(The following statement was released by the ratings agency)
MOODY'S DOWNGRADES JASON INC.'S RATINGS (SR. SEC. TO B3; SR. SUB. TO Caa2); OUTLOOK CHANGED TO NEGATIVE
Approximately $243 Million of Debt Obligations Affected
NEW YORK, Dec 24 - Moody's Investors Service downgraded the ratings for Jason Incorporated ("Jason") and changed the rating outlook to negative. . Moody's notes concern regarding the weakness in Jason's operating profitability and cash flow generation, particularly within the company's most value-added Milsco Manufacturing seating and Janesville-Sackner automotive fiber insulation/acoustical trim divisions. This was due primarily to investment in product development and new launches. Moody's believes that there is a strong likelihood that, absent further amendment, Jason will incur near-term financial covenant violations to its senior secured credit agreement. Moody's additionally notes the escalating risk associated with the fact that all of Jason's $127.6 million of remaining bank term loan obligations will mature by June 2007, with scheduled quarterly amortization requirements stepping up over the remaining tenor. Moody's took the following specific rating actions: - Downgrade to B3, from B2, of Jason's $168 million of remaining guaranteed senior secured bank credit facilities, which consist of: - $40 million revolving credit facility due July 2005; - $30.9 million remaining term loan A due July 2005; and - $96.7 million remaining term loan B due January 2007; - Downgrade to Caa2, from Caa1, of Jason's approximately $75 million of 13% guaranteed senior subordinated notes due November 2008; - Downgrade to B3, from B2, of Jason's senior implied rating; - Downgrade to Caa1, from B3, of Jason's senior unsecured issuer rating The rating actions and negative outlook reflect Moody's concern regarding Jason's persistent high leverage, marginal cash interest coverage, limited available liquidity, and near-term pressures to satisfy scheduled increases in the principal amortization requirements pertaining to Jason's senior secured term loan obligations. Jason's cash flow generation and operating margin performance have fallen well short of estimates within the financial plan on which the April 2002 amendment to financial covenant requirements was based. While the company's revenue performance has notably continued to hold up well versus plan, the actual revenue mix has varied across divisions and has been favorably impacted by the weakening of the US dollar against the major European currencies. Moody's has additional concerns regarding Jason's need to continuously invest in new technologies to remain competitive and broaden its product base associated with the most valued-added product lines. The company additionally risks stepped-up customer pricing pressures, particularly with regard to more commodity-oriented products. Jason may also need to incur greater capital expenditures to grow production capabilities in lower cost countries as it follows the movement of certain customers into emerging markets (primarily Southeast Asia). Jason's key business lines remain vulnerable to the level of vehicle production levels, as well as to the general state of the economy. Moody's also continues to believe that Jason's diversified portfolio of small niche industrial businesses has limited operating synergies and is difficult to manage as a unified entity. The company is actively in discussions with its bank group and investors to relax covenants and additionally either extend principal maturities or refinance certain debt with new loans. Should Jason succeed in this endeavor, the company would benefit from improved liquidity by virtue of alleviation of a portion of the company's near-to-intermediate term principal amortization requirements. Additional revolving credit availability would also be likely to result. The ratings more favorably continue to reflect Jason's strong position in the niche markets it serves. Jason is the top producer in the U.S. and/or world for approximately 90% of its defined product lines. While earnings declined in 2003 due primarily to the cost of investing in product development and the cost of new program launches (Ford F-150, marine seat, golf car seat and new industrial seat), these expenditures should have a major benefit to 2004 and beyond. Incremental new business booked for production next year consists of $25 million for Milsco Manufacturing and $13 million for the Janesville-Sackner Group. Utilization of the highly automated Thompson, GA facility will furthermore increase as new Milsco marine, industrial, and golf cart seating production ramps up during 2004. Market opportunities in the seating market are enhanced by the trend towards stepped up outsourcing of components by marine OE's that desire to be more focused on core product offerings. Completion of a new south China facility through a joint venture partner in 2004 should provide an ability to recapture customers in the JacksonLea industrial buffing wheel and compound business that have moved production to lower cost developing markets, and to potentially add previously unserved European manufacturers. Future events that have potential to lead to further rating downgrades include a failure by Jason to promptly address existing weaknesses within its capital structure, inadequate available liquidity, loss of market share within key niches, increased customer price compression, and/or a failure of the company to improve consolidated operating margins adequately enough to bring total interest coverage above 1.0x on a sustainable basis. Future events that could potentially stabilize Jason's ratings include definitive recapitalization of a material portion of Jason's existing debt obligations (which would serve to extend principal amortization requirements and meaningfully loosen financial covenant requirements), successful expansion on a profitable basis into new products or markets, and/or evidence that margins within the Milsco Manufacturing and Janesville-Sackner divisions are returning to historical levels. For the last twelve months ended September 26, 2003, EBIT coverage of total interest expense declined to approximately 0.9x, versus 1.1x for the fiscal year ended December 27, 2002. For the LTM period ended September 26, 2003, total debt/EBITDA leverage was high at 5.7x and 6.4x respectively, before and after including the outstanding redeemable preferred stock as debt. The EBIT return on assets for the same period was 6.4%. EBIT and EBITDA were adjusted to add-back approximately $1.7 million of losses recorded on asset sales. Jason, headquartered in Milwaukee, Wisconsin, is a diversified industrial manufacturing company with leading positions in niche markets throughout the world. Jason's two major business segments are Motor Vehicle Products and Industrial Products. The Motor Vehicle Products divisions include (i) Automotive Acoustical Fiber Insulation (e.g. Marabond moldable floors, door panel inserts and acoustical trim) and (ii) Seating (e.g. Harley-Davidson exclusive, construction, agricultural and turf vehicles, marine and golf car seats). The Industrial Products divisions include (i) Industrial Consumables (e.g. industrial brushes, buffs and compounds) and (ii) Industrial Components (e.g. stamping and assemblies, wire-formed and expanded metal products). Jason's annual revenues approximate $450 million.