As reported via The Tennessean ( :
Nashville-based Gibson Brands had its credit rating downgraded this week thanks in part to the poor consumer reception of its 2015 model guitars.
Gibson was downgraded by Moody’s Investors Service, which also put the rating on a negative outlook in a strikingly negative report. The rating was downgraded from B3 to Caa1.
In addition to the poor sales for its 2015 guitars, Gibson was downgraded because of high turnover in its senior financial management. The downgrade came with an ominous warning that Gibson may not be able to meet its near term financial obligations, including nearly $100 million in obligations due over the next 22 months.
“The ratings also reflect the company’s high leverage at around 8.5 times and the risks associated with the consumer electronics business,” the Moody’s news release about the downgrade said.
The downgrade comes on the heels of Gibson aggressively acquiring consumer electronics companies, including Onkyo, and shifting its strategy from focusing primarily on guitars and other instruments to more broadly becoming a music lifestyles company. (edit: Darth’s note – “Gibson changes tune: Electronics before guitars“)
Those acquisitions have left the company increasingly leveraged, with a debt to earnings before interest, taxes, depreciation and amortization ratio of 8.5 times, according to Moody’s. That’s up from a debt to EBITDA ratio of 5-times at this time last year.
The company introduced some design changes last year including a robotic tuner called the E-Tune that was standard on many of its flagship models.
Gibson says it is already seeing a financial turnaround on the sales side, and the company has a new CFO to help address stability concerns about senior financial management. Gibson, the maker of the iconic Les Paul model electric guitars, is a privately owned company in its 122nd year of operation.
“The company has posted quarterly results for our quarter ending December 2015 that were materially better than they were for the prior year,” Gibson Chairman and CEO Henry Juszkiewicz said. “While we experienced a soft reception to our 2015 products, we have since introduced our improved 2016 product line that is performing extremely well both in sales to retailers and sell through to consumers globally. We feel we are on an upward trend, poised for an excellent year and are confident of the future.”
Kevin Cassidy, Moody’s senior credit officer, expressed concerns about Gibson’s upcoming debt obligations, including a $36 million payment due in December of this year and another $62 million due in December 2017.
“The downgrade reflects the weak performance and the resulting very high leverage and also the additional financial obligations Gibson incurred from its agreement with a consumer electronics supplier to settle overdue payables and the stress it puts on the company’s liquidity profile,” Cassidy said.
Moody’s called it unlikely in the near term that the negative outlook would be lifted, but over the long term an upgrade is possible “if Gibson improves and sustains its operating performance.”
Revenues were approximately $1.7 billion for 2015. That number has skyrocketed in recent years, up from $300 million in 2010, thanks to the acquisitions of several electronics companies like WOOX.
The Moody’s credit opinion made issue of high turnover in Gibson’s senior financial management. Turnover within the company was made an issue in blog posts on the pop culture website Gawker.com. In comments to The Tennessean last year, Juszkiewicz defended the company’s culture and said the complaints were from a vocal minority.
On Friday, Juszkiewicz said the company has hired a new CFO, Benson K. Woo, who comes to Gibson from Rayonier Advanced Materials Inc.
“We feel the addition of a world-class CFO who has a global background with several major companies has significantly improved our capabilities in this area,” Juszkiewicz said. “We tripled the size of our business one year ago and have been integrating a substantial new business. It is not unusual to have some speed bumps in the integration process of a major new global entity. We believe we are progressing well and are very excited about this coming year.”
Juszkiewicz said the company is committed to Nashville, where it hopes to grow its manufacturing of audio products.
“As part of our continued commitment to Nashville and American manufacturing, we continue to hire people and expand,” Juszkiewicz said. “We also hope to start manufacturing consumer audio products in our Nashville manufacturing campus within the year.”