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Previously published on LewRockwell.com

Buyback Blowback at Kodak

by Eric Englund

The 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

Eastman Kodak Company (EKC) has become another poster child pertaining to the foolishness 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.

A Brief History Of Eastman Kodak Company

George Eastman 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.

George Eastmanís 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:

Eastman built his business on four basic principles:

  • Mass production at low cost
  • International distribution
  • Extensive advertising
  • 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:

  • Foster growth and development through continued research
  • Treat employees in a fair, self-respecting way
  • Reinvest profits to build and extend the business

George Eastman died in 1932. His principles and policies provided a foundation upon which to build continued success.

When examining 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.

Eastmanís policy of financial conservatism was not adhered to by executives who succeeded him; and it shows.

Kodak Is On The Brink Of Bankruptcy

Initially, 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 2010 Annual Report:

Our business 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; or
  • future 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.

How Kodak Got Into This Financial Mess

A fundamental 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 business".

For Kodak, 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.

Kodakís dividend 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.


The future 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.

Kodakís management 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.

Kodakís stock, 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.

Following all of George Eastmanís principles and policies would have prevented Kodakís unfolding financial disaster.

October 19, 2011


The Hyperinflation Survival Guide, Published by Eric Englund.