It might not be the perfect analogy, but do you remember the company Kodak? For those of us over, say, 40, we know that as one of the most recognizable brands in photography. Who among us can forget the “Kodak moment?”
But while Kodak played a dominant role in photography for more than 100 years, its failure to adapt to the digital revolution forced it into bankruptcy, and today it is a shell of its former self.
Founded in 1855 by Samuel Colt, then-Colt Manufacturing Company revolutionized the building of firearms and helped push the boundaries of modern industry in America.
The Colt Navy revolver and the Colt .45 semi-auto pistol are two of the most recognizable guns in America, if not the entire world. Like Kodak with photography and print film, for decades Colt dominated the revolver market and later manufactured the U.S. Army’s standard-issued handgun, the Colt M1911.
And like the digital revolution in photography proved the doom of Kodak, the striker-fired and polymer revolution in the 1980s handgun market opened the door to Colt’s eventual decline.
For years Colt has been on life support from investment firms and had banked on government contracts for M4 carbines to stay in the black. But with the end of the wars in Iraq and Afghanistan and the sunset of its sole source rifle contract with the Department of Defense, Colt has struggled to stay above water.
Critics say the company spent too much time sitting back on its defense contracts and ignored innovations in the civilian market. Others say the company’s financial bailouts proved a deal with the devil that made it all but impossible for the company to pull out of its nosedive.
In June, the bottom seemed to drop out on Colt, with bondholders refusing a major cut to their bailout deal, forcing the company to file for Chapter 11 and throwing Colt’s future into uncertainty.
The sand started to run out of the hourglass in November 2014.
At the time, Colt Defense LLC had filed papers with the Securities and Exchange Commission indicating it did not have the funds to make minimum payments on its loans and was likely to default.
According to reports, Colt declared a loss of as much as 60 percent for the end of 2014, based largely on declining sales and delays in payment for government contracts. Colt told the SEC it would not be able to make a nearly $11 million payment on its nearly $249 million loan.
The SEC filing said Colt was “working through accounting considerations and liquidity concerns.” The effort was made even more difficult since Colt’s stock was considered “junk” by traders and analysts expected to recover no more than 10 percent of the debt if the company went into default.
At the last minute, Colt secured $70 million in emergency cash to pay off some of its debt.
Sure, 2014 was a tough time for gunmakers, with the post-Sandy Hook surge petering out and huge inventories of guns driving prices down. But Colt’s problems stemmed mostly from bad financial decision and management problems, analysts say, and not so much from a slump in demand for guns.
Essentially Colt borrowed the nearly $250 million in 2009 to keep afloat but was unable to pay back the debt. The financial entities that loaned Colt the money kept getting rich while Colt went backward, says one of the top analysts of Colt’s decline, the Weaponsman blog.
Colt’s decline stems from “the opportunistic infections that the doctors are fighting ineffectually as the company lies on its feverish deathbed,” Weaponsman says. “The company’s own management and ownership constitute the virus that defeated its century-old immune system and left it open for a thousand small parasitical wounds to kill it.”
Let’s Make A Deal
By April, the writing of Colt’s demise was on the wall.
Facing a second default on loan payments, Colt told investors that it would need to restructure its $250 million bond debt. It proposed a new issue of bonds at a higher interest rate but longer loan term at 30 percent of their original value. If the bondholders didn’t agree to that plan, the company offered a so-called “prepackaged” bankruptcy agreement that would avoid a lengthy court fight and allow Colt to restructure quickly.
“The exchange offer and the issuance of the new notes are designed to reduce the overall amount of Colt’s debt, reduce total cash interest payments, extend the maturity for the debt exchanged, and place Colt in a better position to attract new financing in the years to come,” the company said in an April 14 release announcing the move. “The company believes the exchange offer will also improve its performance and customer relations by addressing the key issues relating to Colt’s viability as a going concern.”
Not surprisingly, bondholders balked at the deal. Analysts said the beleaguered company was trying to back money managers into a corner by threatening a costly bankruptcy fight.
“Their move … is extremely risky: if they can’t get the bondholders to accept the 70-30 haircut or the prepackaged bankruptcy, bondholders can and probably will sue, plunging the … company into Chapter 11 bankruptcy or even Chapter 7 liquidation,” wrote the Weaponsman blog. “They’re gambling that the bondholders’ fear of being left holding a bag containing much less than 30 percent of the company’s capitalization, divided among the holders of $330 or so million in secured and unsecured debt, will be stronger than their indignation at being 70 percent expropriated so the managers and hedges can be made whole.”
Bondholders countered with an offer to cut their payback to 50 percent and gain a 40 percent stake in a restructured Colt, the Hartford Courant reported. Colt fired back with a 45 percent payback and bondholders said no way.
“The main reason the company hasn’t weathered rocky market conditions since the winding down of the wars in Iraq and Afghanistan is that the New York financiers who control the company borrowed too much and paid themselves lavishly,” wrote Bloomberg’s Paul Barrett. “The private equity firm Sciens Capital and its affiliates loaded Colt with debt since the mid-2000s while taking cash out in the form of ‘distributions’ and ‘advisory fees.’ ”
On its left flank, Colt has also been heading off a looming conflict with the city of Kissimmee, Florida, where it pledged in 2012 to open a 16,000-square-foot regional headquarters. To sweeten the deal, Osceola County spent $500,000 to renovate office space for Colt with another $250,000 kicked in by the state to lure the company south.
Colt pledged $2.5 million in investments and upwards of 63 jobs by 2015.
Today, the building sits empty, no jobs have been created and the county is looking to recoup its investment.
And it’s no surprise Colt is delaying expansion into the South, with financial news outlets reporting that Colt’s 2014 revenue came in 30 percent below 2013.
“When it did give a nod to the consumer market, Colt mostly focused on its classic revolver handguns,” Rich Duprey from the Motley Fool wrote. “But in 2014, the market weakened considerably for all players, and for a company plagued by costly maneuvers, like the restructuring and reversal of its manufacturing and defense businesses, Colt has been unable to cope.”
In March, Colt named Paul Spitale as the new chief of commercial sales and appointed Kenneth Juergens as head of government and military sales, a move Colt ironically called “a new customer-centric design for sales and marketing” at the company.
Next Chapter: 11
Despite the management changes, emergency debt relief and high-pressure threats of collapse to its bondholders, Colt finally had to call uncle and enter into bankruptcy proceedings.
The June announcement came as the final deadline passed for Colt’s lenders to accept a major cut in their payback after the company failed to make its last two interest payments on loans to keep the gunmaker afloat.
Only a handful of its bondholders had accepted Colt’s deal.
“While entering Chapter 11 protection in the absence of a consensual agreement with our noteholders was not our preference and we do not take it lightly, we are confident it is the best path going forward and will enable us to continue to gain traction on a challenging but achievable turnaround in our business performance and competitive positioning in the international, U.S. government and consumer marketplaces,” said Colt’s Chief Restructuring Officer, Keith Maib. “The plan we are announcing and have filed today will allow Colt to restructure its balance sheet while meeting all of its obligations to customers, vendors, suppliers and employees and providing for maximum continuity in the company’s current and future business operations.”
Colt said investment management firm Sciens Capital Management, which holds a good portion of the company’s debt, would act as a “stalking horse” bidder that plans to buy most of Colt Defense and make good on its liabilities and vendor agreements.
The bankruptcy announcement will help the legendary company stay in business, officials said. Just a few weeks after declaring bankruptcy, Colt secured another $20 million loan to “allow for ordinary course business operations” during the Chapter 11 process.
It’s unclear if customers are flocking to stores in search of Colt guns, but the latest data from the popular online gun store GunBroker.com shows Colt guns are among the most sought-after handguns — both new and used.
“Colt remains open for business and our team will continue to be sharply focused on delivering for our customers and being a good commercial partner to our vendors and suppliers,” Maib said. “We look forward to successfully executing on this plan, which provides a sound path of stewardship for an iconic American brand and the key stakeholders we serve.”
Maib went on to say that “nothing has changed” in Colt’s operations.
But for the 160-year-old company that made the gun that “Won the West,” it might be that change is Colt’s only option.