Credit Process Master Case – Baldwin Piano

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On the 300th anniversary of the modern Piano, Baldwin Piano is struggling to survive. It is the perfect Turnaround case. When we first looked at Baldwin’s numbers and its historical performance, we saw a dying industry, a shrinking market, cheaper imports, bad investment bets, distracted management, increased leverage and interest expense, bankers bailing out and a firm bleeding cash from every orifice with no relief in sight. The arrival of GE Capital high yield unit on the scene was the ultimate sign that Baldwin was deeply in trouble. The numbers spoke for themselves.

Line ItemDrop in 1998Drop in 1999
Gross Margin27.7%52.6%
Operating Margin153%453%

At the end of our first meeting there was complete consensus in our group to recommend a quick and painless death for Baldwin. Break and sell out the family silver to anyone interested in assets that Baldwin carried on its books. It was just a question of how long the process would take, not when, not if.

In the interest of being objective and against our better judgment we went looking for any straws that would help us save Baldwin Piano. To us it boiled down to two simple questions. Is there a future in the Piano market? And is there anyone who is making money in this market? Baldwin could only be saved if the answer to these two questions was yes.

The Case for Baldwin Piano

The proof was Steinway. A firm with growing revenues, with a positive gross margin and operating margin. Steinway has never been healthier. Hence there was someone out there making money in this industry.

The next question was “Is there a future?” The case Oliginos presented was simply this. The heyday for this industry was the 1920’s and it will never be like the 20’s again. Although the percentage of people playing the piano is much lower, the population is also higher so the overall numbers haven’t changed by much. In fact there is now a renewed interest in this field because of studies linking intellectual development of children and piano playing. Hits like Shine, The Legend of 1900, etc have also helped the cause. The total number of people starting to play a piano is on the rise (tracked by sales of new beginning piano lessons books). There was a big drop in the late 70’s and 80’s but the market has finally turned for the better.

To figure out the big rise, we have to go back 30 years. In the 70’s as well as the 80’s there was a big movement towards smaller uprights and away from Grands. People just wanted more affordable and smaller pieces. Over the next ten years the same pieces were sold at half price and took away from the new piano market. Dealers did fine, because they bought and sold them. It was the manufacturers of new pianos who struggled. However now these pianos are getting old and are being retired. More importantly, Grands are carrying the industry. They have not been produced for the past 30 years in large quantities and now there is rising demand for them.

Existing Situation and Strategies

Steinway is exploiting these trends to its advantage. They own 90% of the high end market and their growth as well as ROE indicate they are a very professional firm. Baldwin on the other hand is struggling. They bet the farm on offering a full range of piano products from simple keyboards to the pride of Baldwin Line “The Concert Grand Piano “. But the “Tiffany” bet failed. Baldwin next strategy was to diversify its range of services by offering contract electronic manufacturing services. This time Baldwin had to incur significant capital expenses and competed in a market dominated by Japanese, Taiwanese & Korean firms. As expected the operation still has to become cash flow positive. After these two failed bets the firm is now trying to rationalize its operating base. Recent divestitures include the sale of the leasing unit, sale of the church organ business, sale of Mexican manufacturing facilities, consolidation of manufacturing operations in Arkansas, outsourcing of trucking and delivery services, outsourcing of plate manufacturing to external firms & alliances with Korean firms to leverage the Baldwin brand.


Baldwin History

Baldwin was started in 1862 by reed organ and violin teacher Dwight Hamilton Baldwin in Cincinnati, Ohio. The company became the largest piano retailers in the Midwest United States. In 1891, Baldwin manufactured its first upright model. Then in 1895, the company introduced the first grand piano.

Baldwin concert grand took the first international award in 1900 at the International Exhibition in Paris. Followed by top honors in St. Louis in 1904 and London’s Anglo-American Exposition in 1914. At this time, Baldwin was exporting pianos to 32 countries around the globe.

During the depression, the company was able to stay alive due to its prudent management and large reserved created during the early 1920s. Then the company was transformed into war production during WWII. The construction of multiple-ply aircraft wings design during WWII became the bases of many piano pinblock still in use today.

In 1965 Baldwin introduced the SD10 Concert Grand piano, which revolutionized the industry. Many renowned artists attested for the performance of SD10. Furthermore, more music teachers started to recommend the Baldwin upright. By 1973, Baldwin became the largest piano manufacture and sold more piano in the United States than any other manufacturer.

With success in 1973, the common shares of D.H. Baldwin were open to trading in the New York Stock Exchange. However, in 1984, the senior management acquired the Company from Baldwin-United Corporation. Two years later, in 1986, initial public offering was made on the NASDAQ National Market under BPAO.

Chickering History

Jonas Chickering was considered the father of modern piano. The Chickering brand was one of the America’s earliest and most popular piano brand. The first Chickering piano was introduced in 1823. And the first grand piano was produced in 1837 using a one-piece cast-iron plate. Chickering also developed the overstringing method. These two innovations are still the foundation of modern grand piano.

Using some of the excellent cabinet making skills and innovation, Baldwin purchased and reintroduced the Chickering brand in 1995. Baldwin attached the Chickering line to the company’s mid-priced, American-made grand pianos.

Wurlitzer History

The Wurlitzer family was involved in music for more than 300 years back in Germany. The first Wurlitzer Company was formed in 1856 as an importer of fine piano from Europe. In 1861, Wurlitzer started building pianos in Cincinnati. The name of Wurlitzer theater organ was the voice of many silent movies for decades. In 1935, Wurlitzer introduced the world’s first spinet-sized piano. It represented a historic breakthrough in style, sound and performance. This style provided “bigger” sound from smaller piano models.

The Baldwin acquired Wurlitzer’s keyboard division in 1988. Till today, Baldwin has continued to produce both grand and upright model of the original Wurlitzer piano design.

Recent Activities

In recent years, Baldwin has met several problems. Sales within the industry were declining. The unexpected fallout of Asian financial crisis, resulting in a flood of low-priced Asian import that hit the US market, the company took some very defensive actions. The Company launched a defensive spending program. This spending program involved incentives for the retailers and dealers. As a result of these incentives and combine with slower sales, both the Company and dealers started 1999 with approximately $18 million more finished goods than normal. Lower sales resulted from the company as the dealers tried to work off their excess inventories. And the Company reduced its production to reduce its inventory.

Several other programs were also taken to bring back financial stability. The company ceased its Company-managed trucking of pianos to dealers in 1997. These operations were converted to an independent company via contractual arrangement. Also during 1997, the Company sold off its non-core business of church organ business.

The company also sold off its Juarez, Mexico facility in 1999 for $7.2 million. The Company then moved its Mexico operation to a leased facility with 50% reduction in space in Juarez. As far as the reduction in force, the Company has reduced its workforce by 12.5%, or 209 people during 1999.

Finally, the most significant reduction is the sale off of Retail Finance Operation for $35 million to Deutsche Financial Services. This was the Keyboard Acceptance Corporation (KAC) and its leasing finance subsidiary, Signature Leasing Company (SLC), created in 1997. These financial operations provided point-of-sale consumer financing through keyboard dealers located throughout the US. The deal was completed in March 2000. The Company netted $32.5 million before tax.

One of the most major problems at the beginning of the year 2000 was backorders. Due to the reduction in workforce and lack or working capital in 1999, the Company did not maintain a healthy inventory to meet the peak demand in the 4th quarter of 1999. As a result, many backorders from dealers were waiting to be filled in 2000.

Musical Products

Baldwin has been considered a leader in the domestic keyboard market. The musical products are sold through domestic wholesale dealers (82%), Company owned retailer (14%), and international dealer network (4%). The Company currently has three brand names under the acoustic piano. They are consists of Baldwin®, Chickering ™, and Wurlitzer®. These three brands have accounted for nearly 50% of the domestic new piano sale in the last four decades. The premier product is the Baldwin® concert grand piano.

The Company also owns 5 different models of digital keyboards under the name Pianovelle ™. GeneralMusic in Italy produces these products with specifications from Baldwin. The Company also developed a digital player system for the acoustic pianos under the name Baldwin ConcertMaster™ in 1997. This system uses multi-media storage of music and recording capabilities for the acoustic piano. This system can be installed in the factory or in the field only to the Company brand name pianos. And finally, the Company also introduced the ConcertMaster CD system that can be installed on any brand of piano in 2000.

Contract Electronics

This division, began in 1984, provides a full-service contract electronic and electromechanical products to original equipment manufacturers. The application includes heating and air conditioning systems, venting machines, mail handling systems, exercise equipments, commercial and industrial power control, and semiconductor fabrication equipment. This division has several preferred supplier status since 1996. However, this industry remained fairly fragmented with a few larger players and predominately small manufacturers. Baldwin does not have a significant market share. But in terms of sales, the Company believes that it ranked top 65 out of 1000. This division has also developed a strong reputation among its customers base on its quality and flexibility in meeting demands.

Industry Analysis and Competition

Music Industry

Baldwin operates in the musical instruments industry. The principal targets for the Company’s acoustic and electronic pianos are families with children aged 6 to 12, young adults, and educational institutions. The Company competes with a number of domestic and foreign acoustic piano manufacturers based on price relative to tone quality, performance characteristics, styling, finish options and electronic enhancement options. In the U.S. the piano category has averaged approximately 5% growth over the past three years.

Nevertheless, the average growth of acoustic pianos in the past three years has been stronger than the previous three years primarily due to:

  • Strong domestic economy.
  • Reduction in the number of used pianos in the marketplace.
  • Strong media and public interest in newly published research linking keyboard study to enhance intellectual development.

We have identified the seven largest competitors of Baldwin: four Asian companies (Young Change Akki Co., Ltd. (South Korea), “Young“, Roland Corporation (Japan), “Roland“, Kawai Musical Instruments Mfg. Co. Ltd. (Japan), “Kawai” and the Yamaha Corporation (Japan), “Yamaha“, one German company (C. Bechstein Pianofortebabrik AG, “Bechstein“) and two U.S. companies (Steinway Musical Instruments, “Steinway” and Allen Organ Company, “Allen“). See Exhibit I for a quantitative peer group analysis.

Close examination of comparable figures between Baldwin and its competitors provides some evidence as the competitive challenges facing the Company. Baldwin experienced negative sales growth of 7.4% during the FYE99 despite the aforementioned 5% growth of the category and 8.5% of its primary U.S. competitors. Furthermore, Baldwin’s margins immensely trailed all of its competitors in their last fiscal years, respectively. The Company’s gross profit margin of 15.73% compares poorly to the industry average of 33.42%, while its EBITDA margin registered negative 4.55% relative to the industry’s positive 7.33%.

The problem does not appear to be caused primarily by the management of working capital. Baldwin manages its collections quite efficiently relative to its peers. Specifically, the Company’s A/R DOH of 53 days relative to it A/P DOH of 63 days presents an area of management’s strength. While higher than the global peer group’s average, Baldwin’s inventory days on hand compares favorably to its U.S. counterparts. It appears that the Company’s cost structure provides the most significant clues to its poor recent performance.

Comparisons across cost structures across global competitors may seem inappropriate due to the cost advantages of digital keyboards, which account for the majority of the sales of the Asian companies and Allen. However, the remarkable difference in margins between Baldwin and Steinway provides an opportunity for critical analysis. Both Baldwin and Steinway make a majority of their sales in the labor and capital intensive acoustic piano market. Steinway’s gross profit margin of 32.9% positions it near the industry average while, significantly, it maintains the highest EBITDA margin of the entire peer group. The sales per employee ratio provide evidence to support the claim that a portion of Baldwin’s troubles may be found in its cost structure. Steinway’s sales per employee ratio of $143,832 nearly double Baldwin’s ratio of $72,111. Making up half the difference from Steinway would equate to Baldwin reducing its workforce from approximately 2,000 employees to approximately 1,150.

It should be noted here that Steinway concentrates its efforts more significantly on the higher-end products, while Baldwin offers a fully vertical line of keyboard products. The data in Exhibit I indicates that the Asian economic crisis did affect the sales and margins of Baldwin’s lower end products. Young recorded a negative EBITDA margin with sales decreasing 5.2% while Kawai recorded an EBITDA margin of only 3% on declining sales of 2.9%. It appears that these companies could have significant impact on Baldwin’s business.

The Asian economic crisis caused atypical conditions in the musical instruments industry in 1998 and 1999. Unusually high inventory levels held by dealers in 1998 followed by a decline in 1999 resulted in large part due to trade inventory loading in 1998. Piano and keyboard dealers stocked up because the Asian economic crisis caused a surge of Asian piano imports into the U.S. at dramatically discounted piano pricing. In 1999 the dealers worked off their excess inventory from the Asian flood before reordering.

Baldwin’s domestic unit market share for new acoustic pianos was approximately 28% in 1997, approximately 24% in 1998 and approximately 22% in 1999. No single manufacturer has a domestic market share larger than the Company’s, in terms of overall keyboard sales. The Company’s domestic market share for digital pianos was approximately 6% in 1997 and 5% in 1998 and 1999, respectively.

Contract Electronics

In 1984, the Company began manufacturing printed circuit board assemblies for original equipment manufacturers outside the music industry. Final applications include commercial and industrial power controls, heating and air conditioning systems, vending machines, mail handling systems, exercise equipment and semiconductor fabrication equipment. There are many contract manufacturers of electronic assemblies, and the Company does not have a significant share of the market of such products. In terms of sales, the Company believes that this Division is ranked in the top 65 out of approximately 1,000 contract electronics manufacturers in the U.S. The industry remains highly fragmented with predominantly small players and a few large ones. Baldwin has established a niche in low-to-medium volume assembly.

The Contract Electronics Division has increased resource investment, improved its work systems and expanded its customer/supplier partnerships. Since 1996, this Division has strategic partnerships with two of its top five customers. In one strategic partnership, Baldwin has enjoyed preferred supplier status – increasing the likelihood for preferential access to new business being outsourced by this customer. In the other, Baldwin has entered into long term supply arrangements that give the Company preferred supplier status for new business. Baldwin engineering and operations personnel work closely with customers to take a concept or design, develop it, test it and turn it into a manufactured circuit board assembly or finished product component.

Baldwin has stated its intention to grow this business slowly through its partnerships at a level of 5%. As a result, we do not consider this to be Baldwin’s core business and, due to the extremely fragmented and competitive nature of the industry, we discount Baldwin’s ability to make significant process in this business. As a result, we will not concentrate on this segment during our analysis of the Company and assume consistent 5% growth and steady margins.

Top Management

Karen L. Hendricks is Chairman, CEO & President. Prior to joining the Company in 1994, Ms. Hendricks served as the Executive Vice President and General Manager, Skin Care Division of The Dial Corporation since 1992, where she had full responsibility for Dial’s United States bar and liquid soap business and their industrial products. Ms. Hendricks previously was employed for over twenty years by The Procter & Gamble Company in various executive positions in product development and was promoted to General Manager of its Vidal Sassoon Hair Care Company in 1987. In her last two years at Procter & Gamble, she was Manager of Worldwide Strategic Planning for their hair care business. She also currently serves as a director of AC Nielsen Corporation and Columbia Energy Group.

Duane D. Kimble is Executive Vice President, Chief Financial Officer & Corporate Secretary. Mr. Kimble joined the Company in August 1998 as Vice President, Strategic Planning and then was named Chief Financial Officer in December 1998. Prior to joining the Company, Mr. Kimble had been director of finance and operations analysis for Equistar Chemicals, L.P., a leading producer of industrial chemicals, since 1997. From 1986 to 1997, Mr. Kimble held a variety of key financial positions with Millennium Petrochemicals, Inc., the nation’s largest domestic producer of polyethylene plastic.

Daniel B. Baker is Senior Vice President, Worldwide Music Sales. Prior to joining Baldwin in November 1996, Mr. Baker was Vice President, Professional Health Care Systems, a startup professional healthcare company. Prior to October 1994, Mr. Baker spent 14 years in Sales at Procter & Gamble, leaving at the Division Manager level. Prior to his employment with P&G, Mr. Baker was in the U.S. Army (from 1973 to 1980), leaving the Army with the rank of captain.

Perry H. Schwartz is the Company’s Senior Vice President and Treasurer. Mr. Schwartz joined the Company as Executive Vice President and Chief Financial Officer in November 1996 and then in December 1998, Mr. Schwartz was appointed to his current position. Prior to joining the Company, Mr. Schwartz served as Vice President and Chief Financial Officer of Richwood Pharmaceuticals, Inc., and from January 1994 to May 1996, he served as Senior Vice President and Chief Financial Officer of Brockway Standard Holdings Corporation. From October 1984 to January 1994, Mr. Schwartz was Senior Vice President and Chief Financial Officer of Heekin Can, Inc.

The Board

There are no family relationships among any of the directors nor among any of the directors and any executive officers of the Company.

Distribution & Customers

Music Products Division

Baldwin distributes its pianos in the U.S. through a network of approximately 375 independent dealers who sell products of other companies in addition to those of Baldwin as well as 15 company owned stores located in 7 large metropolitan areas which sell Baldwin products only. The company’s sales are very evenly distributed over the independent dealer network, with no single dealer accounting for more than approximately 5% of sales.

To attract and maintain dealers, the company offers a number of programs and services including:

  • A Concert and Artist program, in which prominent musicians and musical institutions endorse Baldwin grand pianos.
  • A dealer support program that provides training, promotional programs and sales incentives
  • Short-term loans to universities followed by “selling events” at the end of the term of the loan.
  • Sponsorship of educational activities such as piano competitions.

Since 1997, Baldwin has shipped its pianos to independent dealers using the services of an independent company that specializes in piano transport. This has resulted in reduced transportation costs (since the company ships for more than one dealer) and less in transit damage to pianos.

The company owned stores have been located in areas where they do not compete directly with the independent dealers. They account for approximately 14% of the company’s sales and provide the company with the opportunity to test new retailing concepts and dealer promotional ideas. They are also a source of future management talent.

Baldwin distributes its pianos in Canada through approximately 30 independent dealers. These sales represent approximately 3% of total revenues. Approximately 1% of sales is made in other countries via international distributors.

The principal demographic groups targeted by the company for its pianos are families with children between the ages of 6 and 12, young adults and educational institutions. Although the company manufactured and sold church organs until 1997, it decided to exit this business because of its unique dealer and customer base, which were deemed to not provide a good fit with the company’s core strengths.

Sales of new pianos are sensitive to the market for second hand instruments, particularly acoustic ones, and almost all of Baldwin’s sales are of new pianos. Baldwin’s domestic market share for acoustic pianos was approximately 28% in 1997, 24% in 1998 and 22% in 1999. These figures give Baldwin the largest market share of any single company in this segment. In the digital segment, the company’s domestic market share is approximately 5%.

Contract Electronics Division

The Contract Electronics Division’s customers include original equipment manufacturers in the commercial and industrial power controls, heating and air conditioning systems, vending machines, mail handling systems, exercise equipment and semiconductor industries. The division has formed strategic partnerships with two of its top five customers in which it has “preferred supplier” status that gives preferential access to new business outsourced by those customers.

The market for these products and services is occupied by approximately 1,000 predominantly small suppliers (and a few large ones) and Baldwin’s market share small – it is ranked approximately 65th in the industry. The company believes it has established a niche in the low-to-medium volume segment of the market.

Strategy & Performance

Strategic objectives

Music Products Division

Baldwin’s strategic objectives for its Music Products Division are as follows:

  1. To focus on the manufacture and sale of high quality pianos;
  2. To continue and increase the pace of product innovation;
  3. To streamline cost structures to improve gross margins;
  4. To increase asset utilization.

    In order to focus on its core business, Baldwin sold its entire Retail Financing Division at the end of 1999. The Division, consisting of two retail-financing units was purchased by Deutsche Financial Services (a company with extensive experience in the piano industry) for $35M. Baldwin planned to use the proceeds of these sales to reduce the leverage of its remaining Music Products Division businesses. In 1998, the company introduced a significant enhancement to its ConcertMaster electronic player system and in 1999 it introduced a new polyester finish for its pianos as well as improved versions of the iron plates used in their construction. Further product innovations planned for the first half of 2000 include improved models in the Artist Grand piano line, a new line of digital pianos and a lower cost version of the top-of-the-line Concertmaster electronic player system.

    To streamline costs and increase asset utilization, Baldwin has consolidated its grand piano assembly operations at its Trumann, Arkansas plant. Together with the introduction of new manufacturing techniques, this has reduced the floor space required for assembly operations and resulted in savings of $2M. Taking advantage of these new manufacturing techniques also permitted the sale of a large manufacturing facility in Juarez, Mexico and its replacement by a smaller leased facility.

    Contract Electronics Division

    Baldwin’s principal strategic objectives for its Contract Electronic Division are:

    1. To avoid the less profitable segments of the electronics market and to focus on the higher margin market segments;
    2. To increase its manufacturing efficiency and to upgrade the supporting infrastructure.

      To meet the first objective, the company intends to move away from the commodity driven electronics market segment and to focus on serving the contract manufacturing needs of the industrial, instrument and consumer products market segments, which provide higher margins.

      To streamline costs, the production planning function (responsible for scheduling consumer demand and managing manufacturing capacity) was upgraded during 1999 and the engineering department was reorganized. These changes, as well as others in the purchasing department, were introduced to improve responsiveness to customers and reduce overtime costs.

      Credit Arrangements

      Baldwin’s music products division faces a seasonal demand for its products, with sales peaking during the fourth quarter and particularly during the Thanksgiving /Christmas season. The company builds its inventory levels during the year to meet this fourth quarter demand. The financing for this working capital is provided by a $40M Revolving Credit Facility with General Electric Capital Corporation. Baldwin can terminate this facility at any time with ten days notice subject to payment of a fee. The maximum amount available under this line of credit is based on the carrying values of the company’s inventories and accounts receivable. The rate of interest payable is adjusted on a quarterly basis based on Baldwin’s operating cash flow ratio over the twelve month period ending on the last day of the quarter – the lower the operating cash flow ratio, the higher the applicable rate of interest.

      (This case is based on a joint class submission for the Turnarounds class submitted in April 2000 by Jawwad Farid, John Fennebresque, Dylan Steeg, Michael Trotz and Kent Tsen)