Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

Thesis: The imminent sale of PROSPER and pay down of the free cash flow draining, high cost debt should
result in the stock finally starting to get credit for its significant asset optionality and result in a significant
upside, at least 125% plus from today's stock price. I would also recommend investing in the KODK-WT
$14.93 strike price/9.18 expiration and KODK-WTA $16.12/9.18 expiration warrants but they trade very
sporadically and are incredibly volatile. Our position is in the KODK-WT warrants.
Post-Bankruptcy Kodak has been a disappointment to those hoping to make a quick buck over the last few
years given the glacial pace of movements on its strategy. Nevertheless, the few announcements and other
factors, which I'll include below, are finally making me believe that management is serious about asset
monetization and the company's price should re-rate to its Sum Of The Parts value, which is anywhere from
~$27.00 to $50.00+ per share.
This is a controversial name and a wide range of opinions exist, from short thesis to strong bull theses. I will
address certain bear scenarios but at the end of the day I am a strong bull on this name and this thesis
should be taken as such.
Background: Kodak has emerged from bankruptcy over 2 years ago, with a number of segments tied to
commercial printing, as well as a collection of other cash producing assets. It is still controlled by Blackstone
and Blue Mountain as owners of 40% of stock outstanding and board positions (controlling all the
committees), most of the debt and the warrants. The top 5 shareholders comprise 68.3% of stock
outstanding. While the first 2 years have been focused on stabilizing the core business and massive cost
cuts, successfully, the disappointment in the stock price is finally making ownership and management get
serious about selling parts of the company. The CEO, Jeff Clark, is a typical private equity CEO, placed into
KODK by Blackstone, and as a way of background for those old enough to remember, he was the CFO at
Compaq when it was sold to HP, so he is no stranger to printing industry deals. He also sold Travelport,
where he was the CEO, from Cendant to Blackstone for $4.3 billion. He is also formerly the COO of CA
Technologies.
There are two ways to look at Kodak. One is a pretty widely known thesis, that the commercial printing
business is in decline in some of its segments and post-cost cutting anniversaries the EBITDA/Cash Flow is
unlikely to grow significantly (though will be at $200mm/$100mm+). There is a pretty terribly written short
thesis on this on Seeking Alpha. It's a surface analysis that doesn't consider the real Sum Of The Parts value
of the company and posts misleading numbers. Nevertheless, that is what the current stock price implies,
the bear case, and I believe the permanent value of the firm at around $500 - $600 million, and other than
price volatility, is unlikely to be impaired beyond today's price given at least the future cash flow generation
ability of the company. In my opinion todays price of $12.00 represents a significant margin of safety.
The other way to look at this investment, which is where I am choosing to concentrate this write up on, is
the Sum Of The Parts valuation analysis based on the PROSPER sale announcement and the implied
transactions that will happen in the next few months to a year. After my reasons on why I think it will
happen, I will go through each segment to highlight its value.
Included for context: Current price $12.00, Current Market Cap is $495mm; Current Cash, including
restricted, $590mm; US Cash $302mm, Current Debt $680mm w ~$63mm annual cost/9%; EV
$585mm. Management guidance for operational EBITDA for 2016 is $130 to $150 million (4.0x to 4.5x 2016
EV/EBITDA), and for 2017 its $180 to $210 million (2.8x to 3.3x EV/EBITDA). Additionally, there is a $450+
million PBO liability, but for reasons I will discuss later it should not be considered a liability.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

So why do I think that management is finally going to get serious about selling the company off by pieces?
- At the analyst day in October, the CEO, Jeff Clark, specifically said that the reason they've chosen to
present and detail the segments is to highlight the value of each segment. There were 2 private equity
groups present at the meeting.
- Post analyst day, the stock dropped over 50% on fears the company would not be able to maintain its
EBITDA covenants, an overblown fear given Blackstone owns some of the debt and the company had over
$500 million cash on the balance sheet. Blackstone bought $5mm more on the dip, and Jeff Clark bought
approximately $250,000 more shares. Ive always been a fan of insider buying on the dip.

50% of 2015 management's bonus was based on $80mm to $160mm asset monetization targets (not met)
so presumably a big part of compensation will continue from non-operating asset monetization.
Additionally, which matters, for the next point, Jeff Clarkes $1mm option grant was priced on 3.13.2016
i.e. at low $10.00 prices. Now that its priced
- The obvious announcement on 3.15.16 that they will be selling the PROSPER unit to a strategic buyer
(more discussion on potential price below). I expect this, or at least an announcement, to happen before
May 31st. Why? Because the industry's biggest trade show, Drupa (http://www.drupa.com/), in Germany,
that happens only once every 3 years is happening then. Since the sale is strategic in nature. presumably
the new owner would want to showcase this technology themselves with their own sales/business
development teams. Management has indicated that indeed, they would like to at least make an
announcement before the show (though we shouldnt hold out hope).
- Management has communicated to shareholders that they will use the proceeds to pay down the debt.
With $302mm in US cash and at least $200mm in the PROSPER sales price management should be able to
pay off parts of 1st and 2nd lien debts at save themselves at least $40mm to $60mm in free cash flow per
year. (Context: Thats at least $1 per share on a run rate basis for an $12 stock).
- An anecdotal point: including this JPG of a Glassdoor employee review where he explicitly says the
company strategy is to breakup Kodak. This is obviously, nothing too substantial, but just bolsters the
argument that at least some of the parts of the company will be sold.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

So now that, hopefully, I've convinced myself and you, that some value creating events are imminent I'd
like to go through the Sum Of The Parts Valuation and see what this business is really worth. I believe at
minimum, this stock should be worth ~$27.00 per share, with upsides to $50.00+ in better cases.

For the sake of avoiding repetition in describing each segments operational and strategic considerations I
am including the October 2015 Analyst Day presentation that has a SWOT Analysis for each segment. Its
worth a read. I am also splitting up the Sum Of The Parts into Operational where most parts have ongoing
positive value; Capital Structure; and Non-Operational, which are really call options on various assets. I am
choosing to keep the corporate expense allocations to each segment to be conservative in valuations.
Finally, I think its important to remember that these segments would come completely unlevered making
them incredibly valuable to any PE or high credit rated strategic buyers.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

Operational
1. Print System Division (PSD) - Value: $10.00 to $16.00 per share
2014 Revenues: $1.26 billion; 2015 Revenues: $1.10 billion ($107mm FX headwind); 2016 Revenue $1.10
billion
2014 EBITDA: $93 million 2015 EBITDA: $98 million; 2016 EBITDA $120-$130 million (post corporate
expense allocation)
-

Why I like it: 92% of revenue is annuity based; Strong leadership; good opportunities in Sonora
Plates; Aluminum price collapse should improve margins
Why I dont like it: Commodity product with pricing erosion; legacy installed base; Chinese
competition.

This is really the core of Kodak, which is why I put it first, though unfortunately its stuck in a slow
growing/flat/potentially declining space. Kodak undertook massive cost cuts over 2 years which have finally
paid off. 4Q2015 EBITDA of $37 million on $292 million in revenues, at 12.6% EBITDA margins is arguably a
pretty decent number and a slow growing $120-$130mm 2016 EBITDA (including corporate expenses)
should probably be worth in line with its peers of 5x to 6x EV/EBITDA. Realistically, if the industry is in
secular decline, it would make sense to consolidate and for someone to buy this division from Kodak. For
the company as a whole, Kodak has $45 million in CapEx, even assigning $30mm of that to PSD would still
get you a nice recurring $80 to $100mm FCF to the buyer. Given that the company has almost $2 billion in
NOLs it would make this an attractive consolidation asset. I am not expecting this sale per se, but I think it
has nice dynamics. Consider that this segment also has $50mm of Corporate SG&A assigned to it in 2015
($44 million 4Q15 run rate), which likely would not come with any sale of this division, and youre getting
EBITDA closer to $170mm and a recurring FCF at $140mm. This division should be worth $500mm to
$750mm or $10.00 to $16.00 per share.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

2a. Enterprise Inkjet Printing Systems (EISD- PROSPER) Value $3.00 - $6.25
2015 Revenues: $81 million; 2016 Revenue $103.5 million; 2017 Revenue $131 million; 2018 Revenue:
$165 million
2015 EBITDA: -$31 million; 2016 EBITDA -$10 million; 2017 EBITDA $11 million; 2018 EBITDA $22 million
This is really the key to the immediate thesis since this asset is going to be monetized within the next few
months so I went out and took all the public tidbits of information based on transcripts, earnings reports
and analyst days, conversations with management and built out the model below. The assumptions are
confirmed by management to be pretty close in the ball park so we can discuss them. I am including the
snapshot but the excel model is included in this write up as well.

The PROSPER segment consists of 3 revenue drivers:

- Sales of Equipment: This one is tricky because each machine costs between $2mm-$3mm but a lot of it
is not recognized as revenue since they are sold on a leasing/commercial arrangements basis so this one
is hard to model. However important to note that despite selling 16 pieces of equipment in 2016, only
approximately $14mm of revenues were recognized. This is important for one very important reason, in
that there is at least $60mm of working capital to be sold with this business, but possibly more, as
commercial inventory/AR. This revenue segment earns approximately -10% Gross Margins which are
expected to get closer to 0% in the next year. This is ok, as the business model is the famous razorblade
model, sell equipment at cost and earn most of the money from replacement
equipment/services/consumables. Last year this business sold 16, but booked 22 machines (6 got
pushed out in 1Q16 on timing) but a run rate of 22-25 which is expected to grow significantly is a good
assumption, per management
- Sales of S-Print Heads: There are about 200 of these sold a year, which last year grew approximately 15%.
They fetch between $150,000 to $200,000 each (management suggested to be on the lower side) and
should expect to grow. They also earn 30% gross margins expected to stay roughly the same. Last year it
was about a $30mm revenue run rate number earning about $9mm in Contribution Margin and this
should grow slightly.
- Consumables/Service: This is the key to the whole venture obviously. Grow the installed base so then you
can make $1mm+ per machine a year at 30-40% Gross Margins selling inks and service. Last year this
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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

business had $37mm in revenue (this can be confirmed in the proxy as well), with consumables earning
40% gross margins and service earning 10-30% gross margins. The services gross margins is expected to
go up significantly as the base gets bigger and ages. Ive chosen to model this out into two different
installed bases: old, black and white machines, which earn about $800,000 a year in annuity revenue and
the new installed PROSPERs which earn about $1mm which is expected to grow. This segments gross
margin contribution is expected to grow from $11mm in 2015 to over $35mm in 2018.
OPEX: Putting it all together youre getting a business generating ~$20mm in gross margin in 2015 which is
expected to grow to $30mm in 2016 and $50mm in 2018. To support this business Kodak spent $50mm in
OPEX in 2015. $20mm of this was in R&D, expected to decline, and $30mm was in SG&A. This number is
expected to decline to $40mm in 2016 and even lower in 2017. These are the bridges to profitability by
2017-2018 where this company WITHIN KODAK could earn $10mm-$20mm in very high recurring
EBITDA/cash flow in next 24 months.
HOWEVER, since this is a segment that is being sold to a strategic buyer, I asked management how much
SG&A can a buyer take out and the answer was all of it meaning approximately $25mm to $30mm worth.
This means from a buyers perspective this is already a $15mm EBITDA run rate company which could go
to $35mm in EBITDA by 2018. This is without assuming any increase from potential revenues by having a
much larger sales force and financing available to clients. By including an increase in higher sales to 48
machines from 32 in 2018, I get a $40mm EBITDA in 2018, growing at 80 to 100% growth rates.

So then you have to ask yourself, how much does a business that is generating highly recurring profitable
revenue, expected to grow its EBITDA 200% for the strategic buyer and is widely considered to be excellent
technology, worth? I dont know. But if 2017 EBITDA is $25mm to the buyer at 6x, this gets you $150mm.
If you add the working capital, youre getting north of $200mm. I personally think this is a very low number
and it could be as high as $300mm but for this purposes of this analysis I am comfortable using $200mm
or about $4.25 per share. Other things to consider is that pre bankruptcy Kodak has invested $1.3 to $2.0
billion dollars (estimates vary) into developing this technology and another $75mm in the last two years.
2b. Enterprise Inkjet Printing Systems (EISD- Versamark) Value $0.30 - $0.50
2014 Revenues: $120 million: 2015 Revenues: $81 million; 2016 Revenue $75 million
2014 EBITDA: $15million; 2015 EBITDA $5 million; 2016 EBITDA $5 million (post corporate SG&A expense
allocation of $10mm, 4Q15 runrate is $8mm)
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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

I dont know what to really assign this business which is a legacy pre-PROSPER product. After taking out
PROSPER from EISD revenues and EBITDAs youre left with declining revenues but still generating 15-20%
EBITDA margins, pre corp expenses. If this business stays stable, earning $5mm to $7mm EBITDA for the
firm ($15mm to $18mm pre-corp) then a 3x to 5x multiple on a post corp expense EBITDAs gets you to
~$15mm to $25mm or $0.30 to $0.50 per share. Its a legacy system so it probably doesnt have much of a
sustainable life but a long tail with high margins and Kodak is attached to it and sees value. I would imagine
given that its going to be able to generate high FCF for a few years its probably worth at least $20mm or
$0.40 per share.
3a. Micro 3D Printing and Packaging Division (MPPD- FLEXCEL) Value $3.00 - $6.00
2014 Revenues: $130 million; 2015 Revenues: $128 million ($14mm FX headwind); 2016 Revenue $145
million
2014 EBITDA: $15 million; 2015 EBITDA $19 million ($4mm FX Headwind; ex $3mm one time gain); 2016
EBITDA $25 million (post corporate SG&A expense allocation of $7mm-$8mm)
This is another division that hosts two various segments, one, FLEXCEL NX, of which is incredibly profitable
and growing fast, and the other, Micro 3D, is considered emerging technology and is a drain on
profitability and cash flow. However, the FLEXCEL packaging division is excellent and behind PROSPER is
probably the next most valuable jewel of the empire. I really like it because much like PROSPER it has a
high installed base of over 450 machines and has close to $80 million of recurring annuity revenue (October
2015 Analyst day).
The Packaging business consists of flexographic printing equipment and related consumables and services,
which enable graphic customization of a wide variety of packaging materials. The flagship FLEXCEL NX
system provides imaging devices to deliver high productivity and consistency, as well as a full tonal range
for flexographic printing. The new FLEXCEL Direct System is a next generation platform that significantly
reduces the steps needed to produce flexographic plates. 2015 10k
The business generates high teen EBITDA margins, at the top of the industry, grew revenues 10% organically
in 2015, and is on track to generate close to $25mm, post corporate expense, EBITDA in 2016. Much like
with PROSPER this segment has opportunity to expand margins as the installed base continues to grow.
The packaging industry trades between 5.6x to 11.6x times on a forward basis with a pretty consistent 7x
to 9x range. Using 8x EBITDA multiples this business should be worth over $200 million or $5.00 per share.
Using a low of 5.0x we get at least a value of $125mm/$2.60 per share and at 10x we can get to
$250mm/$5.20.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

3b. Micro 3D Printing and Packaging Division (MPPD- Micro 3D) Value ($-0.50) - $0.00
This is a contentious issue because a few people, myself included, believe that the company has had enough
time to play around developing this technology which has yet to generate revenue. It lost $16 million in
2014, $14 million in 2015 and is expected to lose $25 million in 2016. In March 2016 Kodak announced
that they will exit the silver mesh technology and concentrate on copper mesh. However, they didnt not
quantify the impact of this on financials. In 2017 they expected this business and PROSPER to generate
$25mm in EBITDA with PROSPER contributing $10mm -$15mm of that, meaning that they expected Micro
3D to earn $10mm-$15mm in EBITDA. That is a tall order and frankly without having sold a single one yet
clearly nobody in the market believes this will happen. In the base case valuation, the conservative thing
to do is to take the negative $20mm-$25mm this year, and hope they shut it down by year end. As such I
am assigning a negative $25mm in the worst and base case and a $0.00 value in the best case.
4. Software and Solutions (SSD) Value $3.00 to $6.50
2014 Revenues: $108 million; 2015 Revenues: $112 million ($9mm FX headwind); 2016 Revenue $130
million
2014 EBITDA: $3 million; 2015 EBITDA $9 million ($3mm FX Headwind); 2016 EBITDA $15 million (post
corporate SG&A expense allocation of $7-$8mm, 4Q15 run rate of $4-5mm).
The Software and Solutions segment is comprised of Kodak Technology Solutions, which includes
enterprise services and solutions, and Unified Workflow Solutions. Unified Workflow Solutions is an
established product line whereas Kodak Technology Solutions includes growing product lines that leverage
existing Kodak technologies and intellectual property in new applications. These business initiatives
generally do not require substantial additional investment and it is expected that they will grow in
contribution to earnings. - 2015 10k
This business is levered to the PSD segment and its valuation really depends on how you view the whole
commercial printing industry and the computer to plates technology. It is unlikely to be a high double digit
grower, however it has had nice 10-15% revenue growth, and high teen EBITDA/cash flow margins. It
probably shouldnt be worth the 20x+ EBITDA of its software peers but a teens EBITDA multiple, 15x in my
base case, gets you to $200mm/$4.25 per share valuation. Alternatively, software companies tend to trade
on revenue multiples and even a modest 2.0x EV/Revenue multiple gets you to $260mm or $5.25 per share.
Since Jeff use to be the COO of CA Technologies I am more comfortable in having this division in that he
presumably understands the profitability drivers and value of the segment.
One more comment on this. It may be nothing, but in the latest proxy document they broke out two
divisions (on the last page): PROSPER, and SSD. One of them is being sold. I just found it interesting.
5. Consumer & Film Division (CFD) Value $0.30 to $1.00
2014 Revenues: $352 million; 2015 Revenues: $259 million ($6mm FX headwind, ex one-time $6mm
payment); 2016 Revenue $185 million
2014 EBITDA: $66 million; 2015 EBITDA $52 million ($5mm FX Headwind); 2016 EBITDA $30 million (post
corporate SG&A expense allocation of $11-$12mm)
What can you say about this business that already hasnt been said by every newspaper article that writes
about post mortem Kodak? Its clearly the bastard stepchild thats left over from old Kodak. It has Motion
Picture 8mm film and treatment chemicals, consumer printers and inks, and licenses for consumer products
like batteries, cameras and recordable media. All dying a slow death declining its revenue 30% a year. I put
together a basic spreadsheet of what its PV could look like at the current run rate and we can see it doesnt
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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

survive past 2018/2019. Its cash flows have to be worth something though so a $30mm to $50mm value
is a good estimate. A few other thoughts here: I think realistically it would be worth something to Disney
that seems to be obsessed with 8mm film (see JJ Abrams) and during bankruptcy they were offered a
$100mm for their brand name. The brand name is listed on the books at $46mm gross carrying value and
has not been considered impaired. Now some may scoff at the notion that the brand name is worth
anything in the US, but it still has global recognition and value (see Nokia in China/Asia) so Id imagine they
could probably get $20mm-$30mm for it still in a few years. For now, I am sticking with a base case
$40mm/$0.85 per share value.

6. IP Solutions (IPSD) - Value (-$2.10)

This business is split up into two parts. Occasional one-time licensing/patent monetization revenues, such
as $70mm in 2014, and an ongoing R&D expenditure of $25mm that, per 10k, supports at least some of
the core business. I am choosing to be conservative and in the core base case I am counting this division
as a core operational expense at 4X as a negative $100mm or ($2.10) per share. Ill discuss its value as
positive optionality later on in the write up.
**I am not including the Eastman Business Park in the Operational Division to be conservative. I believe
it has significant value which I will justify later but to show that this thesis works without it I will include
it in the options section below. Right now its an EBITDA wash, it generates $1mm-$2mm of EBITDA on
a GAAP basis so its a rounding error in the Operational EBITDA analysis**

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

So to recap the core operational thesis:

Approximately $150mm in EBITDA in 2016 ex any FX adjustments ($144mm post adjustments), in

line with management guidance.
$180mm+ in 2017 (management expects $180mm to $210mm in 2017. I would say my major
differences are no inclusion of EBP at $1mm to $3mm; no inclusion of anything from Micro 3D; I
am being a little too conservative on PSD given the operational cost cuts management took out in
2014-2015 (4Q15 run rate alone was $148mm); maybe too aggressive on CFD decline.

Together I get an enterprise value from $830mm/$17.40 per share to $1585mm/$33.00 per share with the
base case value of $1155mm or $24.00 per share (ignoring debt for now).
The next leg of the thesis is discussion of capital structure since its the next imminent value creator for the
equity holders and its important to discuss it in detail.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

Capital Structure/Cash Flows/PBO/NOLs

1. Debt - $680mm/$63mm annual cash expense

2. Cash: $547mm current/$43mm restricted: $590mm total/$302mm in the US, ~$70mm in China
On a net, surface, basis Kodak would appear appropriately levered. It has only $90mm in Net Debt and
$150mm in expected EBITDA so a $90mm/$150mm or 0.6X Net Debt/EBITDA is a pretty conservative
number. However, the debt is costing Kodak $63mm in cash flow per year. Given how Kodak pays very
little taxes due to the NOLs it makes little sense for it to have leverage. I believe the next big value creating
move by management in the next 6 months is the prepayment of the 1st Lien and some of the 2nd Lien loans
with the available cash after sale of PROSPER.
These are the key terms of the agreement:

In my base case scenario, the company would use the $200mm of its PROSPER proceeds and US Cash in 2nd
half of 2016 to pay down the $400mm of 1st Lien debt immediately saving itself $30mm in interest expense
a year, $15mm in 2nd half of 2016. Note that it has very little choice in not prepaying it given the agreements
and given how its in between its 2nd and 3rd year this is the time to do this (9.2016 is the anniversary date).
Where does that leave the US Cash position? It has $302mm in core US cash, $43mm held in escrow for
the bond holders, which presumably would be released once the debt is paid down/used to pay down the
debt, and additional $200mm from PROSPER sale ($300mm would be great though). After the $400mm 1st
Lien pay down it would be left with $145mm of available cash for working capital and 2 nd Lien pay down. I
assume $45mm for working capital cash, and at $273mm in prepayment value of 2 nd Lien ($270mm plus
1%). In the conservative base case a $100mm of excess US cash would be used to pay down the 2nd Lien
saving an additional $11mm in annual interest expenses, $5mm in 2016. However, Kodak could utilize its
2.5% credit line to pay down the other $173mm for a net savings of an additional $15mm per year. That
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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

would be a smart move but one I am not expecting to happen. Alternatively, it could use its NOLs and
repatriate some of the foreign cash.
For now, my 2016 base case assumes the following:
- $200mm PROSPER sale value
- Immediate $400mm 1st Lien pay down
- Immediate $100mm 2nd Lien pay down
- Interest expense savings of $41mm per year or ~$1.00 per share
- $55mm in Free Cash Flow in 2016 (see below)
- $180mm in gross debt
- $345mm in gross cash/$165mm in net cash or ~$4.00 per share
3. Free Cash Flow

So at the end of 2016 if the current price doesnt change, you would have a $485mm Market Cap firm, with
$165 in net cash, or $320mm in Enterprise Value (excluding any NOLs discussed below) generating $100mm
to $120mm ($2.00 to $2.50 per share) in Free Cash Flow per year, and likely growing it at 5% to 10% per
year. I dont know what thats worth, but its worth more than $12.00.
For comparison I am including managements guidance on FCF from October 2015 ($10mm to $30mm in
2016 without debt savings); over $100mm in 2017 without debt savings but potential upside from PROSPER
and Micro 3D. I am lowering the working capital savings, especially if those come from the PROSPER sale
and raising the tax cash payments to be conservative.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

4. Kodak Pension Why its not a liability

In its notes 10k Kodak has an $456mm Pension and Other Post Retirement Liabilities credit. This credit
consists of the following as of 12/31/15:
A US/Non US PBO: $4,899m
A US/Non US Fair Value of Plan Assets: $4,521
Net Liability: $378mm (or 7.7% of total PBO)
Other Post Retirement Liabilities: $78mm
Total Pension Liabilities: $456mm

Why do I think that this liability is not realistic? Because the interest rate the company uses to discount its
pension liabilities is extremely low. For 2015, the weighted average discount rate for the company as a
whole was 3.66% (see inputs below).

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

However, most investment grade industrials have a 4.25% to 4.50% discount rate (HP is 4.4%; Xerox is
4.3%; Lexmark is 4.0%). Since Kodak is hardly an investment grade industrial with a 9%+ cost of debt it
should not be using a 3.66% discount rate.
Even in valuing its own business units Kodak uses 20% to 38% WACC:

So what would a more realistic, and frankly conservative, 1.0% adjustment look like using the companys
own assumptions? The US liability would change to $364mm ($91mm X 4) and the foreign liability would
change by $84mm ($21mm X 4) turning this into a $448mm reversal and becoming an asset. Presumably
this would impact the $78mm other pension benefits account as well making this a wash on the balance
sheet. If youre really a bull on this, then you can assume that as a consolidation asset PSD would assume
the discount rate of its acquirer i.e. becoming an asset and would make the division even more valuable.

Even if Kodak does not change its discount rate soon, the projected increase in interest rates in the next
12-18 months should take care of this paper liability on its own.

The aforementioned reasons, and the fact that this liability requires very little parent cash contributions
($4mm to $5mm) for the basis of valuation, this should not be considered a liability in the Sum Of The Parts
analysis.
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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

5. NOLs Value $2.50 to $5.00

Kodak has $1.6 billion dollars in NOLs and $394mm in tax credits. At a 30% tax rate (conservative for foreign
tax rates and no credit given to the tax credits) this gets you a value of $470mm. There are legitimate uses
for this asset as the company is expected to be highly profitable in the near future, and if it were to dispose
of its assets, it would surely recognize some gains which would be shielded by the NOLs. In my minimal
case I assign $0.00 to the NOL value, in the base case I discount the $470mm by 75% to $115mm or $2.50
per share. In the best case, the NOLs are discounted by 50% to $5.00. Of course at the entire $470mm
valuation this would amount to $10.00 per share or essentially the entire worth of the firm.

6. Stock Outstanding/Warrants/Stock Options

This is pretty simple math. Kodak has
-

42.077 million shares of stock outstanding

It has 775,000 of RSUs
It has 1,520,000 of Stock Options with a weighted average exercise price of $18.89
The company has issued 4.2mm of warrants at exercise prices of $14.93 and $16.12, however, in
the latest 10-K issued the balance of warrants outstanding was at 3.6mm
Total Diluted Shares: 47.97 million (round up to 48 million)

Of course if youre going to count all the shares issued in a dilution you have to count the cash received in
the issuance. Since my base case valuation price is $27.00, above the strike prices of the options and
warrants, the implied cash inflow is:
-

Options: 1.52 million at $18.89 equals $28.7mm

Warrants: 3.6 million at an average of $15.52 equals $55.9mm
Total Cash Inflow: $84.6mm

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

To recap: post operational and capital structure analyses the equity value(s) of the firm are from $835mm
to $1.855 billion without giving credit to any of the potential non-core asset options left to discuss in the
next section. On a per share basis this equals $17.40 for the minimal case, $27.00 for the base case and
$38.60 for the upside case.

Non-Core Assets Value $0.00 to $14.50

1. Eastman Business Park EBP Option Value $0.00 to $4.50
This is surprisingly a contentious issue. So much so that for the purposes of this analysis I decided to take
this segment away from core Operational and put it under Non-Core with a $0.00 in the base case. Out of
all the options I believe this one is the likeliest one to be worth something. If you are 50+ years old and
live in Rochester or a short the stock the answer that this is worthless is easy. If you have patience and are
a long term investor this 16 million square feet business park has pretty good value. I tend to fall in with
the latter and look at this business park in 2 ways, transaction comps and what it would be worth as an
industrial REIT. Kodak walked away from a deal a few years ago where the buyer wanted Kodak to sign
incredibly onerous long term key tenant terms with little upside and they decided to grow the segment
organically and sell it in the near future which is going surprisingly well given the property is at 80%
occupancy. The park does have some environmental liabilities but also has a $99mm trust to settle them.
a. Method 1: Industrial Comps In Rochester, NY - $115mm to $620mm
This is not the best method since Kodak Business Park is 1,200 acres and 16 million square feet and any
commercial transaction comps Ive seen has been under 1 million feet (only one is above) and under
105 acres. This business park dwarves any of these transactions. Finally, I only have these transactions
through mid-2015 and maybe missing a few.
Having said that, I do have 22 comps going back 2011:
o

For those transactions at over 100,000 sq feet (7), the median price per square foot was $30.50
with the minimum at $12.00; the median price per acre was $510,000 with the minimum at
$71,000. I am obviously not considering higher prices. The biggest price tag of $53mm was for a
105 acre/1.8mm sqft property (1600 Lexington Ave, Rochester, NY) also at $31.00 per
sft/$510,000. At these ranges EBD should be worth between $85mm to $192mm on the low side
and $500mm to $600mm on the median/high side.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

b. Method 2: Industrial REIT Comps

I believe what most of the market is missing is that Kodak, while trading at ~3.5x EBITDA, is a 55%
tenant of this facility. However, most industrial REITs trade at 14x to 22x EV/EBITDA multiples. As such
it would make sense to calculate what the value to a potential industrial REIT would be on an EBITDA
basis.
EBP is currently at 25% non-Kodak occupancy earning $13mm in revenue and $3mm pre-$1mm
corporate expense EBITDA. Kodak is the other 55% which management indicated would be at the same
rental rate as the other 25% meaning it would be an additional $28.6mm revenue. Per management,
it wouldnt all fall to the bottom line since there are various expenses that the owner would have to
provide expenses for Kodak for that rent such as utilities/maintenance, etc. And of course this would
reduce Kodaks EBITDA by $28.6mm. Since Kodak trades at 3.5x EV/EBITDA this would in theory reduce
Kodaks value by ~$100mm.

However, the EBITDA for the 80% occupancy standalone EBP would be ~$11mm and at 19X EBITDA
(see industrial REIT comps below) this would create a $210mm value, or $110mm net value to Kodak
shareholders. Of course Kodak management is working hard on filling the other 20% which would be
more profitable. At 19x 90% occupancy EBITDA of $13.2mm the net value to Kodak would be
approximately $150mm on a gross $250mm. At 100%, the value would be $220mm, on a gross
$320mm.
These are not heroic assumptions and I am comfortable using a $150mm valuation or $3.10 per share on
the option of this transaction. On FFO cap rates of 4.0% to 5.0% this valuation would get you even higher
$300mm+ numbers, but for conservative purposes I am ok not using them.

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Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

2. IP Solutions (IPSD) Value $0.00 to $4.25

This is the patent monetization portion of the business. I dont know what this is worth. But I know its not
worth $0.00. In 2014 this segment generated a $70mm cash windfall. This business continues to file
patents on a regular basis in 3D printing, materials to manage light (ultraviolet, infrared, visible), materials
for healthcare applications (antimicrobial films and materials), printed electronics (self-cleaning solar
panels) etc. I think it would be nave to think that these patents are worthless. This is a good spot to remind
the reader that management had goals of $80mm to $160mm for 50% of their 2015 bonus on monetization
of non-core assets.
My best guess, and only a guess, is that on average this business can generate $20mm in FCF per year on a
very lumpy basis. A 10x FCF multiple (10% FCF yield) should get you a value of at least $200mm/$4.25 per
share.

3. Carestream Earn out Value $0.00 to $4.25

While it would be a pleasant surprise if this happened I generally do not believe anymore that this is a
probable event. However, it is still a possible event. Kodak sold its healthcare imaging unit to Onex, a PE
firm, in 2007. It retained a $200mm payout option IF Onex earned a 25% IRR on this investment. I believe
the shorts are actually right on this one, in that this is an unlikely event. Carestream is close to 5x
Debt/EBITDA which would make a liquidity event or a dividend recapitalization, necessary events for a 25%
IRR, hard to achieve. Nevertheless, as long as the option remains, it should be worth something.
4. Brazilian Industrial Park - $0.00 to $2.00
During the October 2015 Analyst day Kodak announced that it has a Brazilian Business Park that its looking
to sell. In its 10k, management said the Brazilian government has $176mm in claims against their
operations there, for which $11mm was reserved. Per conversation with management they still think the
park is worth low to high double digits which I took to mean $10mm to $90mm however given the legal
situation and the deep recession I think this is the least likely option to be monetized. In the downside case
I am even assigning a negative $20mm value to this segment as there maybe potential for payments. In the
upside case, I assign a $30mm value.
18 | P a g e

Peter Rabover, CFA

Artko Capital LP

peter@artkocapital.com

Final Valuation Recap

This business has a range of very valuable assets which in a conservative base case are worth $27.00. I
believe that the realization of value from EBP and IPSD at over $7.00, are probable and should be given
some consideration in any base case valuation, even if at a fraction of this number. In the downside case,
assigning low single digit EV/EBITDA multiples; selling PROSPER for approximately 1.0x revenues; and
assigning a liability to the Brazilian business park, while giving zero credit for any other options such as NOLs
or EBP, results in a downside case of $17.00 per share, which is still 40% above todays price. In other words,
youre buying the Print Systems Division at 6x todays $80mm FCF and getting everything else for free.
Finally, in the upside case I believe this company has a good chance to re-rate to a $50.00+ stock as the
market realizes that this management is serious about creating value and begins to assign market multiples
to each division and non-core option.

Risks
For the sake of brevity this write up focused on the financial aspects and the value of each segment,
not its strengths and weaknesses on a strategic basis. While I dont believe that this is likely, the PSD
segment could face significant pricing erosion which the Sonora growth would be unable to offset and
this segment could decline faster than anticipated. The next few quarters, and the May 5 th, 2016
earnings call, will be important posts to assess how this business is doing. The CFD segment may
completely fall apart and its revenue declines could top the already heavy $20mm in EBITDA declines I
am projecting.
Management might continue plow cash into the Micro 3D segment and taking losses well into 2018.
The market would hate it and keep the stock price low.
The obvious thesis in this case, sale of PROSPER, maybe be a fluke and Kodak might get less than a
$100mm for it. That would likely keep the stock price low.
Kodak is a super volatile, high beta stock, with low liquidity given that a majority of its shares are owned
by the top 5 shareholders. It dropped down to $8.00 in January/February 2016, 50% from todays levels
despite its obvious fundamental value. Its not for the weak hearted.
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