Kodak’s Big Snap: From Shuttered Past to a Focused Future (KODK US)

Unlocking Value from Kodak’s Overfunded Pension

I. BACKGROUND

Investors often search for hidden value, and sometimes it’s buried in unconventional places like corporate pensions. Eastman Kodak Company (“Kodak” or the “Company”), known for its legacy business as a photography giant, is undergoing a significant financial transformation that could offer intriguing upside potential. The catalyst? Its overfunded pension plan, which could release substantial cash for growth and debt reduction, altering the Company’s trajectory.

Kodak’s Retirement Income Plan (“KRIP”) is a corporate relic of a bygone era. While many companies struggle with underfunded pensions, Kodak stands out with a well-funded plan that has transitioned into a surplus position. As of 2023, KRIP had $3.49 billion in assets and liabilities fully funded at an AFTAP (Adjusted Funding Target Attainment Percentage) of 153.05%. The plan’s estimated surplus, after accounting for liabilities, is $885-$975 million.[1]

Here’s the critical part: Kodak is actively working to terminate KRIP. This involves selling illiquid private equity assets and converting the surplus into usable cash. The Company recently disclosed a $764.4 million sale of pension assets to the Mastercard Foundation and other investors for $612.3 million, reflecting the discounted recovery rate of these assets. After satisfying obligations and accounting for excise taxes, Kodak expects to unlock around $215mm to $270 million in cash.

II. CAPITAL ALLOCATION

The primary use of the unlocked pension surplus is twofold:

A. Debt Paydown

Under the terms of its Amended and Restated Credit Agreement, Kodak is obligated to use cash proceeds from the termination of KRIP to prepay its term loan. This is a crucial move for a company burdened with legacy liabilities and relatively high interest costs—Kodak could reduce its interest expense by an estimated $40 million annually. Lowering debt strengthens the balance sheet and provides flexibility for reinvestment in core businesses.

B. Growth Investments

Beyond debt reduction, Kodak’s management has signaled an intent to reinvest surplus cash into its growth initiatives. Kodak operates across multiple verticals, including print, chemicals, and advanced materials. Unlocking funds could accelerate R&D, modernize operations, or fund strategic acquisitions, driving top-line growth.

III. CORE BUSINESS

Kodak has evolved from its film-era legacy into a diversified player with three main revenue streams:

A. Print Segment (9M 9/30/24: $550mm revenue, -$9mm EBITDA)

Kodak's Print Business, which includes commercial print solutions and digital printing technologies, operates with low or negative margins due to pricing pressures and high operating costs. To improve profitability, Kodak is focusing on cost optimization, expanding high-margin technologies like the KODAK PROSPER 7000 Turbo Press, targeting growth markets like packaging, and increasing recurring revenue from consumables and services.

B. Advanced Materials & Chemicals Segment (9M 9/30/24: $203mm revenue, $15mm EBITDA)

This segment is the key driver of Kodak's future growth. Kodak is leveraging its expertise in chemistry and coating technology to develop innovative solutions for various industries, including:

• EV/Energy Storage Battery Materials: Kodak is capitalizing on its expertise in coating technology to develop opportunities in the rapidly growing EV/Energy storage battery market. The Company is expanding its pilot coating facility and has partnered with Wildcat Discovery Technologies to research and develop new battery materials.

• Reagent Manufacturing: Kodak is expanding into the manufacturing of Diagnostic Test Reagent solutions, leveraging its existing chemical manufacturing expertise. The Company is constructing a cGMP lab and manufacturing facility at Eastman Business Park, and production is scheduled to begin in 2025.

• Functional Printing: Kodak is focusing on contract manufacturing, development partnerships, and licensing opportunities in high-resolution micro-3D printing solutions, such as printed electronics and printed transparent antennas.

C. Brand Segment (9M 9/30/24: $13mm revenue, $11mm EBITDA)

Kodak's Brand Division drives high-margin revenue by licensing its iconic name across industries. With minimal costs and no direct production, licensing income translates into exceptional EBITDA margins, showcasing the profitability of its capital-light, brand-focused strategy.

Kodak's transition to a chemicals-centric business positions it for margin expansion and diversification away from declining print markets.

IV. VALUATION

Kodak’s valuation combines its pension surplus and core business value. The KRIP surplus is calculated using a 71.9% average recovery rate for remaining illiquid assets, resulting in a $558 mm net surplus after deducting excise taxes and replacement plan costs. $315mm is allocated to debt paydown, leaving $243M for growth.

For the core business, the Print segment is conservatively valued at $0 due to weak profitability, ensuring no overstatement.

V. CATALYSTS

• Successful KRIP Termination: The completion of the pension wind-down will be a major catalyst, providing clarity on the company’s cash position and reducing financial overhang. This event will likely attract investor attention and drive a re-rating of the stock.

• Debt Refinancing: Lower leverage from debt reduction could lead to improved credit ratings, enabling Kodak to refinance the remaining debt at lower interest rates. This would further boost cash flow and enhance profitability.

• Growth in the Chemicals Division: Scaling the specialty chemicals segment will demonstrate a structural shift in Kodak’s revenue mix, justifying a higher valuation multiple. Success in this segment will drive investor confidence and attract growth-oriented investors.

VI. RISKS

• Execution Risk: The successful termination of KRIP and the realization of the projected cash inflow (12-18 month process) depend on regulatory approvals and efficient asset sales. Delays or unfavorable tax rulings could reduce the surplus available for debt reduction and reinvestment.

• Cyclical Exposure: Kodak operates in cyclical industries, making it vulnerable to economic downturns. Even with a strengthened balance sheet, a decline in economic activity could impact revenues and margin expansion.

• Valuation Overhang: The market might continue to view Kodak through the lens of its legacy print business, limiting multiple expansion. This risk is heightened if the chemicals division fails to scale as anticipated.

• Operational Challenges: Kodak’s ability to deploy capital efficiently in growth initiatives is critical. Missteps could lead to wasted opportunities and limit the company’s growth potential.

Kodak’s overfunded pension presents a rare and tangible catalyst for investors. Unlocking cash from the pension will enable significant debt reduction, strengthen the balance sheet, and free up resources for growth investments. Combined with its strategic focus on higher-margin specialty chemicals and advanced materials, Kodak offers an attractive blend of value and growth potential.

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Disclaimer: The author does not guarantee the accuracy or completeness of any information provided. The author does not provide personalized investment advice and the information written is not tailored to the needs of any individual investor; everything written herein is the opinion of the author and is subject to change without notice. There is substantial risk of loss in the investments mentioned and you should consult with your financial advisor whether any investments suit your specific needs. The author may have positions in the investments mentioned and those positions may change without notice.

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[1] https://www.asppa-net.org/news/2024/12/kodak-plans-to-terminate-pension-plan/