Cautionary Note Regarding Forward-Looking Statements
Unless otherwise indicated, references to "Jason Industries," the "Company,"
"we," "our" and "us" in this Quarterly Report on Form 10-Q refer to Jason
Industries, Inc. and its consolidated subsidiaries.
This report contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Specifically, forward-looking statements may include statements relating to our
future financial performance, changes in the markets for our products, our
expansion plans and opportunities, and other statements preceded by, followed by
or that include the words "estimate," "plan," "project," "forecast," "intend,"
"expect," "anticipate," "believe," "seek," "target" or similar expressions.
These forward-looking statements are based on information available as of the
date of this report and current expectations, forecasts and assumptions, and
involve a number of judgments, risks and uncertainties. Accordingly,
forward-looking statements should not be relied upon as representing our views
as of any subsequent date, and we do not undertake any obligation to update
forward-looking statements to reflect events or circumstances after the date
they were made, whether as a result of new information, future events or
otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, our actual
results or performance may be materially different from those expressed or
implied by these forward-looking statements. Many of these risks and
uncertainties are currently amplified by, and will continue to be amplified by,
or in the future may be amplified by, the COVID-19 outbreak and the related
governmental restrictions and the adverse impact on the global economy from the
outbreak. Some factors that could cause actual results to differ include, among
others:
•our ability to obtain confirmation of the Plan under the Chapter 11 Cases and
successfully consummate the Restructuring (each, as defined herein), including
by satisfying the conditions and milestones in the Restructuring Support
Agreement (as defined herein);
•our ability to improve our liquidity and long-term capital structure and to
address our debt service obligations through the Restructuring and the potential
adverse effects of the Chapter 11 Cases on our liquidity and results of
operations;
•our ability to obtain timely approval by the bankruptcy court with respect to
the motions filed in the Chapter 11 Cases;
•objections to the Company's recapitalization process or other pleadings filed
that could protract the Chapter 11 Cases and third party motions which may
interfere with Company's ability to consummate the Restructuring or an
alternative restructuring;
•the length of time that the Company will operate under Chapter 11 protection
and the continued availability of operating capital during the pendency of the
Chapter 11 Cases;
•increased administrative and legal costs related to the Chapter 11 process;
•potential delays in the Chapter 11 process due to the effects of the COVID-19
pandemic;
•the effects of the Restructuring and the Chapter 11 Cases on the Company and
the interests of various constituents;
•our substantial level of indebtedness and related debt service obligations and
restrictions, including those expected to be imposed by covenants in any exit
financing, that may limit our operational and financial flexibility;
•our ability to continue as a going concern and our ability to maintain
relationships with suppliers, customers, employees and other third parties as a
result of such going concern, the Restructuring and the Chapter 11 Cases;
•the COVID-19 pandemic, which has had, and is expected to continue to have, a
significant impact on our operations, including, but not limited to, weakened
demand for our products, supply chain disruptions, and the inability of certain
of our customers to timely meet their obligations to us;
•our ability to access additional capital and/or the capital markets;
•level of demand for our products;
•competition in our markets;
•volatility in the prices of raw materials and our ability to pass along
increased costs;
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•our ability to successfully complete divestitures and integrate acquisitions;
•our ability to grow and manage growth profitably;
•changes in applicable laws or regulations;
•our ability to attract and retain qualified personnel;
•the impact of proposed and potential regulations related to the U.S. Tax Cuts
and Jobs Act and the CARES Act;
•the possibility that we may be adversely affected by other economic, business,
trade, inflation and/or competitive factors; and
•other risks and uncertainties indicated in this report, as well as those
disclosed in the Company's other filings with the Securities and Exchange
Commission (the "SEC"), including those discussed under "Risk Factors" in Part
I, Item 1A of the Company's Annual Report on Form 10-K/A for the year ended
December 31, 2019, which may be amended or supplemented in Part II, Item 1A,
"Risk Factors," of our subsequently filed Quarterly Reports on Form 10-Q
(including this report).
Introductory Note
The following discussion and analysis of financial condition and results of
operations of the Company should be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 2019,
including the notes thereto, along with the related Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our 2019
Annual Report on Form 10-K/A.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contains certain financial measures, in particular EBITDA
and Adjusted EBITDA, which are not presented in accordance with GAAP. These
non-GAAP financial measures are being presented because management believes that
they provide readers of this MD&A with additional insight into the Company's
operational performance relative to comparable prior periods presented and
relative to its competitors. EBITDA and Adjusted EBITDA are key measures used by
the Company to evaluate its performance. The Company does not intend for these
non-GAAP financial measures to be a substitute for any GAAP financial
information. Readers of this MD&A should use these non-GAAP financial measures
only in conjunction with the comparable GAAP financial measures. Reconciliations
of EBITDA and Adjusted EBITDA to net income, the most comparable GAAP measure,
are provided in this MD&A.
Fiscal Year
Our fiscal year ends on December 31. Throughout the year, we report our results
using a fiscal calendar whereby each three month quarterly reporting period is
approximately thirteen weeks in length and ends on a Friday. The exceptions are
the first quarter, which begins on January 1, and the fourth quarter, which ends
on December 31. For 2020, our fiscal quarters are comprised of the three months
ended March 27, June 26, September 25, and December 31. In 2019, our fiscal
quarters were comprised of the three months ended March 29, June 28, September
27, and December 31. Throughout this MD&A, we refer to the period from
January 1, 2020 through March 27, 2020 as the "first quarter of 2020" or the
"first quarter ended March 27, 2020". Similarly, we refer to the period from
January 1, 2019 through March 29, 2019 as the "first quarter of 2019" or the
"first quarter ended March 29, 2019."
Overview
We are a global industrial manufacturing company with significant market share
positions in each of our two segments: industrial and engineered components. We
provide critical components and manufacturing solutions to customers across a
wide range of end markets, industries and geographies through our global network
of 22 manufacturing facilities and nine sales offices, administrative and/or
warehouse facilities throughout the United States and 13 foreign countries. We
have embedded relationships with long standing customers, superior scale and
resources, and specialized capabilities to design and manufacture specialized
products on which our customers rely.
We focus on markets with long-term sustainable growth characteristics and where
we are, or have the opportunity to become, the industry leader. Our industrial
segment focuses on the production of industrial brushes, polishing buffs and
compounds, abrasives, and roller technology products that are used in a broad
range of industrial and infrastructure applications. The engineered components
segment designs, engineers, and manufactures seating products used in heavy
industry (construction, agriculture, and material handling), turf care, and
power sports applications.
During the three months ended March 27, 2020 and March 29, 2019, approximately
34% and 35% of our sales, respectively, were derived from customers outside of
the United States. As a diversified, global business, our operations are
affected by worldwide, regional and industry-specific economic and political
factors. Our geographic and industry diversity, as well as the wide range of our
products, help mitigate the impact of industry or economic fluctuations. Given
the broad range of
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products manufactured and industries and geographies served, management
primarily uses general economic trends to predict the overall outlook for our
Company. Our individual businesses monitor key competitors and customers,
including to the extent possible their sales, to gauge relative performance and
the outlook for the future.
During 2019, we determined that both the North American fiber solutions business
and the Metalex business within the engineered components segment met the
criteria to be classified as discontinued operations. As a result, our prior
period results of operations, financial position and notes to the financial
statements have been recast to be presented on a continuing operations basis,
except where noted. On August 30, 2019 and December 13, 2019, we completed the
divestitures of our North American fiber solutions business and our Metalex
business, respectively.
On February 27, 2020, we acquired selected assets of Matchless, a North American
manufacturer of high-quality polishing buffs, compounds, and chemicals. Through
the acquisition of Matchless, we expanded our product line offerings within
North America. The business has been integrated into our industrial segment.
Impact of COVID-19
COVID-19 was first identified in late 2019, continued to spread throughout the
world in early 2020 and was eventually declared a pandemic by the World Health
Organization by the end of the first quarter of 2020. The COVID-19 pandemic has
resulted in national, state and local government authorities implementing
numerous measures to try to contain the virus, such as travel bans and
restrictions, border closings, restrictions on public gatherings, quarantining
of people who may have been exposed to the virus, shelter-in-place restrictions,
and limitations or shutdowns of business operations. The Company has significant
operations worldwide, including in the United States, Mexico and Germany, and
each of these countries has been affected by the outbreak and taken measures to
try to contain it, resulting in disruptions and closures at some of our
manufacturing facilities and support operations. These measures have impacted
and may further impact our workforce and operations, the operations of our
customers and distributors, and those of our vendors and suppliers. There is
considerable uncertainty regarding the impact, and expected duration, of such
measures and potential future measures, and restrictions on our access to our
facilities or on our support operations or workforce, or similar limitations for
our vendors and suppliers.
The Company continues to monitor and respond to the COVID-19 pandemic closely
and the top priority remains the health, safety and well-being of our employees,
their families and the communities in which we operate. As a result of the
significant decline in demand for the Company's products as well as disruptions
resulting from restrictions imposed by local governments to contain the virus,
we have experienced periodic and in some cases extended closures of our
manufacturing facilities primarily during the second quarter. Within the
industrial and engineered components segments, some of the markets and customers
the Company serves are considered essential businesses and therefore some of our
plants remained open in those jurisdictions with such essential designations. As
of the date of this filing, the Company's manufacturing operations have
generally resumed production at levels supporting current market demand as local
restrictions have been lifted. As the Company navigates through operating during
the COVID-19 pandemic, it has modified business practices where practicable to
ensure the safety of our employees such as but not limited to, developing social
distancing plans for employees, expanding the number of work from home employees
for roles that can work remotely and restricting employee travel.
The Company's financial results began to be impacted by COVID-19 late in the
first quarter of 2020, and COVID-19 has created significant uncertainty in the
future economic outlook of the Company's businesses. While the Company's
expectations for operating results in 2020 have been lowered to reflect the new
economic environment, the Company's businesses are taking cost countermeasures,
such as reductions in executive and salaried compensation, travel restrictions
and employee furloughs, to manage operating expenses and preserve liquidity. The
Company also began deferring certain lease payments for real property leases in
the second quarter.
Going Concern
The condensed consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company faces significant
challenges and uncertainties related to the COVID-19 pandemic. As a result, the
Company's available capital resources are expected to be consumed more rapidly
than previously forecasted due to (a) significantly increased economic and
demand uncertainty that has resulted in decreases in actual and expected future
sales of the Company's products; (b) significant disruptions to the Company's
ability to operate its manufacturing facilities due to restrictions placed on
business operations, which has resulted in decreases in actual and future
expected sales of the Company's products; (c) the effect of the COVID-19
pandemic on the Company's ability to obtain parts and materials from the
Company's suppliers, which has resulted in decreases in actual and expected
future sales of the Company's products; (d) the costs of continuing to staff
critical production and fulfillment functions despite the significant declines
in sales; (e) restructuring actions which are increasing operating expenses; (f)
costs related to the strategic alternatives process, including executive and
salaried retention agreements; and (g) other items affecting the Company's
forecasted level of expenditures and use of cash resources. These factors will
adversely impact the Company's ability to make a mandatory prepayment in August
2020 on its First Lien Term Loans of the net proceeds from the 2019 sale of the
Fiber Solutions business, of which $48.4 million was remaining after permitted
reinvestments as of March 27, 2020. At March 27, 2020 the Company had
$76.1 million of total liquidity, including
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$72.0 million of available cash (including $48.4 million of net proceeds from
the 2019 sale of the Fiber Solutions business and $12.5 million held at our
non-U.S. operations) and $4.1 million available under revolving loan facilities
outside the U.S. See "Senior Secured Credit Facilities" in the "Liquidity and
Capital Resources" section of this MD&A for further discussion of mandatory
prepayments of debt.
On March 31, 2020, Jason Incorporated (the "Borrower"), a subsidiary of the
Company, elected to defer making the interest payment of approximately $2.3
million due on March 31, 2020 to lenders under the Second Lien Credit Agreement
(as defined in "Senior Secured Credit Facilities" in the "Liquidity and Capital
Resources" section of this MD&A). This resulted in an event of default under the
Second Lien Credit Agreement, with a cross-default under the First Lien Credit
Agreement (as defined in "Senior Secured Credit Facilities" in the "Liquidity
and Capital Resources" section of this MD&A). Under the Intercreditor Agreement,
the lenders under the Second Lien Credit Agreement are not able to exercise
their rights and remedies in connection with such default for 180 days. As of
March 27, 2020, $89.9 million of principal amount of loans was outstanding under
the Second Lien Credit Agreement. On March 31, 2020, the Company made its
quarterly interest and amortization payments to the lenders under the First Lien
Credit Agreement and following these payments $283.7 million of principal amount
of loans was outstanding under the First Lien Credit Agreement as of such date.
As a result of the event of default, the Company is not able to draw on its
Revolving Credit Facility (as defined in "Senior Secured Credit Facilities" in
the "Liquidity and Capital Resources" section of this MD&A).
Also on March 31, 2020, the Borrower and certain of the Company's other
subsidiaries entered into a forbearance agreement with certain lenders under the
Borrower's First Lien Credit Agreement, which was subsequently amended and
restated on April 30, 2020, May 14, 2020, June 2, 2020 and June 3, 2020 (as
amended and restated, the "Amended and Restated Forbearance Agreement").
Pursuant to the Amended and Restated Forbearance Agreement, the Forbearing
Lenders agreed to forbear from exercising their rights and remedies during the
Amended and Restated Forbearance Period (as described below) as a result of the
failure by the Borrower to make the interest payment due on March 31, 2020 to
lenders under the Second Lien Credit Agreement. The Amended and Restated
Forbearance Period terminated on June 5, 2020.
On June 5, 2020 the Company entered into a Restructuring Support Agreement (the
"Restructuring Support Agreement") with certain creditors representing more than
75% of its outstanding indebtedness under its First Lien Credit Agreement. The
Restructuring Support Agreement contemplates agreed-upon terms for a
pre-packaged financial restructuring plan to be filed in cases commenced under
chapter 11 of title 11 of the United States Code. See the "Restructuring Support
Agreement" section of this MD&A below for further discussion of the terms of the
Restructuring Support Agreement.
The impact of the COVID-19 pandemic on the Company's forecasted liquidity and
the factors resulting from the event of default, cross-default and terms of the
Restructuring Support Agreement raise substantial doubt about the Company's
ability to continue as a going concern for the one-year period from the date of
issuance of these financial statements. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Restructuring Support Agreement
On June 5, 2020, the Company and certain of its direct and indirect subsidiaries
(collectively, the "Company Parties") entered into a Restructuring Support
Agreement with certain creditors (the "Consenting Creditors") under its First
Lien Credit Agreement, originally dated as of June 30, 2014 (the "First Lien
Credit Agreement"). The Restructuring Support Agreement contemplates agreed-upon
terms for a pre-packaged financial restructuring plan (the "Plan").
The Consenting Creditors as of the Agreement Effective Date (as defined in the
Restructuring Support Agreement) represent in excess of 75% of outstanding
principal amount of term loans under the First Lien Credit Agreement.
Under the Restructuring Support Agreement, the Consenting Creditors have agreed,
subject to certain terms and conditions, to support a financial restructuring
(the "Restructuring") of the existing debt of, existing equity interests in, and
certain other obligations of the Company Parties, pursuant to the Plan to be
filed in cases commenced under chapter 11 (the "Chapter 11 Cases") of title 11
of the United States Code (the "Bankruptcy Code").
The Plan will be implemented in accordance with the restructuring term sheet
attached to and incorporated into the Restructuring Support Agreement (the "Term
Sheet") (such transactions described in, and in accordance with the
Restructuring Support Agreement and the Term Sheet, the "Restructuring
Transactions") which, among other things, contemplates:
•the Consenting Creditors will consent to the Company's use of cash collateral
to fund the Chapter 11 Cases, provided that such use is in accordance with the
cash collateral order;
•(i) if lenders holding 100% of the outstanding principal amount of term loans
under the First Lien Credit Agreement are Consenting Creditors, the Company
shall make a voluntary prepayment in an amount equal to $10 million; or (ii) if
lenders holding less than 100% of the outstanding principal amount of term loans
under the First Lien Credit Agreement are Consenting Creditors, the Company
shall purchase term loans from such Consenting Creditors in an amount equal to
$10 million;
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•the Company shall pay a forbearance fee to the Consenting Creditors equal to
4.00% of the principal amount of term loans outstanding under the First Lien
Credit Agreement held by Consenting Creditors, of which (i) 2.00% shall be paid
in cash by the 10th business day following the Agreement Effective Date;
provided that any forbearance fee previously paid in cash by the Company to a
Consenting Creditor in connection with the forbearance agreements shall be
credited against such 2.00% cash portion owed to such Consenting Creditor
pursuant to the Restructuring Support Agreement; and (ii) 2.00% shall be paid on
the earlier of (A) the date of termination of the Restructuring Support
Agreement or (B) the effective date of the chapter 11 plan; provided that if
such fee is paid on the effective date of the plan, such fee shall be paid as a
portion of the recovery under the plan and for the avoidance of doubt, shall not
be a cash fee;
•on the effective date of the chapter 11 plan, the reorganized Company will
enter into an asset-based or similar new exit facility that (i) provides
availability of at least $20 million for revolving borrowing after permitting
for any amounts on account of outstanding letters of credit and (ii) has
aggregate total commitments of not less than $30 million;
•the holders of claims under the First Lien Credit Agreement shall receive their
pro rata share of and interest in: (i) a $75 million new first lien credit
facility; (ii) a $50 million new junior convertible term loan; (iii) 90% of the
new equity, subject to dilution on account of the new warrants, the management
incentive plan and the new junior convertible term loan; and (iv) if applicable,
the irrevocable right to offer the entirety of their pro rata distribution of
both the new equity and new junior convertible term loan to one more members
designated by the Consenting Creditors.
•the holders of claims under the Second Lien Credit Agreement shall receive: (i)
if such class of holders timely votes to accept the plan, their pro rata share
of (x) 10% of the new equity, subject to dilution on account of the new
warrants, the management incentive plan, and the new junior convertible term
loan, and (y) new warrants for 10% of the new equity, subject to dilution on
account of the management incentive plan and the new junior convertible term
loan; or (ii) if such class of holders rejects the plan, no distribution;
•all general unsecured claims will be paid in full or otherwise provided such
treatment as to render such claims unimpaired; and
•all preferred and common equity interests in the Company shall be cancelled and
released without any distribution.
In accordance with the Restructuring Support Agreement, the Consenting Creditors
agreed, among other things, to: (i) use commercially reasonable efforts to
support the Restructuring Transactions as contemplated by, and within the
timeframes outlined in, the Restructuring Support Agreement and the definitive
documents governing the Restructuring Transactions; (ii) not object to, delay or
impede the acceptance, implementation, or consummation of the Restructuring
Transactions in accordance with the Restructuring Support Agreement; (iii) vote
and consent to accept the Plan; and (iv) except as permitted in the
Restructuring Support Agreement, not transfer any ownership (including any
beneficial ownership as defined in Rule 13d-3 under the Securities Exchange Act
of 1934, as amended) held by each Consenting Creditor.
In accordance with the Restructuring Support Agreement, the Company Parties
agreed, among other things, to: (i) support and take all steps necessary and
desirable to consummate the Restructuring Transactions in accordance with the
Restructuring Support Agreement; (ii) not take any action, that is inconsistent
in any material respect, or that would reasonably be expected to prevent,
interfere with, delay, frustrate or impede approval, implementation and
consummation of the Restructuring Transactions; (iii) to the extent any legal or
structural impediment arises that would prevent, hinder, or delay the
consummation of the Restructuring Transactions contemplated in the Restructuring
Support Agreement or the Plan, (a) support and take all steps reasonably
necessary and desirable to address any such impediment and (b) negotiate in good
faith appropriate additional or alternative provisions to address any such
impediment, in consultation with the Consenting Creditors; (iv) obtain any and
all required governmental, regulatory and/or third-party approvals for the
Restructuring Transactions; (v) negotiate in good faith and execute and deliver
the Definitive Documents (as defined in the Restructuring Support Agreement) and
any other required agreements to effectuate and consummate the Restructuring
Transactions as contemplated by this Agreement; (vi) operate their business in
the ordinary course of business in a manner consistent with the Restructuring
Support Agreement, provided, however, that the Company board may determine in
good faith that operation of the business in the ordinary course is not
advisable due to potential health or safety concerns related to the COVID-19
emergency; (vii) seek additional support for the Restructuring Transactions from
their other material stakeholders to the extent reasonably prudent and (viii)
actively oppose and object to the efforts of any person seeking to object to,
delay, impede, or take any other action to interfere with the acceptance,
implementation, or consummation of the Restructuring Transactions (including, if
applicable, the timely filing of objections or written responses in the Chapter
11 Cases) to the extent such opposition or objection is reasonably necessary or
desirable to facilitate implementation of the Restructuring Transactions.
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The Restructuring Support Agreement may be terminated upon the occurrence of certain events set forth in the Definitive Documents, including the failure to meet specified milestones specified in the Restructuring Term Sheet. The Company expects to continue to operate its businesses serving customers without interruption during the course of the restructuring proceedings, and while the Plan remains subject to court approval, the Company expects that all trade creditors, employees, sales agents and unsecured creditors will be paid in full and on time in the normal course of business.



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