Painting the Gibson Bankruptcy by the Numbers

Gibson Memphis facility artworkWe have been closely following – first Gibson Guitar and then Gibson Brands – from their decision in 2012 to shoot for the stars by using OPM (other people’s money) to make highly leveraged…and highly questionable…acquisitions of various consumer electronics brands (a category in which the CEO and his team had no experience) to their recent 2018 bankruptcy. Gibson was trying to diversify their musical instrument business into something that now former CEO Henry Juszkiewicz called a music lifestyle brand. Instead, they wound up in bankruptcy.

Let’s look at what some of the numbers in the Gibson filings reveal…

It was 2012 and I was sitting virtually knee-to-knee with Gibson Guitar CEO Henry Juszkiewicz (you can read my report of that meeting here), sitting on a Gibson tour bus with parallel leather sofas near the front of the bus just behind the driver’s cab. As I relayed in my story then, Juszkiewicz spoke slowly, but confidently about why they invested in Onkyo and what their strategy was.

When I asked what he knew about the consumer electronics business, Juszkiewicz answered that he has been involved with the Consumer Electronics Association (CEA, now the CTA) and had served on its industry leaders board. That summed up in total, his experience in the consumer electronics business.

Their Plan? Better Marketing

During our interview, he answered specific questions with generic, businessy, responses. Their plan for Onkyo? They would employ better marketing, he assured us. But other than giving Onkyo a couple of tables in the Gibson tent at CES, I saw no major upgrade in Onkyo’s marketing, thanks to their new relationship with Gibson.

I walked away from that meeting skeptical. It seemed to me as though there was no real plan. Still, it was hard not to be swayed by Juszkiewicz’s overt confidence. Maybe he knew something I didn’t know? Resolved to give Gibson the benefit of the doubt, we learned that Onkyo was really just the beginning – within weeks there would be another announcement of the purchase of TEAC/TASCAM…and, eventually, the Philips accessory division.

At First, It Looked Good…Then, the Bottom Fell Out

At first, it looked like Gibson had made all the right moves. Revenues leapt to $2.1 billion and for a short period of time, they were cruising down the highway of success in style. But then the ride got rough as the road was full of deep and nasty potholes. Eventually the company was crushed under the weight of the debt they had borrowed to buy all of these companies and revenues began to collapse to just a little over $1 billion. As the company stared down the barrel of a $500 million debt maturation, credit agencies began to cut their rating, ultimately to junk status, and the company came to the end of the road at the edge of a cliff.

We have shared some of the numbers we found in their initial filings and thought our readers might like to see some more details from these filings. So here then, in no particular order, are some of the numbers we found that paint the dreary picture of where Gibson is at now…

  • “Gibson’s brands and its proprietary guitar designs, which include the Les Paul, SG, Flying V, Explorer, J-45, Hummingbird, and ES-335, are among the most respected in the music industry and enjoy exceptional market share in the growing ~$2 billion market for fretted musical instruments,* particularly in premium price segments. Indeed, Gibson has a top market share position in electric guitars (22%), selling over 170,000 guitars annually in over eighty (80) countries worldwide. Gibson also sells over 40% of all electric guitars priced above $2,000. Moreover, Gibson’s sales of electric guitars also grew more than 10.5% from January 2017 ($110,000,000 on a LTM basis) to January 2018 ($122,000,000 on a LTM basis).” [NOTE: LTM = last twelve months]
  • *Footnote to above: “Fretted musical instruments grew by 7.3% in 2017, while the guitar segment recorded even stronger growth of approximately 9%. High-end electric guitars (retailing at over $1,250) grew 23% in fact, contributing greatly to the overall industry growth.”
  • “Gibson’s MI Business (excluding TEAC) employs over 875 people.”
  • “Gibson products are sold at more than 3,000 musical retailer locations, e-commerce channels (such as Guitar Center American Musical Supply, Musicians’s Friend and, and third party distributors.”
  • 3,700 – This is the number of entities and individuals “entitled to receive notices and other documents” in this Chapter 11 Bankruptcy Case.
  • “For the fourth quarter of fiscal year 2018 (ending March 31, 2018), while revenues for the MI Business were $71 million, and revenues at the GI Business were $95 million, EBITDA for that same period was $26 million for the MI Business nad negative $8 million for the GI Business and Adjusted EBITDA was $11 million and negative $7 million for the GI Business.”** [EBITDA = earnings before interest, taxes, depreciation, and amortization…representing profits]
  • **Footnote for above: “The Company has recently conducted certain non-core asset sales to raise liquidity. These include sales of (i) certain real estate in Tennessee and Arkansas for a total of $20.2 million and $3 million, respectively, (ii) shares of Onkyo Corporation (“Onkyo”) for a total of $16.4 million, (iii) intellectual property associated with Gibson’s former “Cakewalk” business for $1.6 million, and (iv) GI HK’s sales of a license from Onkyo back to Onkyo.”

Items Specific to the Downfall of Gibson Innovations (GI) [the global accessories business purchased from Philips]

  • “In particular, during the period between October and December 2017, the GI Business  precipitously and unexpectedly lost approximately $100 million of vendor credit terms when, after a ratings downgrade, it lost credit insurance from three government-sponsored trade credit insurance providers”
  • [GI had declined dramatically, causing a violation of various covenants in a loan known as the ITLA (International Term Loan Agreement). As part of the terms of this loan, when such covenants are violated, this triggered a schedule of accelerated payments. “Indeed, since the fall of 2017, the principal balance of the ITLA has been paid down from $60 million to approximately $24 million. These paydowns on the ITLA, however, dramatically exacerbated liquidity issues at the GI Business.”
  • “In other words, the GI Business became trapped in a vicious cycle in which it lacked the liquidity to buy inventory and drive sales while at the same time it lacked the liquidity to rationalize its workforce to match its diminished operations.”***
  • ***Footnote to above: Moreover, the GI Business’s license agreement with Philips has a minimum royalty payment of €23.5 million [$27.7 million], which was an appropriate figure when the GI Business was operating on a larger scale but today is an significant liability for that business.”

Items Specific to the Issue of Unsecured Creditors

  • “In the ordinary course of business, the Debtors incur various fixed, liquidated, and undisputed payment obligations (the “Ordinary Course Claims”). As of the Petition Date, the Debtors estimate that the aggregate amount of Ordinary Course Claims outstanding is approximately $15 million.”
  • In addition, the Debtors have certain material contingent and unliquidated unsecured claims (the “Non-Ordinary Course Claims”). In particular, Gibson has guaranteed certain of GI HK’s obligations to Philips under the existing license agreement on an unsecured basis. Moreover, the ITLA Lenders have guaranty claims against certain Debtors for any deficiency resulting from the liquidation of their collateral in connection with the GI Business insolvency proceedings. The amounts of these potential Non-Ordinary Course Claims are not yet known.”

Events leading up to Bankruptcy Filing

  • [In the fall of 2017, reality began to set in and Gibson retained Jefferies to run “a competitive marketing process to identify a refinancing” partner or partners for all outstanding debt obligations of more than $500 million.] “After executing NDAs with and providing substantial due diligence to over ten (10) proposed financing sources, the feedback from the marketplace was that, while third parties view the Gibson brand as strong and valuable and see great opportunity in the MI Business, the challenges at the GI Business were too great to commit to a refinancing for the entire Company. Accordingly, beginning in early 2018, the Company and Jefferies pivoted to seeking a change of control transaction for both the MI Business and the GI Business, each on a stand-alone basis.”
  • “To date, the Company and Jefferies have contacted fifty-eight (58) parties to evaluate a sale, recapitalization or other change of control opportunity at both the GI Business and the MI Business and twenty-seven (27) have executed non-disclosure agreements.”

But it was too late, the clock had run out. Gibson was facing another accelerated payment due on the ITLA and they didn’t have the money. So Gibson had no choice but to file Chapter 11 protection from creditors and negotiate instead with the majority noteholders of the existing debt.

Read More of Our Coverage on Gibson

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