Blowback at Kodak
by Eric Englund: The
New York Times Company Is Still†Insolvent
employment of more and better tools is feasible only to the extent
that the capital required is available. Saving Ė that is, a surplus
of production over consumption Ė is the indispensable condition
of every further step toward technological improvement. Mere technological
knowledge is of no use if the capital needed is lacking. ~
Ludwig von Mises
Company (EKC) has become another poster child pertaining to the
of stock buybacks. With EKCís roots going back to 1880, this
company has been a world leader in photographic film and camera
sales for well over a century. Keys to Kodakís past success include
research, development, innovation, and a keen focus on customer
satisfaction. Success, however, can breed failure. EKCís tremendous
profitability, during the twentieth century, didnít prepare it for
the digital revolution. Over the years, EKC bought back billions-of-dollars
worth of its common stock. Kodakís top management, to be sure, would
love to have this money back as EKCís executive team has not yet
developed a business model allowing it to profitably transition
from an "analog" to a digital company. I fear time and
cash are running out for this iconic company and bankruptcy is looming
on the horizon.
Of Eastman Kodak Company
was a high school dropout who built an incredibly successful multi-national
corporation. The company he founded, and which flourished under
his leadership, is Eastman Kodak Company. George Eastman became
interested in photography in 1878; and his vision, of bringing photography
to the masses, came into focus over time. A few months before his
26th birthday, in April of 1880, Eastman founded a business
to mass-produce photographic dry plates. Within five years, Eastman
introduced the first transparent photographic film and this became
a highly profitable product for the company. In 1888, the Kodak
camera was introduced using the slogan "You press the button
Ė we do the rest." George Eastman stated his objective was
"Öto make the camera as convenient as the pencil." In
doing so, amateur photography became a growth industry with Kodak
leading the way. Through continuous research and development, by
1900, Kodak introduced the Brownie camera; which sold for $1 and
used film that sold for 15 cents per roll. This camera was highly
popular and it launched Kodak, into the twentieth century, as the
industry leader in both photographic film and cameras.
Business Principles and Policies
Not only was
George Eastman a visionary inventor and entrepreneur, he was a hard-working
and astute businessman capable of successfully building a global
business enterprise. Along these lines, Eastman Kodak Company provides
the following information about its esteemed founder:
his business on four basic principles:
- Mass production
at low cost
- A focus
on the customer
He saw all
four as being closely related. Mass production could not be justified
without wide distribution. Distribution, in turn, needed the support
of strong advertising. From the beginning, he imbued the company
with the conviction that fulfilling customer needs and desires
is the only road to corporate success.
To his basic
principles of business, he added these policies:
growth and development through continued research
employees in a fair, self-respecting way
profits to build and extend the business
died in 1932. His principles and policies provided a foundation
upon which to build continued success.
Eastmanís policy of reinvesting profits to build and extend the
business, it is self-evident he desired to build Kodakís financial
strength through retaining profits. A strong balance sheet allows
a company to fund research and development in order to develop new
products and services to fulfill customer needs and desires. Sound
financial management goes hand-in-glove with retaining market leadership.
of financial conservatism was not adhered to by executives who succeeded
him; and it shows.
On The Brink Of Bankruptcy
it may be difficult to grasp that Kodak is on the verge of bankruptcy.
Well, during fiscal-year 2010, Kodak suffered a net loss of $687
million and saw its net worth drop to negative $1.075 billion Ė
yes, Kodak has a negative net worth. EKCís management understands
it is in serious financial trouble and stated the following in the
may not generate cash flow in an amount sufficient to enable us
to pay the principal of, or interest on, our indebtedness, or
to fund our other liquidity needs, including working capital,
capital expenditures, product development efforts, strategic acquisitions,
investments and alliances, and other general corporate requirements.
Our ability to generate cash is subject to general economic, financial,
competitive, litigation, regulatory and other factors that are
beyond our control. We cannot assure you that:
- our businesses
will generate sufficient cash flow from operations;
- our plans
to generate cash proceeds through the sale of non-core assets
will be successful;
- we will
be able to repatriate or move cash to locations where and when
it is needed;
- we will
realize cost savings, revenue growth and operating improvements
resulting from the execution of our long-term strategic plan;
sources of funding will be available to us in amounts sufficient
to enable us to fund our liquidity needs.
These are not
words spoken by an upbeat executive management team looking toward
a bright future in the digital age. Management has acknowledged
EKC is in deep trouble; yet they wonít tell you it is financial
mismanagement that has taken this company to a state of insolvency.
Got Into This Financial Mess
reason Kodak has fallen into financial distress is that, over the
past decades, management had not adhered to George Eastmanís policy
of reinvesting profits to build and extend Kodakís business. Stock
buybacks, in fact, are the polar opposite of this reinvestment policy.
Share repurchases inherently deplete cash, working capital, and
equity. Such capital depletion has deprived EKCís management of
the funds needed to support the implementation of a business model
allowing Kodak to transition to a profitable digital imaging company.
Over the five-year
period of 2000 to 2004, Kodak generated net earnings of $3.062 billion;
and EKC turned a profit in each of these five years. Moreover, at
fiscal year-end (FYE) 2004, Kodakís retained earnings position stood
at $7.922 billion; which is a pretty stout number. At fiscal year-end
12/31/04, EKCís financial condition was sound.
Kodak, by 2005,
had become the leading
seller of digital cameras in the United States. In fact, for
Kodak, digital camera sales amounted to $5.7 billion in 2005; which
was fully 50% of the companyís sales volume that year. In spite
of Kodakís No. 1 ranking, in U.S. digital camera sales, this company
suffered an operating loss of $1.073 billion in 2005. It is clear
this is the year in which Kodak hit the tipping point where its
margin-rich, film-based photography business had been displaced
by digital imaging; a commoditized business with thin margins. With
digital cameras yielding slim profit margins, it is no wonder Kodakís
CEO Ė Antonio M. Perez Ė called them a "crappy
indeed, digital imaging has been a crappy business; as EKC has not
turned an operating profit since 2003 (2004 was a profitable year
due to significant earnings from discontinued operations). Over
the past six years, Kodak has lost $2.525 billion. Retained earnings,
by fiscal year-end 2010, had declined to $4.969 billion.
If Kodak had
a positive retained earnings position of $4.969 billion, at fiscal
year-end 2010, then how did it have a net worth of negative $1.075
billion? Over the decades, after all, Kodak had been a very profitable
company and had built up a substantial retained earnings position.
A quick perusal of Kodakís FYE 2010 balance sheet provides an answer
to this question. With $5.994 billion of treasury
stock (a contra-equity balance sheet entry) leaping off of the
balance sheet, it is unmistakable that stock buybacks have played
a significant role in depleting Kodakís cash, working capital, and
equity over the years. When a corporationís treasury stock position
exceeds its retained earnings by over $1 billion, it shouldnít be
a surprise to see a company with a negative net worth.
payouts, most certainly, havenít served to preserve the companyís
capital base either. From 2000 through 2008, Kodak paid out $2.757
billion in dividends; while no dividends were paid in 2009 and 2010.
During the five-year span of 2004 through 2008, in which Kodak suffered
an operating loss each year, this company paid out $714 million
in dividends. EKCís executives, undoubtedly, would love to have
this money back almost as much as they wish the company had never
engaged in stock buybacks.
is uncertain; hence it is impossible to foresee what twists and
turns a business may encounter while attempting to remain on a path
of customer satisfaction and profitability. Technology evolves rapidly
while consumer tastes are ever changing. As Kodak has discovered,
it must still develop a viable business model in order for the company
to survive in the new era of digital imaging.
has also discovered that reinventing their company has become a
time consuming and expensive undertaking; and they are rapidly running
out of money. For the very reason that the future is uncertain,
Kodak should never have engaged in the financially-draining practice
of stock buybacks. If Antonio M. Perez could wave a magic wand and
receive back the $6 billion Kodak squandered in share repurchases,
youíd witness a CEO waving his arms wildly. Kodak, accordingly,
would suddenly regain the needed capital to continue the search
for its own unique path to profitability in this uncertain world.
Alas, it isnít so.
today, is selling for $1.27
per share. It once sold for $95
per share; so much for the assertion that share repurchases
enhance shareholder value. Iíve never understood how people can
believe weakening a companyís balance sheet, via stock buybacks,
improves the value of a company.
of George Eastmanís principles and policies would have prevented
Kodakís unfolding financial disaster.
Englund [send him mail], who
has an MBA from Boise State University, lives in the state of Oregon.
He is the publisher of The
Hyperinflation Survival Guide by Dr. Gerald Swanson. He is
also a member of The National Society, Sons of the American Revolution.
You are invited to visit his website.
© 2011 Eric Englund
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