Swindled: Kodak Ceo's Cash-Out Millions In Bonuses

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Swindled: Kodak Ceo’s Cash-Out Millions In Bonuses

Judge Clears Kodak to Pay $6 Million in Performance-Based Bonuses
A judge on Monday cleared Eastman Kodak Co. to pay up to $4.5 million in bonuses to 12 top executives and senior managers, along with a one-time cash payment of up to $1.5 million to its chief operating officer.

Judge Allan L. Gropper of U.S. Bankruptcy Court in Manhattan approved the continuation of the bonus programs, which Kodak put in place before its January bankruptcy filing. Co-President and Chief Operating Officer Laura G. Quatela can earn between $600,000 and $1.5 million based on how much money Kodak raises in an upcoming auction of its patent portfolio and how quickly such a sale closes. An auction of those patents is set for this week: Kodak has said it can get more than $2 billion for the digital patents.

The other bonus package approved by Judge Gropper authorizes the payment of up to $4.5 million to Kodak insiders and executives, including Chairman and Chief Executive Antonio M. Perez and Chief Financial Officer Antoinette P. McCorvey. Those bonuses are tied to Kodak’s financial performance, and the system has been in place for more than 10 years.

About 250 other Kodak managers have been participating in the program since the bankruptcy filing, but the company held off the request for including the executives and insiders until now.

Kodak last week postponed asking for its larger, $9 million bonus plan for insiders and managers after several parties objected. While those bonuses weren’t on the docket Monday, they still came up in court.

Haskell Slaughter Young & Rediker LLC’s R. Scott Williams, a lawyer for a committee of Kodak’s retirees, said the timing of the bonuses was curious.

"I don’t know executives that get bonuses when a company is losing money hand over fist," Mr. Williams said. Kodak last week reported a $299 million loss for the second quarter, including $160 million in reorganization costs. While Mr. William’s was officially referring to the bonuses approved Monday, Judge Gropper was skeptical.

"Some of the rhetoric I heard is directed at that aspect of the plan," the judge said, referring to the $9 million bonus plan.

The Bankruptcy Code generally bars retention payments for executives and other insiders but allows bonuses for these high-ranking officials as long as they are tied to benchmarks that require some stretching to achieve.

In court papers, the retirees had urged the company to hold off on the bonuses until after the patent auction, which will influence the success of its restructuring.

Earlier in the hearing, Sullivan & Cromwell LLP’s Marc R. Trevino defended Kodak’s management team, especially against contentions that the team "drove" the company into bankruptcy and now seeks bonuses. On several occasions, he looked directly over to the table of lawyers objecting to the bonuses while making his points.

"This is a talented team that has worked tirelessly to transform the debtors," Mr. Trevino said. While the objectors’ intuition was that the management team is to blame, he said, "like all intuitions, they can be wrong."

Kodak, based in Rochester, N.Y., filed for Chapter 11 protection in January after failing to sell its patents outside of bankruptcy court. The company’s photography-driven business became marginalized by increased digital competition, and it struggled with high labor and pension costs.

A successful restructuring of the iconic company hinges on the sale of the patents, which the company will auction off later this week. Bidders, according to The Wall Street Journal, include Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Google Inc. (GOOG). Kodak is counting on the sale of those patents to pay its creditors.

In February, Kodak said it will close its camera business, which makes digital cameras, pocket video cameras and digital picture frames, in a move that could save it $100 million annually. Kodak intends to focus on retail and desktop-inkjet printing rather than photography after it completes its restructuring.

http://www.democratandchronicle.com/article/20120805/BUSINESS/308050019/Antonio-Perez-Kodak-future?odyssey=tab|topnews|text|Business
Is Antonio Perez right for Kodak’s future?
Some question why CEO is still at helm of fallen icon

“Phenomenal.” “Extraordinary.”As Antonio M. Perez talked to Wall Street analysts on Jan. 30, 2006, about how 2005 had gone for Eastman Kodak Co., he tossed out superlative after superlative.

True, the Kodak he took over as CEO eight months earlier had big problems, being only halfway through a massive, four-year restructuring that would see it shed thousands of workers and demolish wide swaths of empty manufacturing and warehousing space at Kodak Park. But Perez promised a better tomorrow.

Six years later, on Jan. 19, 2012, Kodak was a shadow of its former self as it sought protection from its creditors, filing for Chapter 11 bankruptcy.

Those years since Perez, a 67-year-old native of Spain, took the helm of one of America’s most iconic companies have brought arguably the most painful upheaval in western New York business history.

Interactive timeline: Perez at Kodak

Kodak finished 2005 with $14.3 billion in sales, a stock market value of $6.7 billion and 14,000 workers locally. It finished 2011 with $6 billion in sales, a market value of $176 million and 5,100 local workers.

The downfall was perhaps inevitable. Demand for film and photographic paper have collapsed in an era of everyone having a digital camera built into their cellphone and sharing their snapshots not as prints but on Facebook or as email attachments.

The company has tried time and again to remake itself, both before Perez took over and during his tenure. His strategy is to have the photography pioneer become largely a print-centric company, selling equipment, supplies and services for commercial and home printers. That direction was perhaps also inevitable the moment Perez, who spent much of his career at printing giant Hewlett-Packard Co., was hired.

Now Kodak is nearing a unique moment in its history. Filing for bankruptcy gave it the opportunity to cut costs to an unprecedented degree. When the company gets out of bankruptcy, presumably in early 2013, it could carry far less baggage, such as retiree costs, than it did going in. It also will have fewer excuses for failure. And the question becomes, are Perez and the Perez strategy right for Kodak’s future?

“Where they are is kind of a consequence of where they were,” said Larry Jamieson, a director at print industry research and consulting firm Photizo Group. As recently as the early 2000s, before digital photography “came like gangbusters,” film still was a healthy business, he said. “When that suddenly disappeared almost overnight, these guys were caught in a hard place.”

But the decline and fall of Kodak didn’t need to be as steep and hard as it has turned out to be, critics say.

“Those of us who have been in the industry and grown up with Kodak have watched Kodak with a certain degree of sadness,” said David L. Zwang of Connecticut publishing and printing consultant Zwang & Co. “It’s like you watch your best friend and you want to help them, but short of some kind of intervention, what do you do?”

Among many current and former Kodakers, the Perez era — with massive job and benefit cuts, even as the CEO over the past five years has received $11.1 million in salary and cash bonuses — has been nothing but a huge disappointment.

“It’s certainly my impression he was hired to save (Kodak),” said David G. Tomer of Greece, who spent 26 years at Kodak as a mechanical engineer. “How he could have saved it, I don’t know. But he obviously did not do that. I don’t understand why he’s still there.”

Reinvention

Kodak invented its own eventual business woes when researchers Steven Sasson and Gareth Lloyd received a patent in 1978 for an electronic still camera. The company knew as far back as the early 1980s that it was facing an issue of technological obsolescence due to digital technology someday replacing film, said Lawrence Matteson, a former Kodak executive and now executive professor of business administration at the University of Rochester.

“This notion (Kodak executives) were asleep at the switch … is nonsense,” Matteson said. “We knew what was coming.”

But the company faced two problems. For one, the years between the Sasson-Lloyd invention and digital technology becoming the norm gave other companies ample time to catch up. For another, Kodak’s underlying technology was chemistry, not electronics.

Kodak since then has tried repeatedly to reinvent itself or diversify beyond its film roots, from the ill-fated foray in the 1980s into pharmaceuticals to Daniel Carp’s five-prong business strategy rolled out in 2003 — those prongs being health imaging, commercial imaging, display and components, digital and film imaging, and commercial printing.

While each may have made sense at the time, in hindsight it smacks of a company lurching in one direction, then another, each new lurch coming with big costs, Matteson said.

For a time, Kodak was a big player in digital photography, enjoying major market share in digital camera sales and launching what became Kodak Gallery. As recently as 2005, Kodak had close to one-quarter of the digital camera sales in the United States. But companies like Nikon, Canon and Sony pushed hard and gobbled up much of that market share. And what was a lucrative industry a decade ago is far less so now, with the competitive point-and-shoot camera market carrying slim profit margins.

Companies that have made digital photography profitable, like Canon and Nikon, make money from higher-end single lens reflex cameras, said Ed Lee, consumer and professional imaging group director for InfoTrends.

Kodak pointed to that lack of profitability when it said in February it was quitting the digital camera/digital video recorder business, a landmark Perez decision.

Under Perez, Kodak also abandoned such fields as health imaging and display and components while doubling down on printing. He is fond of pointing out that making film is analogous to printing, both involving putting down some kind of substance — be it light-sensitive chemical coatings or inkjet inks — on a surface.

As far back as 1999, when Perez was an executive at Hewlett-Packard, he was pushing for HP to buy Kodak, said Ulysses Yannas, a Buckman, Buckman & Reid broker in New York City and longtime Kodak watcher. “He saw the printing portfolio and fell off his chair,” Yannas said.

By the end of 2011, digital technology — covering everything from home All-in-One printers to digital printing plates and document scanners — represented 75 percent of Kodak’s revenues. Part of that was due to growth in those businesses and part was due to the ongoing shriveling of the film business.

Into bankruptcy

For a brief period, it looked like Perez had turned Kodak around. In 2007 and early 2008, at the tail end of the four-year restructuring, the company had a small string of profitable quarters.

However, according to a sworn statement from Chief Financial Officer Ann McCorvey included with Kodak’s bankruptcy filing, the recession and corporate restructuring costs since 2008 led to the Chapter 11. Perez tried to keep the company afloat in 2011 by issuing $250 million in debt, borrowing $160 million and selling assets. But his efforts were offset by expenses ranging from retiree costs to trouble collecting intellectual property licensing fees.

As rumors of Kodak eyeing bankruptcy spread in the second half of 2011, suppliers began demanding payment in full, tying up money the company needed.

The bankruptcy has left numerous management retirees with their unsecured pensions gone, many more rank-and-file retirees worried about their health care, and stockholders with shares worth less than $1 each.

Shareholders could bounce back, though that’s unlikely, said Christopher Carosa of Carosa Stanton Asset Management in Mendon. “If you look at the history of companies going through bankruptcy, how many cases has the original stock survived?”

Yellow box legacy

The shift to digital has been harder than expected. “You have this yellow box legacy,” said Zwang, the industry consultant. “I don’t think (Perez) fully understood that. He was able to do something, but it took him a lot longer than I think even he anticipated. He’s obviously an aggressive guy. If anybody can do it, he can do it. But you have over 100 years of legacy you have to work out.”

Yannas pointed to the billions Kodak spent on stock repurchases in recent years, including a $1 billion buyback announced in 2008. “Can you imagine if Kodak had the $5 billion in cash they put into buying the stock?” he said. “They wouldn’t have had to sell their medical division. They would’ve had the money to finance their entry into the printing business. It was management incompetence.”

Perez was the wrong person for the job of running Kodak, said Delroy Warmington, managing director of Delmar Capital in suburban New York City. “What Kodak needed was a visionary. He came in with revenge against HP. HP’s strength was in printing. He went after HP’s bread and butter, desktop inkjet.

“The hand Antonio was dealt wasn’t the best, but he could’ve played much better. The board was inept. You have to blame the board. Where was the board in all this?”

Kodak did not make Perez available to comment for this story. Board members declined to comment or did not return messages.

Perez did issue a statement Friday in connection with Kodak’s second-quarter earnings report. “I am pleased with our progress, and our operating results are both improved from last year and also ahead of our plan.”

Kodak lost $299 million in the quarter on $1.1 billion in sales, down 27 percent.

Will it work?

In an employee memo last month, Perez said Kodak had put together a strategic business plan that was being shown to the board and to creditors, a step toward emerging from bankruptcy early next year.

That plan hasn’t been made public, though it likely focuses on the areas the company has identified as keys to growth — desktop and commercial inkjet printing, packaging printing, and print industry workflow software. But even with the plan’s details under wraps, Kodak already has its champions and those who see no hope.

“I’ve been saying all along, Kodak is going to be a case study,” Carosa said. “Kodak is probably going to be dead, so it’s going to be more dramatic.”

Business lore carries numerous examples of companies that have reinvented themselves — think Corning Inc., which has been everything from a maker of Pyrex plates to fiber optics and now Gorilla glass for your handheld electronic devices, or Xerox Corp.’s ongoing shift into business services.

But companies with dominant market share that get hit with technological upheaval often go out of business, UR’s Matteson said.

And Perez’s plans so far to save the company are fraught with big challenges.

Being a low-cost provider of consumables such as desktop inkjet cartridges cheaper than the competition “may be a winning strategy,” Matteson said, but it also runs contrary to Kodak’s entire history, as its high-quality products such as film generally were among the costliest on the market.

While inkjet printing once seemed like a “pretty good bet,” said the Photizo Group’s Jamieson, now the home and small business market is stressed by business trends and consumers doing more photo sharing digitally instead of printing out hard copies.

“There’s kind of a perfect storm for home printing and destktop business printing,” Jamieson said. “There’s still printing that goes on. It’s a little difficult to look at a PDF on your phone. Nevertheless, it’s making it more difficult for all the print vendors — less reason to print things these days.”

In the early 2000s, Americans were making 30 billion prints annually. Today, it’s closer to 15 billion, according to InfoTrends.

Others see reasons for optimism.

Perez “is almost finished doing what his charge was, to remake, to reinvent Kodak,” Zwang said. “When this is all done, they’ll be a shell of their former selves, but they’ll be a very strong company.

“They’re quietly building based on the core technologies they do have and can leverage. Once the bankruptcy is over and they bring in a president who has a good marketing head, people are going to be surprised at what’s left. It’s going to be a strong company with a nice focus. It’ll be print.”

Perez, who has largely been out of sight since the bankruptcy filing, was sedate as he announced that monumental step to employees in a seven-minute video on Jan. 19.

“We’re all excited about our future,” he said. “We’ll now be well-positioned to complete our transformation and write the next chapter in the history of the world’s leading materials science and imaging company for the digital age.”

Even a moderately successful next chapter would beat most people’s expectations. But if Perez and his management team can do the seemingly impossible, if the company does stop its long slide and become profitable again — a big if — the tarnish on both the company’s reputation and Perez’s legacy will again be burnished to gleaming Kodak yellow.

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August 21, 2012 at 8:21 AM