1		—		—		—		23
Total Sales	$	216	$	31	$	37	$	20	$	48	$	1	$	4	$	357

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed trade receivables, unbilled receivables (contract assets), and customer advances and deposits (contract liabilities) in the Consolidated Statement of Financial Position. The contract assets are transferred to trade receivables when the rights to consideration become unconditional. The amounts recorded for contract assets at March 31, 2018 and December 31, 2017 were $2 million and $3 million, respectively, and are reported in Other current assets and Trade receivables, respectively, in the Consolidated Statement of Financial Position. The contract liabilities primarily relate to prepaid service contracts, upfront payments for certain equipment purchases or prepaid royalties on intellectual property arrangements. The amounts recorded for contract liabilities at March 31, 2018 and December 31, 2017 were $46 million and $37 million, respectively, of which $38 million and $37 million, respectively, are reported in Other current liabilities and $8 million and $0 million, respectively, are reported in Other long-term liabilities in the Consolidated Statement of Financial Position.

Revenue recognized for the three-month period ended March 31, 2018 that was included in the contract liability balance at the beginning of the year was $25 million, and primarily represented revenue from prepaid service contracts and equipment revenue recognition. Contract liabilities as of March 31, 2018 include $23 million of cash payments received during the three-month period ended March 31, 2018.