NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Horizon Global Corporation and its consolidated subsidiaries (“Horizon,” “Horizon Global,” “we,” or the “Company”) are a global designer, manufacturer and distributor of a wide variety of high quality, custom-engineered towing, trailering, cargo management and other related accessories. These products are designed to support automotive original equipment manufacturers (“automotive OEMs”) and automotive original equipment servicers (“automotive OESs”) (collectively, “OEs”), aftermarket and retail customers within the agricultural, automotive, construction, horse/livestock, industrial, marine, military, recreational, trailer and utility markets. The Company groups its business into operating segments generally by the region in which sales and manufacturing efforts are focused. As a result of the Company’s sale of its Horizon Asia-Pacific operating segment (“APAC”) in 2019, the Company’s operating segments are Horizon Americas and Horizon Europe‑Africa. See Note 18, Segment Information, for further information on each of the Company’s operating segments. APAC results are reported separately as discontinued operations in our consolidated financial statements for all periods presented. Discontinued operations are further discussed in Note 4, Discontinued Operations.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of Americas (“U.S. GAAP”).
2. New Accounting Pronouncements
New accounting pronouncements not yet adopted
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by removing certain separation models in Accounting Standards Codification (“ASC”) 470-20, “Debt—Debt with Conversion and Other Options,” for convertible instruments. Under ASU 2020-06, the embedded conversion features no longer are separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under ASC 815, “Derivatives and Hedging,” or that do not result in substantial premiums accounted for as paid-in capital. For smaller reporting companies, ASU 2020-06 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2023, with early adoption permitted for fiscal years beginning after December 15, 2020. We are currently assessing the impact of this update on the Company’s consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for (or recognize the effects of) reference rate reform on financial reporting. The relief provided by this guidance is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform initiatives being undertaken in an effort to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The optional amendments of this guidance are effective for all entities upon adoption. We are currently assessing the impact of this update on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 replaces the current incurred loss model guidance with a new method that reflects expected credit losses. Under this guidance, an entity would recognize an allowance for credit losses equal to its estimate of expected credit losses on financial assets measured at amortized cost. In November 2019, the FASB extended the effective date of ASU 2016-13 for smaller reporting companies. As a result, ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022, with early adoption permitted. The standard is not expected to have a significant impact on the Company's consolidated financial statements.
Accounting pronouncements recently adopted
There were no new accounting pronouncements adopted during the year ended December 31, 2020.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the assets, liabilities, revenues and expenses of Horizon Global and its wholly-owned subsidiaries. In addition, the consolidated financial statements include the consolidation of a variable interest entity for which the Company has been deemed to be the primary beneficiary. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and other intangibles, valuation allowances for receivables, inventories and deferred income tax assets, asset impairments, valuation of derivatives, estimates related to lease liability and operating lease right-of-use (“ROU”) asset valuations, estimated future unrecoverable lease costs, estimated uncertain tax positions, legal and product liability matters, valuation of debt instruments and warrants, assets and obligations related to employee benefits, and the respective allocation methods. Actual results may differ from such estimates and assumptions.
Cash and Cash Equivalents. The Company considers cash on hand and on deposit and investments in all highly liquid debt instruments with initial maturities of three months or less to be cash and cash equivalents.
Restricted Cash. Restricted cash consists of cash that must be maintained as collateral for letters of credit or other restrictions. The Company considers the expected timing of the release of the restrictions to determine the appropriate financial statement classification. Refer to Note 10, Long-term Debt, for additional information.
Account Receivables. Receivables consist primarily of amounts from contracts with customers for the sale of towing, trailering, cargo management and other related accessories. As of December 31, 2020 and 2019, receivables were $87.4 million and $71.7 million, respectively, net of allowances for doubtful accounts of $2.7 million and $3.2 million, respectively. The Company monitors its exposure for credit losses and maintains allowances for doubtful accounts based upon the Company’s best estimate of probable losses inherent in the account receivables balances. The Company does not believe that significant credit risk exists due to its diverse customer base.
Account Receivables Factoring. The Company has factoring arrangements with financial institutions to sell certain accounts receivables under certain non-recourse agreements. During the twelve months ended December 31, 2020 and 2019, total receivables sold under the factoring arrangements were $237.1 million and $258.4 million, respectively. The sales of accounts receivable in accordance with the factoring arrangements are reflected as a reduction of receivables, net in the consolidated balance sheets as they meet the applicable criteria of ASC 860, “Transfers and Servicing.” As of December 31, 2020 and 2019, the holdback amounts due from the factoring institutions were $8.7 million and $5.7 million, respectively, and are shown in receivables, net in the consolidated balance sheets. Cash proceeds from these arrangements are included in the change in receivables under the operating activities section of the consolidated statements of cash flows. The Company pays factoring fees associated with the sale of receivables based on the dollar value of the receivables sold. During the twelve months ended December 31, 2020 and 2019, total factoring fees were $1.0 million for each period.
Inventories. Inventories are stated at lower of cost or net realizable value, with cost determined using the first-in, first-out basis. Direct materials, direct labor and allocations of variable and fixed manufacturing-related overhead are included in inventory cost. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable cost of completion, disposal and transportation.
Property and Equipment. Property and equipment additions, including significant improvements, are recorded at cost. Upon retirement or disposal of property and equipment, the historical cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in the accompanying consolidated statements of operations. Repair and maintenance costs are charged to expense as incurred.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows:
|
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|
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Fixed Asset Category
|
Estimated Useful Life
|
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Building and Land/Building Improvements
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10 - 40 years
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Machinery and Equipment
|
3 - 15 years
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|
|
Leases. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets; short-term operating lease liabilities; and long-term operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net; short-term borrowings and current maturities, long-term debt; and long-term debt in our consolidated balance sheets. Short-term leases with terms of twelve months or less are not recognized on the balance sheet and are expensed over the lease term.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets. The Company reviews its financial performance for indicators of impairment on at least a quarterly basis. In reviewing for impairment indicators, the Company considers events or changes in circumstances such as business prospects, customer retention, market trends, potential product obsolescence, competitive activities and other economic factors. An impairment loss is recognized when the carrying value of an asset group exceeds the future net undiscounted cash flows expected to be generated by that asset group. The impairment loss recognized is the amount by which the carrying value of the asset group exceeds its fair value.
Goodwill. Goodwill is acquired in a business combination and represents the excess of purchase consideration over the fair value of assets acquired and liabilities assumed. The Company determines its reporting units at the individual operating segment level, or one level below, when there is discrete financial information available that is regularly reviewed by segment management for evaluating operating results. Goodwill is reviewed by the Company for impairment on a reporting unit basis annually on October 1st or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, then the Company performs testing for possible impairment in a one-step quantitative process. The fair value of a reporting unit is compared with its carrying value, including goodwill. If fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then goodwill is considered to be impaired in the amount of the excess of a reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
For purposes of the Company’s annual goodwill impairment test, the Company had one reporting unit with a goodwill balance which is also one of its operating segments, Horizon Americas. This reporting unit had goodwill of $3.1 million at the 2020 annual test for impairment. See Note 6, Goodwill and Other Intangible Assets, for further information.
Indefinite-Lived Intangibles. The Company assesses indefinite-lived intangible assets for impairment annually on October 1st by reviewing relevant qualitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events.
Indefinite-lived intangible assets are tested for impairment by comparing the fair value of each intangible asset with its carrying value. The value of indefinite-lived intangible assets are based on the present value of projected cash flows using a relief from royalty approach. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. See Note 6, Goodwill and Other Intangible Assets, for further information.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Revenue Recognition and Sales Related Accruals. Revenue is recognized when obligations under the terms of a contract with the Company’s customers are satisfied; generally, this occurs with the transfer of control of its towing, trailering, cargo management and other related accessory products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products. Sales, value added and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
For the majority of the Company’s sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset.
Provisions for customer volume rebates, product returns, discounts and allowances, including incentives for cooperative advertising, are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. The Company uses the most likely amount method to estimate variable consideration. For the twelve months ended December 31, 2020 and 2019, adjustments to estimates of variable consideration for previously recognized revenue were insignificant.
The Company expenses costs incurred to obtain a contract with a customer when the amortization period is one year or less. These costs include sales commissions as the Company has determined annual compensation is commensurate with annual sales activities.
The Company does not adjust consideration for the effects of a significant financing component when the period between shipment of its products and customer’s payment is one year or less.
Cost of Sales. Cost of sales includes material, labor and overhead costs incurred in the manufacturing of products sold in the period. Material costs include raw material, purchased components, outside processing and shipping and handling costs. Overhead costs consist of variable and fixed manufacturing costs, wages and fringe benefits, and purchasing, receiving and inspection costs.
Research and Development Costs. Research and development (“R&D”) costs are expensed as incurred. During the twelve months ended December 31, 2020 and 2019, R&D expenses were $13.3 million and $13.2 million, respectively, and are included in cost of sales in the accompanying consolidated statements of operations.
Selling, General and Administrative Expenses. Selling, general and administrative expenses include the following: costs related to the advertising, sale and marketing of the Company’s products, amortization of customer intangible assets, costs associated with the Company’s distribution network, costs of back office support functions and other administrative expenses.
Shipping and Handling Expenses. Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in cost of sales. Other shipping and handling expenses, which primarily relate to Horizon Americas’ distribution network, are included in selling, general and administrative expenses in the accompanying consolidated statements of operations. During the twelve months ended December 31, 2020 and 2019, other shipping and handling costs were $17.0 million and $20.6 million, respectively.
Advertising and Sales Promotion Costs. Advertising and sales promotion costs are expensed as incurred. During the twelve months ended December 31, 2020 and 2019, advertising and sales promotion costs were $2.6 million and $2.3 million, respectively, in selling, general and administrative expenses in the accompanying consolidated statements of operations.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes. The Company computes income taxes using the asset and liability method, whereby deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities and for operating loss and tax credit carryforwards. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. Valuation allowances are determined based on an assessment of positive and negative evidence on a jurisdiction-by-jurisdiction basis and are utilized to reduce deferred tax assets to the amount more likely than not to be realized. The Company recognizes the effect of income tax positions only if those positions have a probability of more likely than not of being sustained in an audit. Recognized income tax positions are measured at the largest amount that has greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to uncertain tax positions within income tax expense. Accrued interest and penalties are included within the related tax liability line in the consolidated balance sheets.
The provision for federal, foreign, and state and local income taxes is calculated on income before income taxes based on current tax law and includes the cumulative effect of any changes in tax rates from those used previously in determining deferred tax assets and liabilities. Such provision differs from the amounts currently payable because certain items of income and expense are recognized in different reporting periods for financial reporting purposes than for income tax purposes.
Foreign Currency Translation. The financial statements of subsidiaries located outside of the United States are measured using the currency of the primary economic environment in which they operate as their functional currency. When translating into U.S. dollars, income and expense items are translated at period average exchange rates and assets and liabilities are translated at exchange rates in effect at the balance sheet date. Translation adjustments resulting from translating the functional currency into U.S. dollars are deferred as a component of accumulated other comprehensive income (loss) (“AOCI”) in the consolidated balance sheets.
Foreign Currency Remeasurement. The effects of remeasuring monetary assets and liabilities of the Company’s businesses denominated in currencies other than their functional currency are recorded as transaction gains and losses as a component of other expense, net in the consolidated statements of operations. Additionally, gains and losses resulting from transactions denominated in a currency other than the functional currency are recorded as transaction gains and losses as a component of other expense, net in the consolidated statements of operations. During the twelve months ended December 31, 2020 and 2019, net foreign currency transaction gains were $0.9 million and $0.1 million, respectively.
Derivative Financial Instruments. The Company records all derivative financial instruments at fair value on the balance sheets as either assets or liabilities, and changes in their fair values are immediately recognized in earnings if the derivatives do not qualify as effective hedges. If a derivative is designated as a fair value hedge, then the effective portion of changes in the fair value of the derivative are offset against the changes in the fair value of the underlying hedged item. If a derivative is designated as a cash flow hedge, then the effective portion of the changes in the fair value of the derivative is recognized as a component of AOCI until the underlying hedged item is recognized in earnings or the forecasted transaction is no longer probable of occurring. When the underlying hedged transaction is realized or the hedged transaction is no longer probable, the gain or loss included in AOCI is reclassified into earnings and reflected in the consolidated statements of operations through the same line item as the underlying hedged item.
The Company formally documents hedging relationships for all derivative transactions and the underlying hedged items, as well as its risk management objectives and strategies for undertaking the hedge transactions at the time of transaction.
Fair Value of Financial Instruments. In accounting for and disclosing the fair value of these instruments, the Company uses the following hierarchy:
▪Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date;
▪Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
▪Level 3 inputs are unobservable inputs for the asset or liability.
Valuation of the Company’s foreign currency forward contracts and cross currency swaps are based on the income approach, which uses observable inputs such as forward currency exchange rates and swap rates. There were no outstanding derivatives contracts at December 31, 2020 and 2019.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Earnings (Loss) Per Share. Basic earnings (loss) per share (“EPS”) is computed based upon the weighted average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted average number of common shares and common equivalent shares outstanding for each period. Common equivalent shares represent the effect of stock-based awards, warrants, and convertible notes during each period presented, which, if exercised, earned, or converted, would have a dilutive effect on EPS. Dilutive EPS is calculated to give effect to stock options and warrants, restricted shares outstanding, and convertible notes during each period. Loss per share excludes certain dilutive securities as inclusion results in an anti-dilutive effect.
Environmental Obligations. The Company is subject to environmental laws and regulations, including those relating to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require the obtainment and compliance with environmental permits. To date, costs of complying with environmental requirements have not been material; however, the Company cannot quantify with certainty the potential impact of future compliance efforts and environmental remediation actions.
While the Company must comply with existing and pending climate change legislation, regulation and international treaties or accords, current laws and regulations have not had a material impact on the Company’s business, capital expenditures or financial position. Future events, including those relating to climate change or greenhouse gas regulation could require the Company to incur expenses related to the modification or curtailment of operations, installation of pollution control equipment or investigation and cleanup of contaminated sites.
Contingencies and Ordinary Course Claims. In the ordinary course of business, the Company is subject of, or party to, various pending or threatened legal actions and other contingent liability actions, including those arising from alleged defects related to our products, product warranties, recalls, breach of contracts, intellectual property matters, international trade, customs and duties matters, employment-related matters and other litigation. Litigation is always subject to inherent uncertainty and the Company is not able to reasonably predict if any matter will be resolved in a manner that is materially adverse to the Company.
An accrual for potential losses related to these contingencies is established when there is a probable occurrence of loss and the amount can be reasonably estimated. The Company does not record liabilities when the likelihood that a liability has been incurred is probable, but the amount cannot be reasonably estimated, or when the liability is believed to be only reasonably possible or remote. When the Company evaluates matters for accrual and disclosure purposes, management takes into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted and the related jurisdictional legal proceedings, the likelihood that we will prevail, and the severity of any potential loss. We monitor and update our accruals as matters progress over time.
The Company carries product liability, recall and other insurance to defray some of the costs if a claim settlement or judgment exceeds our self-insured retention limit. Refer to Note 14, Contingencies, for additional information.
Stock-based Compensation. The Company measures stock-based compensation expense at fair value as of the grant date in accordance with U.S. GAAP and recognizes such expenses over the vesting period of the stock-based employee awards. Stock options are issued with an exercise price equal to the opening market price of Horizon common shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option pricing model, which incorporates assumptions regarding the expected volatility, expected option life, risk-free interest rate and expected dividend yield. In addition, the Company periodically updates its estimate of attainment for each restricted share with a performance factor based on current and forecasted results, reflecting the change from prior estimate, if any, in current period compensation expense.
Other Comprehensive Income (Loss). The Company refers to other comprehensive income (loss) as revenues, expenses, gains and losses that under U.S. GAAP are included in comprehensive income (loss) but are excluded from net income (loss) as these amounts are recorded directly as an adjustment to AOCI. Other comprehensive income (loss) is comprised of foreign currency translation adjustments and changes in unrealized gains and losses on forward currency contracts and cross currency swaps.
4. Discontinued Operations
On September 19, 2019, the Company completed the sale of its subsidiaries that comprised APAC to Hayman Pacific BidCo Pty Ltd., an affiliate of Pacific Equity Partners, for $209.6 million in net cash proceeds after payment of transaction costs, in a net debt free sale. The sale resulted in the recognition of a gain of $180.5 million, of which $17.3 million was related to the cumulative translation adjustment that was reclassified to earnings, which is reflected within the income from discontinued operations, net of income taxes line of the consolidated statements of operations.
The Company has classified APAC’s operating results and the gain on the sale as discontinued operations in the accompanying consolidated statements of operations for all periods presented in accordance with ASC 205, “Discontinued Operations.” Prior to the sale, APAC was included as a separate operating segment.
In the first quarter of 2020, the remaining post-closing conditions of the sale were completed, resulting in a true up to net cash proceeds, for which we recognized a loss on sale of discontinued operations of $0.5 million.
The Company’s results from discontinued operations through the date of sale of APAC, September 19, 2019 are as follows:
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|
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|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2019
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
92,300
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|
|
|
|
|
|
Cost of sales
|
|
(68,530)
|
|
|
|
|
|
|
Gross profit
|
|
23,770
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
(9,580)
|
|
|
|
|
|
|
Other expense, net
|
|
(400)
|
|
|
|
|
|
|
Interest expense
|
|
(310)
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|
|
|
|
|
|
Income before income tax expense
|
|
13,480
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|
|
|
|
|
|
Income tax expense
|
|
(4,450)
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|
|
|
|
|
|
Gain on sale of discontinued operations
|
|
180,490
|
|
|
|
|
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
189,520
|
|
|
|
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Revenues
The Company disaggregates revenue from contracts with customers by major sales channel. The Company determined that disaggregating revenue into these categories best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The automotive OEM channel represents sales to automotive vehicle manufacturers. The automotive OES channel primarily represents sales to automotive vehicle dealerships. The aftermarket channel represents sales to automotive installers and warehouse distributors. The retail channel represents sales to direct-to-consumer retailers. The industrial channel represents sales to non-automotive manufacturers and dealers of agricultural equipment, trailers, and other custom assemblies. The e-commerce channel represents sales to direct-to-consumer retailers who utilize the Internet to purchase the Company’s products. The other channel represents sales that do not fit into a category described above and these sales are considered ancillary to the Company’s core operating activities.
The Company’s net sales by segments and disaggregated by major sales channel are as follows:
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|
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|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2020
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|
|
|
Horizon Americas
|
|
Horizon Europe-Africa
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|
Total
|
|
|
|
(dollars in thousands)
|
|
Net Sales
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|
|
|
|
|
Automotive OEM
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|
$
|
77,280
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|
|
$
|
149,850
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|
|
$
|
227,130
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|
|
Automotive OES
|
|
8,310
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|
|
50,290
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|
|
58,600
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|
|
Aftermarket
|
|
114,750
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|
|
73,010
|
|
|
187,760
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|
|
Retail
|
|
100,660
|
|
|
—
|
|
|
100,660
|
|
|
Industrial
|
|
27,480
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|
|
1,670
|
|
|
29,150
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|
|
E-commerce
|
|
53,850
|
|
|
1,570
|
|
|
55,420
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|
|
Other
|
|
50
|
|
|
2,460
|
|
|
2,510
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|
|
Total
|
|
$
|
382,380
|
|
|
$
|
278,850
|
|
|
$
|
661,230
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2019
|
|
|
|
Horizon Americas
|
|
Horizon Europe-Africa
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
87,700
|
|
|
$
|
181,490
|
|
|
$
|
269,190
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|
|
Automotive OES
|
|
6,950
|
|
|
58,080
|
|
|
65,030
|
|
|
Aftermarket
|
|
96,910
|
|
|
69,370
|
|
|
166,280
|
|
|
Retail
|
|
105,970
|
|
|
—
|
|
|
105,970
|
|
|
Industrial
|
|
29,390
|
|
|
2,850
|
|
|
32,240
|
|
|
E-commerce
|
|
45,750
|
|
|
1,880
|
|
|
47,630
|
|
|
Other
|
|
50
|
|
|
4,060
|
|
|
4,110
|
|
|
Total
|
|
$
|
372,720
|
|
|
$
|
317,730
|
|
|
$
|
690,450
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Goodwill and Other Intangible Assets
The novel coronavirus (“COVID-19”) pandemic and the related wide-ranging actions taken by international, federal, state, and local public health and governmental authorities to combat the pandemic and spread of COVID-19 in regions across the United States and the world resulted in a temporary decline in the financial performance of the Company, primarily related to the first half of the year, and at the same time pressure on its near-term financial forecasts. Consequently, the Company identified an indicator of impairment on its goodwill and indefinite-lived intangible assets in its Horizon Americas reporting unit and on its indefinite-lived intangible assets in its Horizon Europe-Africa reporting unit in the first quarter of 2020.
As a result of the indicator, the Company performed an interim quantitative impairment assessment of the goodwill recorded for the Horizon Americas reporting unit as of March 31, 2020, by considering the market and income approaches. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value. Key assumptions used in the analysis were a discount rate of 14.0%, Adjusted EBITDA (as defined below) margin and a terminal growth rate of 3.0%. The primary driver in the reduction of the fair value of the reporting unit was a reduction of expected future cash flows during the remainder of 2020 to reflect the uncertainty surrounding the full impact of the COVID-19 pandemic. Future events and changing market conditions, including operating restrictions may, however, lead the Company to re-evaluate the assumptions that have been used to test for goodwill impairment, including key assumptions used in the expected Adjusted EBITDA margin, cash flows and discount rate, as well as other assumptions with respect to matters outside of the Company’s control, such as currency rates and the aforementioned geographical government shutdowns and operating restrictions.
Adjusted EBITDA is defined as net income attributable to Horizon Global before interest expense, income taxes, depreciation and amortization, and before certain items, as applicable, such as severance, restructuring, relocation and related business disruption costs, impairment of goodwill and other intangibles, non-cash stock compensation, certain product liability and litigation claims, acquisition and integration costs, gains (losses) on business divestitures and other assets, board transition support and non-cash unrealized foreign currency remeasurement costs.
In addition, as a result of the indicator of impairment identified, the Company performed an interim impairment assessment of its indefinite-lived intangible assets as of March 31, 2020 in the Horizon Americas and Horizon Europe‑Africa operating segments. Based on the results of our analyses, the estimated fair values of the trade names exceeded the carrying values. Key assumptions used in the analyses were a discount rate of 14.5% and royalty rates ranging from 0.5% to 1.9%.
The Company performed an annual goodwill impairment test as of October 1, 2020 and 2019, for the Horizon Americas reporting unit. The assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
Horizon Europe‑Africa
|
|
Total
|
|
|
(dollars in thousands)
|
|
Balances at January 1, 2019
|
|
$
|
4,500
|
|
|
$
|
—
|
|
|
$
|
4,500
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
(150)
|
|
|
—
|
|
|
(150)
|
|
|
Balances at December 31, 2019
|
|
4,350
|
|
|
—
|
|
|
4,350
|
|
|
Foreign currency translation
|
|
(990)
|
|
|
—
|
|
|
(990)
|
|
|
Balances at December 31, 2020
|
|
$
|
3,360
|
|
|
$
|
—
|
|
|
$
|
3,360
|
|
The gross carrying amounts and accumulated amortization of the Company’s other intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Intangible Category by Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
|
|
(dollars in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships, 2 - 20 years
|
|
$
|
166,420
|
|
|
$
|
(135,140)
|
|
|
$
|
31,280
|
|
|
Technology and other, 3 - 15 years
|
|
22,250
|
|
|
(16,710)
|
|
|
5,540
|
|
|
Trademark/Trade names, 1 - 8 years
|
|
150
|
|
|
(150)
|
|
|
—
|
|
|
Total finite-lived intangible assets
|
|
188,820
|
|
|
(152,000)
|
|
|
36,820
|
|
|
Trademark/Trade names, indefinite-lived
|
|
21,410
|
|
|
—
|
|
|
21,410
|
|
|
Total other intangible assets
|
|
$
|
210,230
|
|
|
$
|
(152,000)
|
|
|
$
|
58,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
Intangible Category by Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
|
|
(dollars in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships, 2 - 20 years
|
|
$
|
164,150
|
|
|
$
|
(129,310)
|
|
|
$
|
34,840
|
|
|
Technology and other, 3 - 15 years
|
|
21,420
|
|
|
(17,260)
|
|
|
4,160
|
|
|
Trademark/Trade names, 1 - 8 years
|
|
150
|
|
|
(150)
|
|
|
—
|
|
|
Total finite-lived intangible assets
|
|
185,720
|
|
|
(146,720)
|
|
|
39,000
|
|
|
Trademark/Trade names, indefinite-lived
|
|
21,120
|
|
|
—
|
|
|
21,120
|
|
|
Total other intangible assets
|
|
$
|
206,840
|
|
|
$
|
(146,720)
|
|
|
$
|
60,120
|
|
On March 1, 2019, the Company entered into an agreement of sale of certain business assets in its Horizon Europe-Africa operating segment, via a share and asset sale (the “Sale”). Under the terms of the Sale, effective March 1, 2019, the Company disposed of certain non-automotive business assets that operated using the Terwa brand for $5.5 million, which included a $0.5 million note receivable. The Sale resulted in a $3.6 millions loss recorded in other expense, net in the consolidated statements of operations, including a $3.0 million reduction of net intangibles related to customer relationships.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortization expense related to other intangible assets as included in the accompanying consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Technology and other, included in cost of sales
|
|
$
|
1,160
|
|
|
$
|
530
|
|
|
|
|
Customer relationships, included in selling, general and administrative expenses
|
|
5,460
|
|
|
5,220
|
|
|
|
|
Total amortization expense
|
|
$
|
6,620
|
|
|
$
|
5,750
|
|
|
|
Estimated amortization expense for the next five fiscal years beginning after December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
Estimated Amortization Expense
|
|
|
|
(dollars in thousands)
|
|
2021
|
|
$
|
4,860
|
|
|
2022
|
|
$
|
4,550
|
|
|
2023
|
|
$
|
4,280
|
|
|
2024
|
|
$
|
4,050
|
|
|
2025
|
|
$
|
3,990
|
|
The Company performed an annual qualitative indefinite-lived impairment assessment as of October 1, 2020 and 2019. The assessment indicated that it was more likely than not that the fair value of each of the indefinite-lived intangible assets exceeded its respective carrying value. We do not believe there is risk for impairment as of December 31, 2020.
7. Inventories
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Finished goods
|
|
$
|
58,600
|
|
|
$
|
82,080
|
|
|
Work in process
|
|
13,070
|
|
|
12,820
|
|
|
Raw materials
|
|
43,650
|
|
|
41,750
|
|
|
Total inventories
|
|
$
|
115,320
|
|
|
$
|
136,650
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Property and Equipment, Net
Property and equipment, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Land and land improvements
|
|
$
|
520
|
|
|
$
|
470
|
|
|
Buildings
|
|
23,040
|
|
|
21,290
|
|
|
Machinery and equipment
|
|
134,750
|
|
|
121,740
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
158,310
|
|
|
143,500
|
|
|
Accumulated depreciation
|
|
(84,220)
|
|
|
(67,670)
|
|
|
Property and equipment, net
|
|
$
|
74,090
|
|
|
$
|
75,830
|
|
Depreciation expense as included in the accompanying consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Depreciation expense, included in cost of sales
|
|
$
|
15,210
|
|
|
$
|
13,360
|
|
|
|
|
Depreciation expense, included in selling, general and administrative expenses
|
|
1,080
|
|
|
2,580
|
|
|
|
|
Total depreciation expense
|
|
$
|
16,290
|
|
|
$
|
15,940
|
|
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Accrued and Other Long-term Liabilities
Accrued liabilities consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Customer incentives
|
|
$
|
15,870
|
|
|
$
|
14,270
|
|
|
Accrued compensation
|
|
12,130
|
|
|
6,760
|
|
|
Customer claims
|
|
6,520
|
|
|
7,540
|
|
|
Short-term tax liabilities
|
|
5,570
|
|
|
90
|
|
|
Litigation settlements
|
|
1,600
|
|
|
1,110
|
|
|
Accrued professional services
|
|
1,510
|
|
|
3,680
|
|
|
Deferred purchase price
|
|
1,370
|
|
|
790
|
|
|
Restructuring
|
|
650
|
|
|
2,340
|
|
|
Other
|
|
13,880
|
|
|
12,270
|
|
|
Total accrued liabilities
|
|
$
|
59,100
|
|
|
$
|
48,850
|
|
Other long-term liabilities consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Litigation settlements
|
|
$
|
2,930
|
|
|
$
|
—
|
|
|
Deferred purchase price
|
|
1,650
|
|
|
2,370
|
|
|
Restructuring
|
|
1,070
|
|
|
1,600
|
|
|
Long-term tax liabilities
|
|
130
|
|
|
340
|
|
|
Other
|
|
8,780
|
|
|
9,480
|
|
|
Total other long-term liabilities
|
|
$
|
14,560
|
|
|
$
|
13,790
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Long-term Debt
The Company’s long-term debt consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Revolving Credit Facility
|
|
$
|
24,230
|
|
|
$
|
—
|
|
|
ABL Facility
|
|
—
|
|
|
20,020
|
|
|
Replacement Term Loan
|
|
90,210
|
|
|
—
|
|
|
First Lien Term Loan
|
|
—
|
|
|
25,210
|
|
|
Second Lien Term Loan
|
|
—
|
|
|
56,960
|
|
|
Convertible Notes
|
|
125,000
|
|
|
125,000
|
|
|
Paycheck Protection Program Loan
|
|
8,670
|
|
|
—
|
|
|
Bank facilities, capital leases and other long-term debt
|
|
17,970
|
|
|
13,670
|
|
|
Gross debt
|
|
266,080
|
|
|
240,860
|
|
|
Less:
|
|
|
|
|
|
Short-term borrowings and current maturities, long-term debt
|
|
14,120
|
|
|
4,310
|
|
|
Gross long-term debt
|
|
251,960
|
|
|
236,550
|
|
|
Less:
|
|
|
|
|
|
Unamortized debt issuance costs and original issuance discount on Replacement Term Loan
|
|
9,100
|
|
|
—
|
|
|
Unamortized debt issuance costs and original issuance discount on First Lien Term Loan
|
|
—
|
|
|
700
|
|
|
Unamortized debt issuance costs and discount on Second Lien Term Loan
|
|
—
|
|
|
12,730
|
|
|
Unamortized debt issuance costs and discount on Convertible Notes
|
|
11,470
|
|
|
18,070
|
|
|
Unamortized debt issuance costs and discount
|
|
20,570
|
|
|
31,500
|
|
|
Long-term debt
|
|
$
|
231,390
|
|
|
$
|
205,050
|
|
ABL Facility
On December 22, 2015, the Company entered into an Amended and Restated Loan Agreement among the Company, Horizon Global Americas Inc. (“HGA”), Cequent UK Limited, Cequent Towing Products of Canada Ltd. (“Cequent Towing”), certain other subsidiaries of the Company party thereto as guarantors, the lenders party thereto and Bank of America, N.A., as agent for the lenders (the “ABL Loan Agreement”), under which the lenders party thereto agreed to provide the Company and certain of its subsidiaries with a committed asset-based revolving credit facility (the “ABL Facility”) providing for revolving loans up to an aggregate principal amount of $99.0 million.
The ABL Facility consisted of (i) a U.S. sub-facility, in an aggregate principal amount of up to $85.0 million (subject to availability under a US-specific borrowing base), (ii) a Canadian sub-facility, in an aggregate principal amount of up to $2.0 million (subject to availability under a Canadian-specific borrowing base), and (iii) a UK sub-facility in an aggregate principal amount of up to $3.0 million (subject to availability under a UK-specific borrowing base).
In March 2020, the Company paid in full all outstanding debt incurred under the ABL Facility, which the Company accounted for as a debt extinguishment in accordance with guidance in ASC 405-20, “Extinguishment of Liabilities.” As a result of the debt extinguishment, during the twelve months ended December 31, 2020, the Company recognized $0.8 million of unamortized debt issuance costs in interest expense and $0.6 million of additional costs in selling, general and administrative expenses in the accompanying consolidated statements of operations, in accordance with ASC 470-50, “Modifications and Extinguishments” (“ASC 470-50”).
During the twelve months ended December 31, 2020 and 2019, the Company recognized $0.4 million and $1.6 million for amortization of debt issuance costs, respectively, in the accompanying consolidated statements of operations.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2020 and 2019, the Company had no and $7.7 million of letters of credit issued and outstanding under the ABL Facility. The letters of credit were collateralized with a line block on the ABL Facility. During the twelve months ended December 31, 2020, certain letters of credit were reissued under the Revolving Credit Facility, as defined below, with a total of $3.1 million issued and outstanding as of December 31, 2020, with no cash collateral requirement. Other letters of credit were reissued under the Revolving Credit Facility, with a cash collateral requirement, with a total of $4.9 million as of December 31, 2020. The cash collateral requirement is 105% of the outstanding letters of credit, for a total amount of $5.1 million as of December 31, 2020. Cash collateral is presented in restricted cash in the accompanying consolidated balance sheets.
Revolving Credit Facility
In March 2020, the Company, as guarantor, entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as agent for the lenders party thereto, and HGA and Cequent Towing, as borrowers (the “ABL Borrowers”). The Loan Agreement provides for an asset-based revolving credit facility (the “Revolving Credit Facility”) in the maximum aggregate principal amount of $75.0 million subject to customary borrowing base limitations contained therein, and may be increased at the ABL Borrowers’ request in increments of $5.0 million, up to a maximum of five times over the life of the Revolving Credit Facility, for a total increase of up to $25.0 million.
The interest on the loans under the Loan Agreement is payable in cash at the interest rate of LIBOR plus 4.00% per annum, subject to a 1.00% LIBOR floor, provided that if for any reason the loans are converted to base rate loans, interest will be paid in cash at the customary base rate plus a margin of 3.00% per annum. All interest, fees, and other monetary obligations due may, in Encina’s discretion but upon prior notice to the ABL Borrowers, be charged to the loan account and thereafter be deemed to be part of the Revolving Credit Facility subject to the same interest rate. There are no amortization payments required under the Loan Agreement. Borrowings under the Loan Agreement mature on the earlier of: (i) March 13, 2023 and (ii) 90 days prior to the maturity of the Company’s Replacement Term Loan, as defined below, as may be in effect from time to time, unless earlier terminated. As a result of the 2020 Replacement Term Loan Amendment, as defined below, the maturity of all borrowings under the Revolving Credit Facility were extended to fiscal year 2022 and are presented in gross long-term debt in the accompanying consolidated balance sheets as of December 31, 2020. All of the indebtedness under the Loan Agreement is and will be guaranteed by the Company and certain of the Company’s existing and future North American subsidiaries and is and will be secured by substantially all of the assets of the Company, such other guarantors, and the ABL Borrowers.
The Loan Agreement also contains a financial covenant that stipulates the ABL Borrowers and guarantors under the Loan Agreement will not make Capital Expenditures (as defined in the Loan Agreement) exceeding $30.0 million during any fiscal year.
Debt issuance costs of $2.3 million were incurred in connection with the Loan Agreement. These debt issuance costs will be amortized into interest expense over the contractual term of the Loan Agreement. During the twelve months ended December 31, 2020, the Company recognized $1.2 million for amortization of debt issuance costs in the accompanying consolidated statements of operations. As of December 31, 2020, there was $1.1 million of unamortized debt issuance costs included in other assets in the accompanying consolidated balance sheets.
As of December 31, 2020, there was $24.2 million outstanding under the Revolving Credit Facility and as of December 31, 2019, there was $20.0 million outstanding under the ABL Facility, with a weighted average interest rate of 5.0% and 5.5%, respectively. As of December 31, 2020, the Company had $38.4 million of availability under the Revolving Credit Facility and as of December 31, 2019, the Company had $33.1 million of availability under the ABL Facility.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
First Lien Term Loan Agreement
On June 30, 2015, the Company entered into a credit agreement among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A. (the “Term Loan Agreement”) under which the Company borrowed an aggregate of $200.0 million (the “Original Term B Loan”). The Term Loan Agreement has been subsequently amended and restated on several occasions and is collectively referred to as the “First Lien Term Loan Agreement.” The Original Term B Loan has also been subsequently amended on several occasions and is collectively referred to as the “First Lien Term Loan.” In conjunction with the entry into the Revolving Credit Facility referenced above, Cortland Capital Markets Services LLC served as administrative agent and collateral agent for the First Lien Term Loan.
In July 2018, the Company entered into the Fourth Amendment to the Term Loan Agreement which provided for additional borrowings of $50.0 million (the “2018 Incremental Term Loan”; the 2017 Replacement Term Loan, as increased by the 2018 Incremental Term Loan, the “2018 Term B Loan”). Interest on borrowings under the 2018 Term B Loan was payable at LIBOR, with a 1.0% floor, plus 6.0% per annum.
In February 2019, the Company amended and restated the existing 2018 Term Loan Agreement (the “First Lien Term Loan Agreement”) to permit the Company to enter into the Senior Term Loan Agreement and tightened certain indebtedness, asset sale, investment and restricted payment baskets.
In March 2019, the Company amended the existing term loan agreement (“Sixth Term Amendment”) to permit the Company to enter into the Second Lien Term Loan Agreement, as well as amended the interest rate on the First Lien Term Loan Agreement to add 3.0% paid-in-kind (“PIK”) interest in addition to the existing cash interest.
In September 2019, the Company amended the existing First Lien Term Loan Agreement (“Eighth Term Amendment”) to provide consent for the sale of the Company’s APAC segment, provide consent for the Company to meet its prepayment obligation of the First Lien Term Loan, remove prepayment penalties and make certain negative covenants less restrictive. In September 2019, the Company paid down a portion of its First Lien Term Loan’s outstanding principal plus fees and paid-in-kind interest in the amount of $172.9 million.
During the twelve months ended December 31, 2019, the Company recognized $8.7 million of unamortized debt issuance costs in interest expense in the accompanying consolidated statements of operations, in accordance with ASC 470-50, due to the extinguishment of debt for certain lenders in the loan syndicate in connection with various amendments to the First Lien Term Loan Agreement occurring during 2019. During the twelve months ended December 31, 2019, the Company also recognized $0.7 million of additional costs in selling, general and administrative expenses in the accompanying consolidated statements of operations, in accordance with ASC 470-50.
In May 2020, the Company entered into an amendment, limited waiver and consent (the “Tenth Term Amendment”) with an effective date of April 1, 2020, to amend the First Lien Term Loan Agreement and to consent to the Company’s entering into, among other things, the PPP Loan and French Loan, each as defined and described below.
As a result of the Replacement Term Loan Amendment, as defined and described below, the outstanding balance and any accrued interest has been replaced by the Replacement Term Loan, as defined and described below.
During the twelve months ended December 31, 2020 and 2019, the Company recognized $0.2 million and $2.8 million, respectively, of amortization of debt issuance and discount costs, in the accompanying consolidated statements of operations.
During the twelve months ended December 31, 2020 and 2019, the Company recognized $0.4 million and $3.2 million, respectively, of PIK interest, on the First Lien Term Loan. As of December 31, 2020 and 2019, the Company had no and $25.2 million, respectively, of aggregate principal amount outstanding, and as of December 31, 2019, bearing cash interest at 8.1% under the First Lien Term Loan.
As of December 31, 2019, the Company’s First Lien Term Loan traded at 97.8% of par value. The valuation of the First Lien Term Loan was determined based on Level 2 inputs under the fair value hierarchy.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Term Loan Agreement
In February 2019, the Company entered into a credit agreement (the “Senior Term Loan Agreement”) with Cortland Capital Markets Services LLC, as administrative agent and collateral agent, and the lenders party thereto. The Senior Term Loan Agreement provided for a short-term loan facility in the aggregate principal amount of $10.0 million, all of which was borrowed by the Company. Certain of the lenders under the Company’s First Lien Term Loan Agreement were the lenders under the Senior Term Loan Agreement.
The Senior Term Loan Agreement required the Company to obtain additional financing in amounts and on terms acceptable to the lenders. The Senior Term Loan Agreement was repaid on March 15, 2019, in conjunction with the additional financing further detailed below. During the twelve months ended December 31, 2019, the Company incurred debt issuance costs of $0.5 million in connection with the Senior Term Loan Agreement, which were recorded to selling, general and administrative expenses in the accompanying consolidated statements of operations.
Second Lien Term Loan Agreement
In March 2019, the Company entered into a credit agreement (the “Second Lien Term Loan Agreement”) with Cortland Capital Markets Services LLC, as administrative agent and collateral agent, and Corre Partners Management L.L.C., as representative of the lenders, and the lenders party thereto. The Second Lien Term Loan Agreement provided for a term loan facility in the aggregate principal amount of $51.0 million. The proceeds, net of applicable fees, of the Second Lien Term Loan Agreement were used to repay all amounts outstanding under the Senior Term Loan Agreement and to provide additional liquidity and working capital for the Company. Interest on borrowings under the Second Lien Term Loan Agreement Loan was payable in-kind at the customary eurocurrency rate plus a margin of 11.5%. The Second Lien Term Loan Agreement was secured by a second lien on substantially the same collateral as the First Lien Term Loan, bearing an interest rate of LIBOR plus 11.5% payable in-kind through an increase in principal balance.
In September 2019, the Company amended the Second Lien Term Loan Agreement (“Second Lien Amendment”) to remove the prepayment requirement related to the use of APAC sale proceeds and made certain negative covenants less restrictive.
Pursuant to the Second Lien Term Loan Agreement, the Company was required to issue detachable warrants to purchase up to 6.25 million shares of its common stock, which can be exercised on a cashless basis over a five-year term with an exercise price of $1.50 per share. In March 2019, warrants to purchase 3,601,902 shares of common stock were issued and the Company also issued 90,667 shares of Series A Preferred Stock in the interim that were convertible into additional warrants to purchase 2,952,248 shares of common stock upon receipt of shareholder approval of the issuance of such additional warrants and the shares of common stock issuable upon exercise thereof.
In accordance with ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”) and ASC 815, “Derivatives and Hedging” (“ASC 815”), the (i) Second Lien Term Loan; (ii) Series A Preferred Stock, and (iii) warrants are all freestanding instruments and proceeds were allocated to each instrument on March 15, 2019 on a relative fair value basis: (i) $40.3 million; (ii) $5.3 million and (iii) $5.4 million, respectively.
The Series A Preferred Stock was not within the scope of ASC 480 and did not meet the criteria for liability classification. The Series A Preferred Stock was classified as temporary equity as of March 31, 2019, as the Series A Preferred Stock was entitled to receive two times its liquidation value in cash upon occurrence of a liquidation or deemed liquidation event, which is outside the control of the Company. After receipt of shareholder approval at the Company’s annual meeting of shareholders on June 25, 2019, the 90,667 shares of Series A Preferred Stock were automatically converted into warrants to purchase 2,952,248 shares of common stock and $5.3 million was reclassified to common stock warrants within shareholders’ equity in the Company’s consolidated balance sheets. The warrants also do not meet the criteria for liability classification under ASC 480. However, the warrants meet the definition of a derivative under ASC 815, and are determined to be indexed to the Company’s common stock and meet the requirements for equity classification pursuant to ASC 815-40, “Derivatives and Hedging-Contracts in Entity’s Own Equity” (“ASC 815-40”).
The Company determined the fair value of the Second Lien Term Loan using a discount rate build up approach. The fair values of the Series A Preferred Stock and warrants were determined using an option pricing method. The debt discount of $10.7 million created by the relative fair value allocation of the equity component is being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the loan.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In May 2020, the Company entered into an amendment, limited waiver and consent (the “Second Lien Third Amendment”), with an effective date of April 1, 2020, to amend the Second Lien Term Loan Agreement and to consent to the Company’s entering into, among other things, the PPP Loan and French Loan, each as defined and described below.
Debt issuance costs of $3.8 million and original issuance discount of $1.0 million were incurred in connection with entry into the Second Lien Term Loan Agreement.
As a result of the Replacement Term Loan Amendment, as defined and described below, the outstanding balance and any accrued interest has been replaced by the Replacement Term Loan, as defined and described below.
During the twelve months ended December 31, 2020 and 2019, the Company recognized $2.7 million and $2.8 million, respectively, for amortization of debt issuance and discount costs, in the accompanying consolidated statements of operations.
During the twelve months ended December 31, 2020 and 2019, the Company recognized $3.4 million and $6.5 million, respectively, of PIK interest on its Second Lien Term Loan. As of December 31, 2020 and 2019, the Company had no and $57.0 million, respectively, of aggregate principal amount outstanding, and as of December 31, 2019 bearing interest at 13.3% under the Second Lien Term Loan.
The Company’s Second Lien Term Loan had a fair value of $46.0 million as of December 31, 2019. The valuation of the Second Lien Term Loan was determined based on Level 2 inputs under the fair value hierarchy.
Replacement Term Loan
On July 6, 2020, the Company entered into the Replacement Term Loan Amendment (the “Eleventh Term Amendment”) to amend the Term Loan Agreement. The Eleventh Term Amendment provided replacement term loans (the “Replacement Term Loan”) that refinanced and replaced the outstanding balances under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement, plus any accrued interest thereon. The remaining unamortized debt issuance and original issuance discount costs related to the First Lien Term Loan Agreement and Second Lien Term Loan Agreement will be amortized into interest expense over the contractual term of the Replacement Term Loan using the effective interest method.
The interest on the Replacement Term Loan was LIBOR plus 10.75% per annum, subject to a 1.00% LIBOR floor, of which 4.00% was payable in cash and the remainder of which was PIK interest (provided that the Company may elect on not more than one occasion to pay all interest as PIK interest). Borrowings under the Eleventh Term Amendment were to mature on the earlier of: (i) June 30, 2022 and (ii) April 1, 2022 if the Convertible Notes, as defined below, were not repaid or otherwise discharged prior to such date. Additionally, the Eleventh Term Amendment provided for a 1.00% PIK closing fee, which was added to the principal amount of the Replacement Term Loan on the closing date; provided for a prepayment penalty on the entire principal amount of the Replacement Term Loan in an amount equal to 3.0% of the aggregate principal amount prepaid prior to December 31, 2021; and amended the fixed charge coverage ratio covenant beginning with the fiscal quarter ending June 30, 2021, as follows:
•June 30, 2021: 1.10 to 1.00
•September 30, 2021: 1.25 to 1.00
•December 31. 2021 and each fiscal quarter ending thereafter: 1.40 to 1.00
During the twelve months ended December 31, 2020, the Company recognized $0.2 million of additional costs in selling, general and administrative expense in the accompanying consolidated statements of operations, in accordance with ASC 470-50.
As of December 31, 2020, the Company had total unamortized debt issuance and discount costs of $9.1 million, all of which are recorded as a reduction of the long-term debt balance on the Company’s accompanying consolidated balance sheets. During the twelve months ended December 31, 2020, the Company recognized $2.3 million for amortization of debt issuance and discount costs in the accompanying consolidated statements of operations.
As of December 31, 2020, the Company had $90.2 million of aggregate principal amount outstanding under the Replacement Term Loan. The Company made a one-time election to pay all interest as PIK interest on the first interest payment date. As a result of this election, during the twelve months ended December 31, 2020 the Company recognized $4.3 million of PIK interest.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All of the indebtedness under the Replacement Term Loan is guaranteed by the Company’s existing and future material domestic subsidiaries and is be secured by substantially all of the assets of the Company and such guarantors.
As of December 31, 2020, the Company’s Replacement Term Loan traded at 103.6%. The valuation of the Replacement Term Loan was determined based on Level 2 inputs under the fair value hierarchy.
Convertible Notes
In February 2017, the Company completed a public offering of 2.75% Convertible Senior Notes (the “Convertible Notes”) in an aggregate principal amount of $125.0 million. Interest is payable on January 1 and July 1 of each year, beginning on July 1, 2017. The Convertible Notes are convertible into 5,005,000 shares of the Company’s common stock, based on an initial conversion price of $24.98 per share. The Convertible Notes will mature on July 1, 2022 unless earlier converted.
The Convertible Notes are convertible at the option of the holder (i) during any calendar quarter beginning after March 31, 2017, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock $1,000 and the conversion rate on each such trading day; (iii) upon the occurrence of specified corporate events; and (iv) on or after January 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date. During the fourth quarter of 2020, no conditions allowing holders of the Convertible Notes to convert have been met. Therefore, the Convertible Notes were not convertible during the fourth quarter of 2020 and are classified as long-term debt. Should conditions allowing holders of the Convertible Notes to convert be met in a future quarter, the Convertible Notes will be convertible at their holders’ option during the immediately following quarter. As of December 31, 2020, the if-converted value of the Convertible Notes did not exceed the principal value of those Convertible Notes.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. Because the Company may elect to settle conversion in cash, the Company separated the Convertible Notes into their liability and equity components by allocating the issuance proceeds to each of those components in accordance with ASC 470-20, “Debt-Debt with Conversion and Other Options.” The Company first determined the fair value of the liability component by estimating the fair value of a similar liability that does not have an associated equity component. The Company then deducted that amount from the issuance proceeds to arrive at a residual amount, which represents the equity component. The Company accounted for the equity component as a debt discount (with an offset to paid-in capital in excess of par value). The debt discount created by the equity component is being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the Convertible Notes ending on July 1, 2022.
The Company allocated offering costs of $3.9 million to the debt and equity components in proportion to the allocation of proceeds to the components, treating them as debt issuance costs and equity issuance costs, respectively. The debt issuance costs of $2.9 million are being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the Convertible Notes. The Company presents debt issuance costs as a direct deduction from the carrying value of the liability component. The carrying value of the liability component at December 31, 2020 and 2019, was $113.5 million and $106.9 million, respectively, including total unamortized debt discount and debt issuance costs of $11.5 million and $18.1 million. The $1.0 million portion of offering costs allocated to equity issuance costs was charged to paid-in capital. The carrying amount of the equity component was $20.0 million at December 31, 2020 and 2019, respectively, net of issuance costs and taxes.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest expense recognized relating to the contractual interest coupon, amortization of debt discount and amortization of debt issuance costs on the Convertible Notes included in the accompanying consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Contractual interest coupon on convertible debt
|
|
$
|
3,457
|
|
|
$
|
3,490
|
|
|
Amortization of debt issuance costs
|
|
$
|
530
|
|
|
$
|
530
|
|
|
Amortization of "equity discount" related to debt
|
|
$
|
6,071
|
|
|
$
|
5,590
|
|
The estimated fair value of the Convertible Notes based on a market approach as of December 31, 2020 and 2019 was $113.3 million and $100.0 million, respectively, which both represent a Level 2 valuation. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on the last business day of the period.
In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) in privately negotiated transactions with certain of the underwriters or their affiliates (in this capacity, the “option counterparties”). The Convertible Note Hedges provide the Company with the option to acquire, on a net settlement basis, 5,005,000 shares of its common stock, which is equal to the number of shares of common stock that notionally underlie the Convertible Notes, at a strike price of $24.98, which corresponds to the conversion price of the Convertible Notes. The Convertible Note Hedges have an expiration date that is the same as the maturity date of the Convertible Notes, subject to earlier exercise. The Convertible Note Hedges have customary anti-dilution provisions similar to the Convertible Notes. The Convertible Note Hedges have a default settlement method of net-share settlement but may be settled in cash or shares, depending on the Company’s method of settlement for conversion of the corresponding Convertible Notes. If the Company exercises the Convertible Note Hedges, the shares of common stock it will receive from the option counterparties to the Convertible Note Hedges will cover the shares of common stock that it would be required to deliver to the holders of the converted Convertible Notes in excess of the principal amount thereof. The aggregate cost of the Convertible Note Hedges was $29.0 million (or $7.5 million net of the total proceeds from the Warrants sold, as discussed below), before the allocation of issuance costs of $0.7 million. The Convertible Note Hedges are accounted for as equity transactions in accordance with ASC 815-40.
In connection with the issuance of the Convertible Notes, the Company also sold net-share-settled warrants (the “Warrants”) in privately negotiated transactions with the option counterparties for the purchase of up to 5,005,000 shares of its common stock at a strike price of $29.60 per share, for total proceeds of $21.5 million before the allocation of $0.5 million of issuance costs. The Company also recorded the Warrants within shareholders’ equity in accordance with ASC 815-40. The Warrants have customary anti-dilution provisions similar to the Convertible Notes. As a result of the issuance of the Warrants, the Company will experience dilution to its diluted earnings per share if its average closing stock price exceeds $29.60 for any fiscal quarter. The Warrants expire on various dates from October 2022 through February 2023 and must be net-settled in shares of the Company’s common stock. Therefore, upon exercise of the Warrants, the Company will issue shares of its common stock to the purchasers of the Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.
Paycheck Protection Program Loan
In April 2020, Horizon Global Company LLC (the “U.S. Borrower”), a direct U.S.-based subsidiary of the Company, received a loan from PNC Bank, National Association for $8.7 million, pursuant to the Paycheck Protection Program (the “PPP Loan”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP Loan, which is in the form of a Note dated April 18, 2020 issued by the U.S. Borrower, matures on April 18, 2022. Funds from the PPP Loan may be used for payroll, costs used to continue group health care benefits, rent and utilities. Under the terms of the PPP Loan, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act.
The Company submitted its PPP Loan application in good faith in accordance with the CARES Act and the guidance issued by the Small Business Administration (the “SBA”), including the SBA’s Paycheck Protection Program’s Frequently Asked Questions. During 2020, the Company, in accordance with the final guidance issued by the United States Department of the Treasury (the “Treasury”), met the need and sized based criteria of the program.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In December 2020, the Company filed its application of loan forgiveness with PNC Bank, National Association. The potential loan forgiveness for all or a portion of the PPP Loan is determined, subject to limitations, based on the use of loan proceeds for payment of qualifying expenses over the 24 weeks after the loan proceeds were disbursed. The unforgiven portion of our PPP Loan, if any, is payable monthly over two years at an interest rate of 1.0% per annum. The Company has deferred any interest payments until the Company’s application for forgiveness is completed in accordance with the guidance issued by the SBA and Treasury and the terms of the Company’s PPP Loan. While we currently believe that our use of the loan proceeds will meet the conditions for forgiveness of our PPP Loan, there can be no assurance that forgiveness for any portion of the PPP Loan will be obtained.
The French Loan
In April 2020, S.I.A.R.R. SAS (the “French Borrower”), an indirect subsidiary of the Company, received a loan from BNP Paribas (the “French Loan”) for $5.5 million. The French Loan, issued pursuant to an agreement dated April 9, 2020, between the French Borrower and BNP Paribas, matures on April 9, 2021. The French Loan bears interest at a rate of 0.5% per annum. The French Borrower, at its election, may repay the French Loan in full on April 9, 2021 or in monthly installments for a period of five years from the date of election.
Covenant and Liquidity Matters
The Company is in compliance with all of its financial covenants as of December 31, 2020.
Long-term Debt Maturities
Future maturities of the face value of long-term debt at December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Maturities of
Long-Term Debt
|
|
|
|
(dollars in thousands)
|
|
2021
|
|
$
|
14,120
|
|
|
2022
|
|
242,660
|
|
|
2023
|
|
70
|
|
|
2024
|
|
70
|
|
|
2025
|
|
70
|
|
|
Thereafter
|
|
9,090
|
|
|
Total
|
|
$
|
266,080
|
|
11. Derivative Instruments
Foreign Currency Exchange Rate Risk
In the past, the Company has used foreign currency forward contracts to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to certain payments for contract manufacturing in its lower-cost manufacturing facilities. The foreign currency forward contracts hedged currency exposure between the Mexican peso and the U.S. dollar and matured at specified monthly settlement dates through December 2019. At inception, the Company designated the foreign currency forward contracts as cash flow hedges. Upon the performance of contract manufacturing or purchase of certain inventories the Company de-designated the foreign currency forward contracts.
On October 4, 2016, the Company entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. The Company used the cross currency swap to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to a non-functional currency intercompany loan of €110.0 million. The cross currency swap hedged currency exposure between the Euro and the U.S. dollar and matured on January 3, 2019 with a liability of $2.5 million. The Company entered into forward contracts to settle the cross currency swap, which resulted in a $0.9 million offset to the liability. These settlements resulted in a net realized gain reclassified from AOCI of $0.6 million during 2019. The Company made quarterly principal payments of €1.4 million, plus interest at a fixed rate of 5.4% per annum, in exchange for $1.5 million, plus interest at a fixed rate of 7.2% per annum during the term of the cross currency swap arrangement. At inception, the Company designated the cross currency swap as a cash flow hedge. Changes in the currency rate resulted in reclassification of amounts from AOCI to earnings to offset the re-measurement gain or loss on the non-U.S. denominated intercompany loan.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
There were no outstanding derivatives contracts at December 31, 2020 and 2019.
Financial Statement Presentation
The amounts reclassified from AOCI into earnings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Total Amounts of Expense Line Items Presented in the Statements of Operations in Which the Effects of Cash Flow Hedges are Recorded
|
|
|
|
|
|
$
|
(594,220)
|
|
|
$
|
(58,270)
|
|
|
|
|
|
|
Amount of Gain Reclassified from AOCI into Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives classified as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
|
|
|
|
$
|
1,850
|
|
|
$
|
—
|
|
|
|
|
|
|
Cross currency swap
|
|
|
|
|
|
$
|
—
|
|
|
$
|
900
|
|
|
|
|
|
12. Restructuring
The Company’s restructuring activities are undertaken as necessary to execute management’s strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve productivity improvements and net cost reductions. The Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits) and facility closure and other costs.
To the extent these programs involve voluntary separations, no liabilities are generally recorded until offers to employees are accepted. If employees are involuntarily terminated, a liability is generally recorded at the communication date. Estimates of restructuring charges are based on information available at the time such charges are recorded. Related charges are recorded in cost of sales and selling, general and administrative expenses in the accompanying consolidated statements of operations.
The Company’s consolidated restructuring liabilities and related activity for each type of exit cost is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Costs
|
|
Facility Closure and Other Costs
|
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2019
|
|
$
|
1,830
|
|
|
$
|
2,110
|
|
|
|
|
$
|
3,940
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and other(a)
|
|
(1,830)
|
|
|
(390)
|
|
|
|
|
(2,220)
|
|
|
Balances at December 31, 2020
|
|
$
|
—
|
|
|
$
|
1,720
|
|
|
|
|
$
|
1,720
|
|
(a)Other consists primarily of changes in the liability balance due to foreign currency translation and the finalization of employee costs and facility closures.
13. Leases
The Company leases certain facilities, automobiles and equipment under non-cancellable operating leases. Our leases have remaining lease terms of one year to eleven years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets; the Company recognizes lease expense for these leases on a straight-line basis over the lease term.
Most leases include one or more options to renew. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in the Company’s ROU assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in the lease term. The Company combines lease and non-lease components which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Refer to Note 3, Summary of Significant Accounting Policies, for more information.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Additional cost, cash flow and balance sheet information for the Company’s leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
(dollars in thousands)
|
|
|
Operating lease cost
|
|
$
|
14,970
|
|
|
$
|
18,830
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
16,050
|
|
|
$
|
18,000
|
|
|
|
ROU assets obtained in exchange for operating lease obligations(a)
|
|
$
|
9,940
|
|
|
$
|
56,540
|
|
|
|
|
|
|
|
|
|
(a) 2019 reflects the impact of adopting ASC 842, “Leases” and is net of $24.2 million of disposals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
Weighted average remaining lease term (years)
|
|
6.0
|
|
6.8
|
|
Weighted average discount rate
|
|
8.4
|
%
|
|
8.7
|
%
|
In 2019, the Company abandoned two operating lease ROU assets. First, in September 2019, the Company ceased use of its former Troy, Michigan headquarters office lease. In conjunction with the lease abandonment, the Company accelerated the recognition of expense of its ROU asset and wrote it off, which resulted in a $4.3 million charge. Second, in November 2019, the Company ceased use of leased equipment in its Kansas City location. In conjunction with the lease abandonment, the Company accelerated the recognition of expense of its ROU asset and wrote it off, which resulted in a $6.5 million charge. Each of these charges are recorded in selling, general and administrative expense in the accompanying consolidated statements of operations for the twelve months ended December 31, 2019.
Future maturities of operating lease liabilities at December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(dollars in thousands)
|
|
2021
|
|
$
|
16,230
|
|
|
2022
|
|
14,050
|
|
|
2023
|
|
11,070
|
|
|
2024
|
|
8,490
|
|
|
2025
|
|
7,970
|
|
|
2026 and thereafter
|
|
16,650
|
|
|
Total lease payments
|
|
74,460
|
|
|
Less imputed interest
|
|
(15,940)
|
|
|
Present value of lease liabilities
|
|
$
|
58,520
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Contingencies
During the fourth quarter of 2018, the Company was notified by two OEM customers of potential claims related to product sold by Horizon Europe‑Africa arising from potentially faulty components provided by a third-party supplier. The claims resulted from the failure of products not functioning to specifications, but the claims did not allege any damage and only sought replacement of the product. The Company performed an assessment of the facts and circumstances for all asserted and unasserted claims and considered all factors including the Company’s recall insurance. The Company recorded a $1.7 million charge for the twelve months ended December 31, 2019.
As of December 31, 2019, the Company had $3.9 million recorded in accrued liabilities for the remaining unpaid settlement obligations and an insurance-related asset of $0.4 million recorded in prepaid expenses and other current assets in the accompanying consolidated balance sheets. In the first quarter of 2020, the Company settled its outstanding obligations related to the claim. The Company has no remaining liability or insurance-related asset.
On April 29, 2020, the Company agreed to a settlement (the “Settlement”) related to certain intellectual property infringement claims made against one of the Company’s subsidiaries in its Horizon Europe‑Africa operating segment. The Company settled all historical and future associated claims for $4.4 million to be paid evenly in semi-annual installments on June 30 and December 31 of each year through December 31, 2024. As a result of the Settlement, the Company recorded a $1.5 million charge during the first quarter of 2020 and also recorded $0.5 million of royalties in the accompanying consolidated statements of operations for the twelve months ended December 31, 2020.
As of December 31, 2020, the Company had recorded $0.9 million in prepaid expenses and other current assets and $1.8 million in other assets in the accompanying consolidated balance sheets related to the future royalties to be recognized by the Company over the life of future programs connected to the Settlement. In addition, $1.0 million was recorded in accrued liabilities and $2.9 million in other long-term liabilities in the accompanying consolidated balance sheets related to the remaining semi-annual installment payments to be paid.
15. Earnings (Loss) per Share
Basic earnings (loss) per share is computed using net income (loss) attributable to Horizon Global and the number of weighted average shares outstanding. Diluted earnings (loss) per share is computed using net income (loss) attributable to Horizon Global and the number of weighted average shares outstanding, adjusted to give effect to the assumed exercise of outstanding stock options and warrants, vesting of restricted shares outstanding and conversion of the Convertible Notes, where dilutive to earnings per share.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the numerator and the denominator of basic loss per share attributable to Horizon Global and diluted loss per share attributable to Horizon Global is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands, except for per share amounts)
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(37,480)
|
|
|
$
|
(110,010)
|
|
|
|
|
Add: (Loss) income from discontinued operations, net of tax
|
|
(500)
|
|
|
189,520
|
|
|
|
|
Less: Net loss attributable to noncontrolling interest
|
|
(1,420)
|
|
|
(1,240)
|
|
|
|
|
Net (loss) income attributable to Horizon Global
|
|
$
|
(36,560)
|
|
|
$
|
80,750
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
25,797,529
|
|
|
25,297,576
|
|
|
|
|
Dilutive effect of common stock equivalents
|
|
—
|
|
|
—
|
|
|
|
|
Weighted average shares outstanding, diluted
|
|
25,797,529
|
|
|
25,297,576
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share attributable to Horizon Global
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.40)
|
|
|
$
|
(4.30)
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.02)
|
|
|
$
|
7.49
|
|
|
|
|
Total
|
|
$
|
(1.42)
|
|
|
$
|
3.19
|
|
|
|
|
Diluted (loss) income per share attributable to Horizon Global
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.40)
|
|
|
$
|
(4.30)
|
|
|
|
|
Discontinued operations
|
|
$
|
(0.02)
|
|
|
$
|
7.49
|
|
|
|
|
Total
|
|
$
|
(1.42)
|
|
|
$
|
3.19
|
|
|
|
Due to losses from continuing operations for the twelve months ended December 31, 2020 and 2019, the effect of certain dilutive securities were excluded from the computation of weighted average diluted shares outstanding, as inclusion would have resulted in anti-dilution. A summary of these anti-dilutive common stock equivalents are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
Number of options
|
|
18,961
|
|
|
54,847
|
|
|
|
|
Exercise price of options
|
|
$9.20 - $11.02
|
|
$9.20 - $11.29
|
|
|
|
Restricted stock units
|
|
1,823,573
|
|
|
1,172,228
|
|
|
|
|
Convertible Notes
|
|
5,005,000
|
|
|
5,005,000
|
|
|
|
|
Convertible Notes warrants
|
|
5,005,000
|
|
|
5,005,000
|
|
|
|
|
Second Lien Term Loan warrants
|
|
6,280,251
|
|
|
4,381,411
|
|
|
|
For purposes of determining diluted loss per share, the Company has elected a policy to assume that the principal portion of the Convertible Notes, as described in Note 10, Long-term Debt, is settled in cash and the conversion premium is settled in shares. Therefore, the Company has adopted a policy of calculating the diluted loss per share effect of the Convertible Notes using the treasury stock method. As a result, the dilutive effect of the Convertible Notes is limited to the conversion premium, which is reflected in the calculation of diluted loss per share as if it were a freestanding written call option on the Company’s shares. Using the treasury stock method, the Warrants issued in connection with the issuance of the Convertible Notes are considered to be dilutive when they are in the money relative to the Company’s average common stock price during the period. The Convertible Note Hedges purchased in connection with the issuance of the Convertible Notes are always considered to be anti-dilutive and therefore do not impact the Company’s calculation of diluted loss per share.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Equity Awards
Description of the Plan
Horizon employees and non-employee directors participate in the Horizon Global Corporation 2015 Equity and Incentive Compensation Plan (as amended and restated, the “Horizon 2015 Plan”). The Horizon 2015 Plan authorizes the Compensation Committee of the Horizon Board of Directors to grant stock options (including “incentive stock options” as defined in Section 422 of the U.S. Internal Revenue Code), restricted shares, restricted stock units, performance shares, performance stock units, cash incentive awards, and certain other awards based on or related to our common stock to Horizon employees and non-employee directors. No more than 4.4 million Horizon common shares may be delivered under the Horizon 2015 Plan.
On June 19, 2020, the shareholders approved the Horizon Global Corporation 2020 Equity and Incentive Compensation Plan (the “Horizon 2020 Plan”). Horizon employees, non-employee directors and certain consultants participate in the Horizon 2020 Plan. The Horizon 2020 Plan authorizes the Compensation Committee of the Horizon Board of Directors to grant stock options (including “incentive stock options” as defined in Section 422 of the U.S. Internal Revenue Code), appreciation rights, restricted shares, restricted stock units, performance shares, performance stock units, cash incentive awards, dividend equivalents and certain other awards based upon terms and conditions described in the Horizon 2020 Plan. No more than 4.1 million Horizon common shares may be delivered under the Horizon 2020 Plan, plus (A) the total number of shares remaining available for awards under the Horizon 2015 Plan, as described above, as of June 19, 2020, plus (B) the shares that are subject to awards granted under the Horizon 2020 Plan or the Horizon 2015 Plan that are added (or added back, as applicable) to the aggregate number of shares available under the Horizon 2020 Plan pursuant to the share counting rules of the Horizon 2020 Plan. These shares may be shares of original issuance or treasury shares, or a combination of both.
Stock Options
Horizon’s stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
|
Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2019
|
|
37,737
|
|
|
$
|
10.52
|
|
|
|
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Canceled, forfeited
|
|
(18,776)
|
|
|
10.61
|
|
|
|
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
|
18,961
|
|
|
$
|
10.43
|
|
|
5.0
|
|
$
|
—
|
|
As of December 31, 2020, the unrecognized compensation cost related to stock options is immaterial. For the twelve months ended December 31, 2020 and 2019, the stock-based compensation expense recognized by the Company related to stock options was immaterial. There was no aggregate intrinsic value on the outstanding options at December 31, 2020. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Restricted Shares
During 2020, the Company granted an aggregate of 1,502,072 restricted stock units (“RSUs”) and performance stock units (“PSUs”) to certain key employees and non-employee directors. The total grants consisted of: (i) 284,859 time-based RSUs vesting on a ratable basis on March 3, 2021, March 3, 2022 and March 3, 2023; (ii) 277,228 time-based RSUs vesting on June 24, 2021; (iii) 21,351 time-based RSUs vesting on a ratable basis on April 2, 2021, March 3, 2022 and March 3, 2023 and (iv) 918,634 PSUs that vest on March 3, 2023 (the “2020 PSUs”).
The performance criteria for the 2020 PSUs is based on the Company’s three-year cumulative EBITDA. The grant date fair values for the PSUs and RSUs granted during 2020 are based on the closing trading price of the Company’s common stock on the date of grant.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2019, the Company granted an aggregate of 1,950,296 RSUs and PSUs to certain key employees and non-employee directors. The total grants consisted of: (i) 353,592 time-based RSUs that vest on May 15, 2020; (ii) 27,840 time-based RSUs that vest on September 10, 2020; (iii) 245,134 time-based RSUs that vest on September 19, 2020; (iv) 25,000 time-based RSUs that vest on November 13, 2020; (v) 25,000 time-based RSUs that vest on December 9, 2020; (vi) 5,000 time-based RSUs that vest on May 15, 2021; (vii) 411,373 time-based RSUs that vest on March 19, 2022; (viii) 857,357 market-based PSUs (the “2019 PSUs”), of which 757,357 vest on March 19, 2022, with the remaining 100,000 vesting on a ratable basis on September 23, 2020, September 23, 2021 and September 23, 2022.
For the 2019 PSUs, the performance criteria for the market-based PSUs is based on the Company’s total shareholder return (“TSR”) relative to the TSR of the common stock of a pre-defined industry peer group. TSR is measured over a period beginning January 1, 2019 and ending December 31, 2021. TSR is calculated as the Company’s average closing stock price for the 20-trading days at the end of the performance period plus Company dividends, divided by the Company’s average closing stock price for the 20-trading days prior to the start of the performance period. Depending on the performance achieved, the amount of shares earned can vary from 0% of the target award to a maximum of 200% of the target award. The Company estimated the grant-date fair value of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted-average assumptions: risk-free interest rate of 2.43% and annualized volatility of 84.1%. The grant date fair value of the 2019 PSUs was $3.69.
The grant date fair value of RSUs is expensed over the vesting period. RSU fair values are based on the closing trading price of the Company’s common stock on the date of grant. Changes in the number of RSUs outstanding for the twelve months ended December 31, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock Units(a)
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at December 31, 2019
|
|
1,393,085
|
|
|
$
|
4.30
|
|
|
Granted
|
|
1,502,072
|
|
|
2.92
|
|
|
Vested
|
|
(639,403)
|
|
|
3.91
|
|
|
Canceled, forfeited
|
|
(455,072)
|
|
|
4.90
|
|
|
Outstanding at December 31, 2020
|
|
1,800,682
|
|
|
$
|
3.14
|
|
(a)Includes PSUs at 100% attainment.
As of December 31, 2020, there was $3.1 million in unrecognized compensation costs related to unvested RSUs that is expected to be recognized over a weighted average period of 2.0 years.
During the twelve months ended December 31, 2020 and 2019, the Company recognized $2.7 million and $2.2 million, respectively, of stock-based compensation expense related to RSUs. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Shareholders’ Equity
Preferred Stock
The Company is authorized to issue 100,000,000 shares of preferred stock, par value of $0.01 per share. As of December 31, 2020 and 2019, there were no preferred shares outstanding.
Common Stock
The Company is authorized to issue 400,000,000 shares of Horizon Global common stock, par value of 0.01 per share. As of December 31, 2020, there were 27,089,673 shares of common stock issued and 26,403,167 shares of common stock outstanding. As of December 31, 2019, there were 26,073,894 shares of common stock issued and 25,387,388 shares of common stock outstanding.
Common Stock Warrants
In connection with the Second Lien Term Loan the Company entered into in March 2019, the Company became obligated to issue detachable warrants to purchase up to 6.25 million shares of its common stock, which can be exercised on a cashless basis over a five year term with an exercise price of $1.50 per share.
The Company also issued 90,667 shares of Series A Preferred Stock in March 2019 in connection with the Second Lien Term Loan that were convertible into additional warrants upon receipt of shareholder approval of the issuance of such additional warrants and the shares of common stock issuable upon exercise thereof. The Series A Preferred Stock was presented as temporary equity in the March 31, 2019 condensed consolidated balance sheet. Upon receipt of such shareholder approval on June 25, 2019, the 90,667 shares of Series A Preferred Stock were converted into warrants to purchase 2,952,248 shares of common stock. See Note 10, Long-term Debt, for additional information.
As of December 31, 2020, warrants for 739,111 shares have been exercised on a net basis, resulting in the issuance of 519,206 shares of the Company’s common stock. As of December 31, 2020, warrants to purchase 5,815,039 shares of common stock were issued and remain outstanding. During the twelve months ended December 31, 2020 and 2019, the Company recognized $1.1 million and $0.1 million, respectively, of non-cash transactions in connection with warrants exercised.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Share Repurchase Program
In April 2017, the Board of Directors authorized a share repurchase program of up to 1.5 million shares of the Company’s issued and outstanding common stock during the period beginning on May 5, 2017 (the “Share Repurchase Program”). The Share Repurchase Program provided for share purchases in the open market or otherwise, depending on share price, market conditions and other factors, as determined by the Company. As of December 31, 2020 and 2019, cumulative shares purchased totaled 686,506 at an average purchase price per share of $14.55, excluding commissions. The repurchased shares are presented as treasury stock, at cost, in the accompanying consolidated balance sheets. No shares were repurchased during 2020 or 2019 and the Share Repurchase Program expired on May 5, 2020.
Accumulated Other Comprehensive Income (Loss)
Changes in AOCI attributable to Horizon Global by component, net of tax, for the twelve months ended December 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Foreign Currency Translation and Other
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 1, 2019
|
|
$
|
1,960
|
|
|
$
|
5,800
|
|
|
$
|
7,760
|
|
|
Net unrealized gains arising during the period(a)
|
|
820
|
|
|
1,650
|
|
|
2,470
|
|
|
Less: Net realized gains reclassified to net income(a)
|
|
2,760
|
|
|
—
|
|
|
2,760
|
|
|
Amounts reclassified from AOCI(b)
|
|
(20)
|
|
|
(17,240)
|
|
|
(17,260)
|
|
|
Net change
|
|
(1,960)
|
|
|
(15,590)
|
|
|
(17,550)
|
|
|
Balances at December 31, 2019
|
|
$
|
—
|
|
|
$
|
(9,790)
|
|
|
$
|
(9,790)
|
|
|
Net unrealized gains arising during the period
|
|
—
|
|
|
3,250
|
|
|
3,250
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
—
|
|
|
3,250
|
|
|
3,250
|
|
|
Balances at December 31, 2020
|
|
$
|
—
|
|
|
$
|
(6,540)
|
|
|
$
|
(6,540)
|
|
(a) There was no income tax impact for derivative instruments during the twelve months ended December 31, 2019. See Note 11, Derivative Instruments, for further details.
(b) Recognition of loss associated with the sale of the Company’s APAC segment. See Note 4, Discontinued Operations, for further details.
18. Segment Information
The Company groups its business into operating segments generally by the region in which sales and manufacturing efforts are focused, which are grouped on the basis of similar product, market and operating factors. Each operating segment has discrete financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance. The Company reports the results of its business in two operating segments: Horizon Americas and Horizon Europe‑Africa. Horizon Americas is comprised of the Company’s North American and South American operations. Horizon Europe‑Africa is comprised of the Company’s European and South African operations. See below for further information regarding the types of products and services provided within each operating segment.
Previously, the Company had three operating segments. However, as a result of its sale in the third quarter of 2019, we have removed APAC as a separate operating segment and its results are presented as a discontinued operation in the accompanying consolidated financial statements. Historical information has been retrospectively adjusted to reflect these changes. Please see Note 4, Discontinued Operations, for additional information.
Horizon Americas - A market leader in the design, manufacture and distribution of a wide variety of high-quality, custom engineered towing, trailering and cargo management products and related accessories. These products are designed to support automotive OEMs, automotive OESs, aftermarket and retail customers in the agricultural, automotive, construction, industrial, marine, military, recreational vehicle, trailer and utility end markets. Products include brake controllers, cargo management, heavy-duty towing products, jacks and couplers, protection/securing systems, trailer structural and electrical components, tow bars, vehicle roof racks, vehicle trailer hitches and additional accessories.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Horizon Europe‑Africa - With a product offering similar to Horizon Americas, Horizon Europe‑Africa focuses its sales and manufacturing efforts in the Europe and Africa regions of the world.
The Company’s operating segment activity and total assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
382,380
|
|
|
$
|
372,720
|
|
|
|
|
|
|
Horizon Europe‑Africa
|
|
278,850
|
|
|
317,730
|
|
|
|
|
|
|
Total
|
|
$
|
661,230
|
|
|
$
|
690,450
|
|
|
|
|
|
|
Operating Profit (Loss)
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
27,950
|
|
|
$
|
(10,390)
|
|
|
|
|
|
|
Horizon Europe‑Africa
|
|
(8,390)
|
|
|
(12,100)
|
|
|
|
|
|
|
Corporate
|
|
(26,470)
|
|
|
(34,680)
|
|
|
|
|
|
|
Total
|
|
$
|
(6,910)
|
|
|
$
|
(57,170)
|
|
|
|
|
|
|
Capital Expenditures
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
3,670
|
|
|
$
|
6,590
|
|
|
|
|
|
|
Horizon Europe‑Africa
|
|
9,640
|
|
|
3,080
|
|
|
|
|
|
|
Corporate
|
|
—
|
|
|
50
|
|
|
|
|
|
|
Total
|
|
$
|
13,310
|
|
|
$
|
9,720
|
|
|
|
|
|
|
Depreciation of Property and Equipment and Amortization of Intangibles
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
8,420
|
|
|
$
|
8,670
|
|
|
|
|
|
|
Horizon Europe‑Africa
|
|
14,280
|
|
|
11,720
|
|
|
|
|
|
|
Corporate
|
|
210
|
|
|
1,300
|
|
|
|
|
|
|
Total
|
|
$
|
22,910
|
|
|
$
|
21,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Total Assets
|
|
|
|
|
|
Horizon Americas
|
|
$
|
212,570
|
|
|
$
|
224,430
|
|
|
Horizon Europe-Africa
|
|
206,900
|
|
|
185,810
|
|
|
Corporate
|
|
37,020
|
|
|
10,800
|
|
|
Total
|
|
$
|
456,490
|
|
|
$
|
421,040
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s net sales and net fixed assets attributed to each subsidiary’s country of domicile are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
370,840
|
|
|
$
|
362,690
|
|
|
|
|
Non-U.S.
|
|
|
|
|
|
|
|
Germany
|
|
207,450
|
|
|
209,120
|
|
|
|
|
Other Europe
|
|
63,470
|
|
|
95,700
|
|
|
|
|
Other Americas
|
|
11,540
|
|
|
7,000
|
|
|
|
|
South Africa
|
|
7,930
|
|
|
15,940
|
|
|
|
|
Total non-U.S.
|
|
290,390
|
|
|
327,760
|
|
|
|
|
Total
|
|
$
|
661,230
|
|
|
$
|
690,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
(dollars in thousands)
|
|
Property and equipment, net
|
|
|
|
|
|
Total U.S.
|
|
$
|
22,720
|
|
|
$
|
25,650
|
|
|
Non-U.S.
|
|
|
|
|
|
Germany
|
|
36,690
|
|
|
36,480
|
|
|
Other Europe
|
|
7,940
|
|
|
7,780
|
|
|
South Africa
|
|
4,340
|
|
|
3,930
|
|
|
Other Americas
|
|
2,400
|
|
|
1,990
|
|
|
Total non-U.S.
|
|
51,370
|
|
|
50,180
|
|
|
Total
|
|
$
|
74,090
|
|
|
$
|
75,830
|
|
During the twelve months ended December 31, 2020 and 2019, external export sales from the U.S. to other countries were $44.8 million and $36.5 million, respectively.
19. Income Taxes
The Company’s loss from continuing operations before income tax, by tax jurisdiction, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Domestic
|
|
$
|
(22,430)
|
|
|
$
|
(91,100)
|
|
|
|
|
Foreign
|
|
(16,630)
|
|
|
(29,730)
|
|
|
|
|
Loss from continuing operations before income tax
|
|
$
|
(39,060)
|
|
|
$
|
(120,830)
|
|
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax benefit (expense) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
Current income tax benefit (expense):
|
|
|
|
|
|
|
|
Federal
|
|
$
|
770
|
|
|
$
|
(1,660)
|
|
|
|
|
State and local
|
|
(180)
|
|
|
60
|
|
|
|
|
Foreign
|
|
(1,070)
|
|
|
5,140
|
|
|
|
|
Total current income tax benefit (expense)
|
|
(480)
|
|
|
3,540
|
|
|
|
|
Deferred income tax benefit (expense):
|
|
|
|
|
|
|
|
Federal
|
|
170
|
|
|
140
|
|
|
|
|
State and local
|
|
180
|
|
|
(290)
|
|
|
|
|
Foreign
|
|
1,710
|
|
|
7,430
|
|
|
|
|
Total deferred income tax benefit
|
|
2,060
|
|
|
7,280
|
|
|
|
|
Income tax benefit
|
|
$
|
1,580
|
|
|
$
|
10,820
|
|
|
|
The components of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
Receivables, net
|
|
$
|
510
|
|
|
$
|
600
|
|
|
|
|
Inventories
|
|
2,310
|
|
|
3,750
|
|
|
|
|
Disallowed interest deduction
|
|
25,690
|
|
|
19,210
|
|
|
|
|
Operating lease liabilities
|
|
14,660
|
|
|
14,150
|
|
|
|
|
Accrued liabilities and other long-term liabilities
|
|
8,890
|
|
|
7,970
|
|
|
|
|
Tax loss and credit carryforwards
|
|
31,570
|
|
|
31,670
|
|
|
|
|
Gross deferred tax asset
|
|
83,630
|
|
|
77,350
|
|
|
|
|
Valuation allowances
|
|
(55,180)
|
|
|
(50,370)
|
|
|
|
|
Net deferred tax asset
|
|
28,450
|
|
|
26,980
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
(2,090)
|
|
|
(3,190)
|
|
|
|
|
Other intangibles, net
|
|
(12,270)
|
|
|
(12,790)
|
|
|
|
|
Operating lease right-of-use assets
|
|
(11,870)
|
|
|
(11,240)
|
|
|
|
|
Other
|
|
(4,070)
|
|
|
(3,370)
|
|
|
|
|
Gross deferred tax liability
|
|
(30,300)
|
|
|
(30,590)
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,850)
|
|
|
$
|
(3,610)
|
|
|
|
ASC 740, “Income Taxes,” requires that companies assess whether a valuation allowance should be established based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. A cumulative loss in recent years is significant negative evidence in considering whether deferred tax assets are realizable and also restricts the amount of reliance that can be placed on projections of future taxable income to support the recovery of deferred tax assets.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In prior years, the Company established valuation allowances against substantially all of its net deferred tax assets of its domestic and certain other foreign jurisdictions. As of December 31, 2020 and 2019, certain foreign jurisdictions were in a three-year cumulative pre-tax loss position; therefore, the Company recorded valuation allowances of $0.5 million and $4.0 million, respectively, against certain of its deferred tax assets. In addition, as of December 31, 2020, the deferred tax assets in certain foreign jurisdictions that previously had recognized a valuation allowance were deemed realizable; therefore, the Company recorded a $2.6 million tax benefit. The ultimate realization of these deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
As of December 31, 2020, the Company has recorded deferred tax assets of $42.8 million of federal operating loss carryforward, $59.3 million of various state operating loss carryforwards and $72.1 million of various foreign operating loss carryforwards. The federal loss carryforward has an indefinite carryforward period, the majority of the state tax loss carryforwards expire between 2028 through 2038, however, certain states now have indefinite carryforward periods. In addition, the majority of foreign losses have indefinite carryforward periods. A significant amount of the deferred tax assets discussed above are offset by a corresponding valuation allowance within the jurisdiction to which the deferred tax assets relate.
A reconciliation of the Company’s provision for income taxes to income tax benefit computed at the U.S. federal statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
U.S. federal statutory rate
|
|
21
|
%
|
|
21
|
%
|
|
|
|
Tax at U.S. federal statutory rate
|
|
$
|
8,210
|
|
|
$
|
25,370
|
|
|
|
|
State and local taxes, net of federal tax benefit
|
|
1,390
|
|
|
3,370
|
|
|
|
|
Differences in statutory foreign tax rates
|
|
2,810
|
|
|
4,310
|
|
|
|
|
Uncertain tax positions
|
|
(20)
|
|
|
6,620
|
|
|
|
|
Tax credits
|
|
250
|
|
|
(4,460)
|
|
|
|
|
Net change in valuation allowance
|
|
(4,030)
|
|
|
(24,970)
|
|
|
|
|
Restructuring charges
|
|
(5,030)
|
|
|
950
|
|
|
|
|
Transition tax
|
|
700
|
|
|
(1,740)
|
|
|
|
|
Other, net
|
|
(2,700)
|
|
|
1,370
|
|
|
|
|
Income tax benefit
|
|
$
|
1,580
|
|
|
$
|
10,820
|
|
|
|
Certain foreign subsidiary earnings are subject to U.S. taxation. No deferred taxes have been provided for taxes that would result upon repatriation of our foreign investments to the U.S. as it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations or should not give rise to additional income tax liabilities as a result of the distribution of such earnings.
Uncertain Tax Positions
As of December 31, 2020 and 2019, the Company had $0.2 million and $0.2 million, respectively, of uncertain tax positions (“UTPs”). If the UTPs were recognized, the impact to the Company’s effective tax rate would be to increase reported income tax benefit for the twelve months ended December 31, 2020 and 2019, by $0.2 million and $0.2 million, respectively.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the change in the UTPs as of December 31, 2020 and 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain Tax Positions
|
|
|
|
(dollars in thousands)
|
|
Balances at January 1, 2019
|
|
$
|
5,660
|
|
|
Tax positions related to current year:
|
|
|
|
Additions
|
|
—
|
|
|
Reductions
|
|
—
|
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
|
20
|
|
|
Reductions
|
|
(4,970)
|
|
|
Settlements
|
|
—
|
|
|
Lapses in the statutes of limitations
|
|
(400)
|
|
|
Cumulative translation adjustment
|
|
(100)
|
|
|
Balance at December 31, 2019
|
|
$
|
210
|
|
|
Tax positions related to current year:
|
|
|
|
Additions
|
|
—
|
|
|
Reductions
|
|
—
|
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
|
—
|
|
|
Reductions
|
|
—
|
|
|
Settlements
|
|
—
|
|
|
Lapses in the statutes of limitations
|
|
—
|
|
|
Cumulative translation adjustment
|
|
10
|
|
|
Balance at December 31, 2020
|
|
$
|
220
|
|
The Company recognizes interest and penalties on UTPs as income tax expense. During the twelve months ended December 31, 2020 and 2019, the Company recognized no expense and a net benefit of $1.2 million, respectively, related to interest and penalties. As of December 31, 2020 and 2019, the Company had a liability of $0.2 million and $0.2 million, respectively, related to interest and penalties.
During the twelve months ended December 31, 2020 and 2019, the change in UTPs and liabilities for interest and penalties primarily relates foreign currency translation during 2020 and the expiration of statutes of limitations and resolution of income tax examinations in certain jurisdictions during 2019.
Management monitors changes in tax statutes and regulations and the issuance of judicial decisions to determine the potential impact to UTPs. As of December 31, 2020, the Company estimated $0.1 million of UTPs are expected to be released in the next twelve months.
Income tax returns are filed in multiple domestic and foreign jurisdictions, which are subject to examinations by taxing authorities. As of December 31, 2020, the Company is subject to U.S. federal tax examination for tax years 2017 through 2020. The Company is subject to state, local, and foreign income tax examinations for tax years 2013 through 2020. The Company’s German jurisdiction is subject to German federal tax examination for tax years 2017 through 2020. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we may reach resolution of income tax examinations in one or more foreign jurisdictions. The Company does not believe that the results of these examinations will have a significant impact on the Company’s tax position or its effective tax rate.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Matters
On March 27, 2020, the United States enacted the CARES Act to provide certain relief due to the COVID-19 pandemic. The CARES Act, among other things, includes various income and payroll tax provisions. The CARES Act did not have a significant impact our consolidated financial statements and income tax provision based on the Company’s existing domestic valuation allowance and historical operating performance. Additionally, on December 27, 2020, the United States passed additional legislation that clarifies expenses paid with the proceeds of a PPP loan that is forgiven are considered to be deductible. The Company expects its expenses paid with proceeds of its PPP Loan to be deductible, to the extent the PPP Loan is forgiven. See Note 10, Long-term Debt, for additional information on the Company’s PPP Loan.
20. Other Expense, Net
Other expense, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Customer pay discounts
|
|
$
|
(1,410)
|
|
|
$
|
(1,510)
|
|
|
|
|
Foreign currency gain
|
|
910
|
|
|
50
|
|
|
|
|
Loss on sale of business
|
|
—
|
|
|
(3,630)
|
|
|
|
|
Other
|
|
30
|
|
|
(300)
|
|
|
|
|
Total
|
|
$
|
(470)
|
|
|
$
|
(5,390)
|
|
|
|
21. Subsequent Events
Senior Term Loan Credit Agreement
On February 2, 2021, the Company entered into a credit agreement (the “Senior Term Loan Credit Agreement”) with Atlantic Park Strategic Capital Fund, L.P. (“Atlantic Park”), as administrative agent and collateral agent, and the lenders party thereto (collectively, the “Lenders”). The Senior Term Loan Credit Agreement provides for an initial term loan facility in the aggregate principal amount of $100.0 million, all of which has been borrowed by the Company, and a delayed draw term loan facility in the aggregate principal amount of up to $125.0 million, which may be drawn by the Company in up to three separate borrowings through June 30, 2022. A ticking fee of 25 basis points per annum will accrue on the undrawn portion of the delayed draw term loan facility.
The proceeds received by the Company from the initial borrowings under the Senior Term Loan Credit Agreement were used to repay in full all outstanding debt and accrued interest on the Company’s Replacement Term Loan. As a result of the repayment, the credit agreement governing the Company’s Replacement Term Loan has been terminated and is no longer in effect.
Interest on the Senior Term Loan Credit Agreement is payable in cash on a quarterly basis at the interest rate of LIBOR plus 7.50% per annum, subject to a 1.00% LIBOR floor, and is subject to various affirmative and negative covenants, including a secured net leverage ratio tested quarterly, commencing with the fiscal quarter ending March 31, 2023, not to exceed: 6.50 to 1.00. The Senior Term Loan Credit Agreement also contains a financial covenant that stipulates the Company will not make Capital Expenditures (as defined in the Senior Term Loan Credit Agreement) exceeding $27.5 million during any fiscal year. To the extent that the amount of Capital Expenditures is less than $27.5 million in any fiscal year, up to 50% of the difference may be carried forward and used for Capital Expenditures in the immediately succeeding fiscal year.
Following a one-year no-call period, the Senior Term Loan Credit Agreement provides for a 2.5% call premium for years two through five and no premium thereafter. All outstanding borrowings made under the Senior Term Loan Credit Agreement mature on February 2, 2027.
All of the indebtedness under the Senior Term Loan Credit Agreement is and will be guaranteed by the Company’s existing and future United States, Canadian and Mexican subsidiaries and certain other foreign subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pursuant to the Senior Term Loan Credit Agreement, the Company issued warrants (the “Senior Term Loan Warrants”) to Atlantic Park to purchase in the aggregate up to 3,905,486 shares of the Company’s common stock, with an exercise price of $9.00 per share, subject to adjustment as provided in the Senior Term Loan Warrants. The Senior Term Loan Warrants are exercisable at any time prior to February 2, 2026.
The Company estimates it incurred $11.4 million of debt issuance costs and fees associated with the above transactions. The transactions will be accounted for in the first quarter of 2021.
Additionally, on February 2, 2021, the Company entered into a limited consent of the Loan Agreement for the Company’s Revolving Credit Facility, that among other modifications, consented to the Company’s entering into the Senior Term Loan Credit Agreement.