Eastman Kodak

Source: Kodak Website — PROSPER Imprinting System
  • Reduced guidance and continued cash burn: Financial results have shown deterioration in certain segments over the past year, particularly in the Print Systems Division. Increased competition has led to pricing pressure, rising input costs have squeezed margins, and foreign exchange headwinds have magnified the decline.
  • Inability to complete PROSPER sale: In March 2016, management announced they were in discussions with potential bidders to sell the PROSPER enterprise inkjet business. However, after exploring various alternatives for over a year and receiving multiple bids, the company ultimately decided to retain this business as the offers were below their estimate of fair value.
  • Micro 3D printing failure: Kodak’s Research Lab developed metal mesh sensors using silver and copper for use in touchscreen displays. However, the endeavor failed to gain sufficient traction despite ~$50 million of investment over the past decade. In August 2017, management ultimately announced the decision to stop investment in this initiative.
Sources: Company filings, investor presentations, and earnings call transcripts
Sources: Company filings, investor presentations, and earnings call transcripts
Sources: Company filings, investor presentations, and earnings call transcripts
Sources: Company filings, investor presentations, and earnings call transcripts
  • Consumer Products: Kodak continues to develop various consumer products, including the Super 8 camera. Additionally, the company licenses the Kodak brand to third parties for a range of products including batteries, cameras, camera accessories, printers, and recordable media. Kodak also sells ink to the legacy installed base of consumer inkjet printers, which is profitable but also rapidly declining as it’s in a runoff mode.
  • Industrial Film and Chemicals: Kodak sells industrial film used by the electronics industry to produce printed circuit boards. They also manufacture professional and consumer still photographic film.
  • Motion Picture Film: With the rise of digital imaging technologies, this business has declined over 90% since its peak. However, Kodak is the sole company still making motion picture film and finalized a deal with Hollywood studios in 2014 to operate profitably. JJ Abrams, Christopher Nolan, Quentin Tarantino, and Judd Apatow are some of the leading filmmakers who are passionate supporters. This business is a relatively small contributor as it generates ~$40–45 million of revenue.
  • Print Systems: I attribute a 3x EBITDA multiple in the Downside Case. This is in line with Agfa’s current multiple and suggests continued price erosion and volume declines. However, my baseline is more optimistic and I value PSD at 5x EBITDA in the Investment Case. There will likely be a meaningful re-rating if fundamentals improve (e.g. pricing conditions stabilize due to industry wide capacity reductions or aluminum headwinds subside). Additionally, I think there is a chance Kodak will sell this division to either Fuji or Agfa. Pro forma EBITDA would likely double or triple due to cost synergies and industry consolidation would likely curb pricing pressure. A buyer can therefore pay 5–8x EBITDA and the transaction would still be very attractive. Agfa, in particular, seems motivated to explore M&A alternatives based on this disclosure in their most recent annual report, “Agfa Graphics is convinced that the prepress market will see further consolidation waves in the years to come. As one of the market leaders in CtP printing plates, the business group aims to be the driving force behind the consolidation, and to expand its share in a market under pressure.”
  • EISD — PROSPER: Due to the lack of current profitability, I value this segment based on recurring revenue. Assuming steady-state EBITDA margins of ~25%, the 1.5–2.0x recurring revenue equates to ~6–8x EBITDA. Further supporting this range, management said they believe PROSPER is worth more than its net book value which is in the $85–100 million range (book value was $102 million at YE 2016 but the company took some restructuring charges in January 2017). This segment also includes the ULTRASTREAM technology slated for a 2019 release which provides upside option value.
  • EISD — VERSAMARK: A legacy business in runoff mode that appears to be declining by 10–20% per year. However, it continues to generate cash and I am attributing a modest 1.0–1.5x EBITDA multiple.
  • Flexographic Packaging: This may be Kodak’s most valuable segment. Revenue is growing at a low double-digit rate and margins are very healthy in the 20–25% range. According to PMCF Mergers & Acquisitions, the average packaging transaction in 2016 was valued at ~8x EBITDA. I use this multiple in the downside case but it’s worth noting that Kodak is growing the division at a much faster rate than the overall industry. Additionally, as shown in Exhibit F, public packaging companies with at least some exposure to flexo are trading at ~10–14x forward EBITDA.
  • SSD — PRINERGY: Despite the lack of current profitability, this is a valuable business due to the recurring nature of enterprise software. The 1.0–2.0x revenue multiple range equates to ~6–11x EBITDA assuming steady state margins are in the high teens.
  • SSD — Other: As described above, this is a lumpy, project-based business. Due to the lack of visibility and small scale I have applied a conservative valuation range of 0.5–1.0x revenue.
  • Consumer and Film: I ascribe zero value to this segment as it’s expected to be close to break even this year and is unlikely to generate significant profits going forward.
  • Advanced Materials: In the Downside Case, I capitalize cash burn at 2.0x. This assumes Kodak receives no payoff from the R&D investment and it takes a couple of years to wind down the losses. I estimate zero value in the Investment Case, which assumes the company is able to generate some small wins to offset the investment. Any big commercial success out of AM3D provides investors with upside option value.
  • Eastman Business Park: The 1,200 acre campus obviously has significant value. However, it’s uncertain when Kodak will be able to monetize the land so I have chosen to value the division similar to a REIT based only on current earnings. The 10–15x EBITDA multiple translates to a cap rate in the 7–10% range.
  • Cash: At the conservative end of management’s 2017 forecast, cash and equivalents will be ~$444 million at year end. About half of the balance is held overseas but Kodak should be able to repatriate tax-free through the use of their large NOL balance.
  • Future Restructuring Expenses: Kodak has been in a continuous state of restructuring for two decades. Although the heavy lifting is largely complete, the company should still incur additional charges as their footprint continues to decline due to divestitures and/or further business deterioration. In both cases, I use a very rough placeholder of $50 million.
  • Debt: As described above, there is $411 million of debt and capital leases outstanding.
  • Convertible Preferred: In the Downside Case, the $200 million liquidation preference is treated as a liability. In the Investment Case, the preferred converts to ~11.5 million common shares and is accounted for in the fully diluted share count.
  • Pension & OPEB: The Downside Case assumes a liability of $220 million. As shown in Exhibit E, this equates to a modest rise in the discount rate of 50 basis points. Additionally, the company made contributions of $17 million in 2016 and expects to contribute $18 million in 2017. The $220 million liability implies a 12–13x capitalization multiple on the recent annual cash contributions. In the Investment Case, I have assumed zero liability which equates to a ~1% increase in the discount rate. It’s also possible that this liability turns into an asset down the road if discount rates rise more than 1%.
  • Net Operating Losses: I am assuming a value of ~$50 million in the Downside Case and ~$140 million in the Investment Case. This is a very illustrative range and value will ultimately depend on Kodak’s ability to generate pretax profits. As shown in Exhibit G, the estimates assume Kodak generates $25 million and $75 million, respectively, for the next 15 years. I assume a blended tax rate of 25% to account for lower tax rates in foreign jurisdictions and I discount the savings back at a 10% rate.
  • Fully diluted shares: Kodak currently has ~43 million shares outstanding inclusive of unvested restricted shares. Kodak also has options, warrants, and convertible preferred stock outstanding although all are currently way out of the money. Here is a summary of the securities: 2.6 million options with a weighted average exercise price around $17, 1.8 million warrants with a $14.93 exercise price that expire in September 2018, 1.8 million warrants with a $16.12 exercise price that expire in September 2018, and preferred stock that is convertible into ~11.5 million shares at a price of $17.40. The Investment Case accounts for all these dilutive securities using the treasury stock method.
  • The stabilization in PSD financials due to reduced pricing pressure and/or input cost headwinds.
  • The sale of PSD would be even more significant and could potentially generate proceeds in excess of Kodak’s entire market cap.
  • Recurring revenue growth and cash flow generation from PROSPER, led by increased adoption of imprinting components.
  • Significant interest or pre-orders for ULTRASTREAM as the 2019 go-to-market launch approaches.
  • Commercial success from any of the AM3D ventures.
  • Economic slowdown: Kodak operates businesses that are cyclical by nature. A global slowdown may reduce EBITDA to levels where debt covenants are breached.
  • Management execution: As certain segments continue to decline or are divested, Kodak will be forced to further reduce their employee base and footprint. Management’s speed and ability to execute these restructuring initiatives will be crucial. Otherwise, the large fixed cost base has the potential to swallow the majority of value.
  • Inability to monetize assets: This is a complex thesis and may require the divestiture of certain segments for the market to recognize fair value.
  • Failure of R&D investment: Kodak is investing heavily in PROSPER, ULTRASTREAM, and various AM3D initiatives. At this point, it’s too early to tell if the investments will ultimately payoff.
Source: Company filings
Source: Yahoo Finance
Source: http://www.macrotrends.net/2539/aluminum-prices-historical-chart-data
Source: October 2015 Analyst and Investor Day Presentation
Source: Company filings
Source: CapitalIQ
Source: Form 4 SEC filings

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