Gibson, the iconic Nashville-based guitar company filed for bankruptcy relief under Chapter 11 in Delaware on May 1, 2018. The filing occurred as a result of the manufacturer’s failed efforts to convert itself into a musical lifestyle company. Gibson manufactures guitars, banjos, and mandolins and its subsidiary, Baldwin, manufactures pianos. Gibson’s guitars include the Les Paul, SG, J-45, and Hummingbird. However, the company believed that expanding into electronics and creating a music-based lifestyle brand was the key to continued growth. This belief turned out to be a costly mistake.
Industry observers and experts believe that the bankruptcy signals the departure of CEO Henry Juszkiewicz, who owns 36 percent of the company and who, along with partner Dave Berryman, rescued Gibson from a tough financial climate 32 years ago, returning the company to prominence. Fortunately for musicians everywhere, the company has entered into an agreement with the majority of its creditors that will allow business and the manufacturing of quality instruments to continue.
The guitar, especially the electric guitar, was probably the most popular instrument of the 20th Century. Unfortunately, its popularity and use have been replaced by the computer, which is arguably the most prolific instrument of the 21st Century. As computers became more prevalent in the production of popular music, Gibson’s international guitar sales began to decline. As a response, Juszkiewicz implemented a strategy that foresaw the expansion of Gibson from a guitar company into a lifestyle brand. To this end, the company acquired electronics companies like Phillips, Onkyo, and TEAC that manufactured headphones, speakers, and turntables.
As Gibson assumed more debt to acquire these electronics companies, its annual revenue grew but its profit margins substantially diminished. In 2010, Gibson had $300 million in total sales and showed an earnings-before-taxes-and-interest margin of 12.9 percent. By 2015, Gibson had $2.1 billion in annual revenue, but its profit margin had significantly dropped to 4 percent.
Over-leveraged, Gibson had been negotiating with banks and creditors for months. As a July 23 deadline loomed for maturities on over $500 million of funded debt obligations, the company filed for bankruptcy. Gibson announced it will cease operating its innovations division as part of the bankruptcy.
Juszkiewicz said: “Over the past 12 months, we have made substantial strides through an operational restructuring…Gibson will “refocus on our core business” of musical instruments, which “we believe will assure the company’s long-term stability and financial health.”
Gibson currently has a 22 percent market share in electric guitars, and 40 percent market share for guitars selling for over $2,000, including the Les Paul model. Gibson’s guitar sales have risen 10.5 percent from January 2017, specifically from $110 million to $122 million during the same 12-month period.
Gibson has made payments to reduce its principal balance on its initial term loan agreement with creditors over the last six to nine months, thus lowering the principal balance from $60 million to $24 million. However, these paydowns have “exacerbated liquidity issues,” the company said in its bankruptcy. A federal judge will be required to sign off on the company’s plan to reduce debt, which has the support of 69% of secured lenders on notes due in 2018.
Recently in May 2018, Gibson Brands Inc. stated that its $135 million debtor-in-possession (DIP) financing had been authorized by the bankruptcy courts, thus helping the company maintain daily operations. Gibson said the courts also approved the company’s use of its existing cash management systems and bank accounts. “Today’s approval of our first-day motions is encouraging and puts Gibson on a strong footing as we move forward with our reorganization with the support of a majority of our noteholders,” said Chief Executive Henry Juszkiewicz.
Under the terms of the deal, the company’s creditors, the largest of which is KKR Credit Advisers, will take over ownership. Gibson expects to exit bankruptcy by the fourth quarter of 2018.
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