NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
. General
Nature of operations and basis of presentation.
Horizon Global Corporation (“Horizon,” “Horizon Global,” “we,” or the “Company”) is 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 original equipment manufacturers (“OEMs”) and original equipment servicers (“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 by the region in which sales and manufacturing efforts are focused. The Company’s operating segments are
Horizon Americas
,
Horizon Europe‑Africa
, and
Horizon Asia‑Pacific
. See Note
18
, “
Segment Information
,” for further information on each of the Company’s operating segments.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of Americas (“U.S. GAAP”).
Corporate history
. On June 30, 2015, Horizon became an independent company as a result of the distribution by TriMas Corporation (“TriMas” or “former parent”) of
100 percent
of the outstanding common shares of Horizon Global to TriMas shareholders (the “spin-off”). Each TriMas shareholder of record as of the close of business on June 25, 2015 (the “Record Date”) received
two
Horizon Global common shares for every
five
TriMas common shares held as of the Record Date. The spin-off was completed on June 30, 2015 and was structured to be tax-free to both TriMas and Horizon Global shareholders. On July 1, 2015, Horizon Global common shares began regular trading on the New York Stock Exchange under the ticker symbol “HZN”.
2
. New Accounting Pronouncements
New accounting pronouncements not yet adopted
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU 2018-07”). ASU 2018-07 expands the scope of Accounting Standard Codification (“ASC”) 718 to include all share-based payment arrangements related to the acquisition of goods and services from both non-employees and employees. ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. The standard is not expected to have a significant impact on the Company's consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted and should be applied on a modified retrospective basis. The standard is not expected to have a significant impact on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which supersedes the lease requirements in “Leases (Topic 840).” The objective of this update is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. Under this guidance, lessees are required to recognize on the balance sheet a lease liability and a right-of-use asset for all leases, with the exception of short-term leases with terms of twelve months or less. The lease liability represents the lessee’s obligation to make lease payments arising from a lease and will be measured as the present value of the lease payments. The right-of-use asset represents the lessee’s right to use a specified asset for the lease term, and will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company has elected the package of practical expedients, excluding the lease term hindsight, as permitted by the transition guidance. The Company has made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases will be expensed over the lease term. The Company will adopt the standard January 1, 2019, by applying the modified retrospective method without restatement
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of comparative periods' financial information, as permitted by the transition guidance. The impact of adoption will result in the recognition of right-of-use assets estimated in the range of
$70.0 million
to
$80.0 million
, with corresponding lease liabilities of the same amount. The standard will not have a significant impact on the Company's consolidated results of operations and cash flows.
Accounting pronouncements recently adopted
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “Act”). The Company adopted the standard in the third quarter of 2018 and the impact of the adoption of ASU 2018-02 is approximately a
$0.9 million
increase to accumulated deficit, a $
0.3 million
increase to paid-in capital, and a $
0.6 million
increase to accumulated other comprehensive income.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements and provides guidance on when an entity would be required to apply modification accounting. The Company adopted ASU 2017-09 on January 1, 2018, on a prospective basis, and there was no impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. As of January 1, 2018, ASU 2017-01 became effective for the Company for any new acquisitions (or disposals), and there was no impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 provides an amendment to the accounting guidance related to the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. Under the new guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under the current guidance, the income tax effects are deferred until the asset has been sold to an outside party. The Company adopted ASU 2016-16 on January 1, 2018, on a modified retrospective basis, and there was no impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 was issued to reduce differences in practice with respect to how specific transactions are classified in the statement of cash flows. The Company adopted ASU 2016-15 on January 1, 2018, and there was no impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09” or “Topic 606”). ASU 2014-09 supersedes most of the existing guidance on revenue recognition in ASC Topic 605, “Revenue Recognition” (“Topic 605”), and establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not record a cumulative adjustment related to the adoption of ASU 2014-09, and the effects of adoption were not significant. See Note
4
, “
Revenues,
” for further information.
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 (“VIE”) for which the Company has been deemed to be the primary beneficiary. The consolidated financial statements include the assets and liabilities of the VIE at
December 31, 2018
and
2017
, and the revenue and expenses of the VIE for the period beginning October 1, 2016. Intercompany accounts and transactions have been eliminated in consolidation.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, valuation of derivatives, estimated future unrecoverable lease costs, estimated uncertain tax positions, legal and product liability matters, 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.
Account Receivables.
Receivables consist primarily of amounts from contracts with customers for the sale of towing, trailering, cargo management and other related accessories. Receivables are presented net of allowances for doubtful accounts of approximately
$5.1 million
and
$3.1 million
at
December 31, 2018
and
2017
, 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 accounts receivable 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 receivable under certain recourse and non-recourse agreements. Total receivables sold under the factoring arrangements were approximately
$242.8 million
and
$257.5 million
as of
December 31, 2018
and
2017
, 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 Accounting Standards Codification (“ASC”) 860, “
Transfers and Servicing.”
The holdback amounts due from the factoring institutions were approximately $
3.1 million
each as of
December 31, 2018
and
2017
, respectively, and is 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. Total factoring fees were
$0.7 million
for each the years ended
December 31, 2018
and
2017
, respectively.
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.
Depreciation.
Depreciation is computed principally using the straight-line method over the estimated useful lives of the assets. Annual depreciation rates are as follows:
|
|
|
Fixed Asset Category
|
Estimated Useful Life
|
Building and Land/building improvements
|
10 - 40 years
|
Machinery and Equipment
|
3 - 15 years
|
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets.
The Company reviews, on at least a quarterly basis, the financial performance of each business unit for indicators of impairment. 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
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
evaluating operating results. For purposes of the Company’s annual goodwill impairment test, the Company had
three
reporting units which are the same as its
three
operating segments, of which the Horizon Americas and Horizon Asia-Pacific reporting units had goodwill of
$4.5 million
and
$8.2 million
, respectively, at the 2018 annual test for impairment. The Horizon Europe-Africa reporting unit’s goodwill was written off during 2018 due to interim triggering events that resulted in
$124.7 million
of impairment charges. See Note
6
,
Goodwill and Other Intangible Assets
for further information.
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.
Indefinite-Lived Intangibles.
The Company assesses indefinite-lived intangible assets for impairment annually on October 1st by reviewing relevant quantitative factors. More frequent evaluations may be required if the Company experiences changes in its business climate or as a result of other triggering events that take place.
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. The Company recognized indefinite-lived intangible impairment charges of
$2.1 million
for the year ended December 31, 2018. See Note
6
,
Goodwill and Other Intangible Assets,
for further information.
Self-insurance.
Horizon instituted self-insurance plans for losses and liabilities related to workers’ compensation and comprehensive general, product and vehicle liability at the time of spin-off which ran through June 30, 2016. The Company was generally responsible for up to
$1.0 million
per occurrence under our comprehensive general, product and vehicle liability plan and
$0.5 million
under our workers’ compensation plan. Beginning on July 1, 2016, Horizon is fully insured for workers’ compensation and retains no liability for claims under the new plan, and are generally responsible for up to
$0.8 million
per occurrence under our comprehensive general, product and vehicle liability plan. Reserves for claim losses, including an estimate of related litigation defense costs, are recorded based upon the Company’s estimates of the aggregate liability for claims incurred using actuarial assumptions about future events. Changes in assumptions for factors such as actual experience could cause these estimates to change.
Revenue Recognition.
Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
See Note
4
,
Revenue
, for further information on the Company’s revenue recognition in accordance with ASC Topic 606.
Cost of Sales.
Cost of sales includes material, labor and overhead costs incurred in the manufacture 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. R&D expenses were approximately
$15.5 million
,
$15.4 million
and
$10.4 million
for the years ended
December 31, 2018
,
2017
and
2016
, 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, marketing and distribution of the Company’s products, outbound freight costs, amortization of customer intangible assets, costs of finance, human resources, legal functions, executive management costs and other administrative expenses.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shipping and Handling Expenses.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales. Other outbound freight costs are included in selling, general and administrative expenses. Shipping and handling expenses, including those of
Horizon Americas
’ distribution network, are included in cost of sales in the accompanying consolidated statements of operations. Shipping and handling costs were
$19.5 million
,
$13.3 million
and
$9.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Advertising and Sales Promotion Costs.
Advertising and sales promotion costs are expensed as incurred. Advertising costs were approximately
$4.4 million
,
$6.2 million
and
$6.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
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 is greater than 50% likely 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) in the consolidated statements of shareholders’ equity. Net foreign currency transaction gains or losses were approximately a
$1.0 million
loss for the year ended
December 31, 2018
, a
$0.8 million
loss for the year ended
December 31, 2017
, and a
$0.5 million
gain for the year ended
December 31, 2016
.
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 other comprehensive income (loss) 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 accumulated other comprehensive income (loss) is recorded in 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.
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.
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The carrying value of financial instruments reported in the balance sheets for current assets and current liabilities approximates fair value due to the short maturity of these instruments.
Business Combinations.
The Company records assets acquired and liabilities assumed from acquisitions at fair value. The fair value of working capital accounts, except inventory generally approximate book value. The valuation of inventory, property, plant and equipment, and intangible assets require significant assumptions. Inventory is recorded based on the estimated selling price less costs to sell, including completion, disposal and holding period costs with a reasonable profit margin. Property, plant and equipment is recorded at fair value using a combination of both the cost and market approaches for both the real and personal property acquired. Under the cost approach, consideration is given to the amount required to construct or purchase a new asset of equal value at current prices, with adjustments in value for physical deterioration, as well as functional and economic obsolescence. Under the market approach, recent transactions for similar types of assets are used as the basis for estimating fair value. For trademark/trade names and technology and other intangible assets, the estimated fair value is based on projected discounted future net cash flows using the relief-from-royalty method. For customer relationship intangible assets, the estimated fair value is based on projected discounted future cash flows using the excess earnings method. The relief-from-royalty and excess earnings method are both income approaches that utilize key assumptions such as forecasts of revenue and expenses over an extended period of time, royalty rate percentages, tax rates, and estimated costs of debt and equity capital to discount the projected cash flows.
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. 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 are 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 increasingly stringent 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, including those arising from alleged defects related to our products, product warranties, recalls, breach of contracts, intellectual property 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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 reevaluate 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 losses as these amounts are recorded directly as an adjustment to accumulated deficit. 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
. Revenues
Revenue Recognition
The following tables present the Company’s net sales by segments and disaggregated by major sales channel for the twelve months ended
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
Horizon
Europe-Africa
|
|
Horizon
Asia-Pacific
|
|
Total
|
|
|
(dollars in thousands)
|
Net Sales
|
|
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
80,300
|
|
|
$
|
174,040
|
|
|
$
|
23,810
|
|
|
$
|
278,150
|
|
Automotive OES
|
|
5,610
|
|
|
50,890
|
|
|
60,620
|
|
|
117,120
|
|
Aftermarket
|
|
114,450
|
|
|
77,190
|
|
|
25,070
|
|
|
216,710
|
|
Retail
|
|
115,920
|
|
|
—
|
|
|
11,460
|
|
|
127,380
|
|
Industrial
|
|
38,810
|
|
|
—
|
|
|
15,040
|
|
|
53,850
|
|
E-commerce
|
|
34,220
|
|
|
4,570
|
|
|
—
|
|
|
38,790
|
|
Other
|
|
1,380
|
|
|
16,570
|
|
|
—
|
|
|
17,950
|
|
Total
|
|
$
|
390,690
|
|
|
$
|
323,260
|
|
|
$
|
136,000
|
|
|
$
|
849,950
|
|
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 add, 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
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
For certain sales arrangements within the automotive OEM and automotive OES sales channels, the Company deems control to transfer over time, and recognizes revenue as products are manufactured, when the terms of the arrangement include both a right to payment and contractual restrictions against the alternative use of its products. For revenue recognized over time, the Company estimates the amount of revenue earned at a given point during the production cycle based on certain costs factors such as raw materials and labor, incurred to date, plus a reasonable profit. The Company believes this method, which is the cost-to-cost input method, best estimates the revenue recognizable for these arrangements. At
December 31, 2018
, the aggregate amount of the transaction prices allocated to remaining performance obligations was not material, and the Company will recognize this revenue as the manufacturing of the products is completed, which is expected to occur over the next 12 months.
Provisions for customer volume rebates, product returns, discounts and allowances 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. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue as there is no distinct good or service received in return for the advertising. The Company uses the most likely amount method to estimate variable consideration. Adjustments to estimates of variable consideration for previously recognized revenue were insignificant during the year ended
December 31, 2018
.
Contract Balances
The timing of revenue recognition, billings and cash collections and payments results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenues (contract liabilities).
Revenue recognized over time gives rise to contract assets, which represent revenue recognized but unbilled. The Company’s sales arrangements satisfied over time create contract assets when revenue is recognized as the products are manufactured, as payment is not contractually required until the products have shipped. Contract assets in these arrangements are reclassified to accounts receivable upon shipment. At
December 31, 2018
, total opening and closing balances of contract assets were not material.
Contract liabilities are comprised of customer payments received or due in advance of the Company’s performance. At
December 31, 2018
, total opening and closing balances of deferred revenue were not material. The Company recognizes deferred revenue as net sales after the Company has transferred control of the products to the customer and all revenue recognition criteria is met. For the year ended
December 31, 2018
, the total amount of revenue recognized from revenue deferred in prior periods was not material.
Additionally, the Company monitors the aging of uncollected billings and adjusts its accounts receivable allowance on a quarterly basis, as necessary, based upon its evaluation of the probability of collection. The adjustments made by the Company due to the write-off of uncollectible amounts have been immaterial for all periods presented. At
December 31, 2018
and
December 31, 2017
, the Company’s accounts receivable, net of reserves were
$108.3 million
and
$91.8 million
, respectively.
Practical Expedients
The Company elects the practical expedient to expense costs incurred to obtain a contract with a customer when the amortization period would have been one year or less. These costs include sales commissions as the Company has determined annual compensation is commensurate with annual sales activities.
The Company elects the practical expedient that does not require the Company to 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.
5
. Acquisitions
Brink Group Termination
On December 13, 2017, the Company entered into a sale and purchase agreement (the “SPA”) to acquire Brink International B.V. and its subsidiaries (collectively, the “Brink Group”). The SPA contemplated a business combination through the purchase of
100%
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the equity interest in the Brink Group (the “Brink Group Acquisition”). On the date of the closing of the Brink Group Acquisition, the Brink Group would have become a wholly owned subsidiary of Horizon.
On June 14, 2018, the Brink Group Acquisition was terminated by the parties pursuant to the terms of the transaction. On July 16, 2018, in accordance with the termination and settlement agreement, the Company paid the Brink Group a breakup fee of approximately
$5.5 million
. During the year ended
December 31, 2018
, Horizon incurred transaction fees, including related financing costs, of approximately
$11.0 million
in connection with the pursuit of the Brink Group Acquisition, as well as
$5.1 million
of costs incurred related to deal financing a ticking fee. The breakup fee and transaction fees are included in selling, general and administrative expenses and the ticking fee is included in other expense, net in the accompanying consolidated statements of operations. There were no transaction fees incurred in connection with the Brink Group Acquisition for the years ended
December 31, 2017
or
December 31, 2016
.
Best Bars Acquisition
On July 3, 2017, the Company completed the acquisition of Best Bars Limited (“Best Bars”), within the Horizon Asia-Pacific operating segment, for total consideration of
$19.6 million
. Best Bars is a provider of towing solutions and automotive accessories to OE and aftermarket customers in New Zealand. The Company believes the acquisition will expand its opportunities for revenue and margin growth, increase its market share and further develop its global OE footprint.
The following table summarizes the fair value of consideration paid for Best Bars, and the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
Acquisition Date
|
|
|
(dollars in thousands)
|
Consideration
|
|
|
Cash paid
|
|
$
|
19,570
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
|
Receivables
|
|
2,100
|
|
Inventories
|
|
2,340
|
|
Other intangibles
|
|
7,690
|
|
Prepaid expenses and other current assets
|
|
110
|
|
Property and equipment
|
|
2,250
|
|
Accounts payable and accrued liabilities
|
|
(1,680
|
)
|
Deferred income taxes
|
|
(2,150
|
)
|
Total identifiable net assets
|
|
10,660
|
|
Goodwill
|
|
8,910
|
|
|
|
$
|
19,570
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6
.
Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill for the years ended
December 31, 2018
and
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
Horizon Europe‑Africa
|
|
Horizon Asia‑Pacific
|
|
Total
|
|
(dollars in thousands)
|
Balances at December 31, 2016
|
|
$
|
5,370
|
|
|
$
|
114,820
|
|
|
$
|
—
|
|
|
$
|
120,190
|
|
Goodwill from acquisitions
(a)
|
|
—
|
|
|
—
|
|
|
6,990
|
|
|
6,990
|
|
Foreign currency translation
|
|
(90
|
)
|
|
11,340
|
|
|
(240
|
)
|
|
11,010
|
|
Balances at December 31, 2017
|
|
5,280
|
|
|
126,160
|
|
|
6,750
|
|
|
138,190
|
|
Impairment
|
|
—
|
|
|
(124,660
|
)
|
|
—
|
|
|
(124,660
|
)
|
Foreign currency translation and other
|
|
(780
|
)
|
|
(1,500
|
)
|
|
1,410
|
|
|
(870
|
)
|
Balances at December 31, 2018
|
|
$
|
4,500
|
|
|
$
|
—
|
|
|
$
|
8,160
|
|
|
$
|
12,660
|
|
__________________________
(a)
Attributable to the acquisition of Best Bars, as further described in Note
5
, “
Acquisitions
”.
The Company performed an annual goodwill impairment test as of October 1, 2017, for which the fair value of all reporting units exceeded their respective carrying value, indicating no impairment. However, during the fourth quarter of 2017, Horizon experienced a significant decline in market capitalization, which, coupled with the Europe-Africa reporting unit’s performance, which were below expectations, formed an indicator of impairment of recorded goodwill. The indicator did not impact the Horizon Americas and Horizon Asia-Pacific reporting units as these reporting units were generating positive cashflows and had a good business outlook. A separate qualitative assessment was completed over these reporting units as part of the Company’s annual October 1, 2017 goodwill test for impairment and it was determined that it was more likely than not that the fair values of the Horizon Americas and Horizon Asia-Pacific reporting units was greater than the carrying values, when considering positive and negative macro and micro factors such as market value, market capitalization and income approach factors (e.g., cash generation, operating results, etc.). However, due to the triggers described above, a quantitative analysis was performed for the Horizon Europe-Africa reporting unit as of December 31, 2017, which indicated that the fair value of the reporting unit exceeded its carrying value by approximately
1%
.
During the first quarter of 2018, the Company continued to experience a decline in market capitalization. Additionally, the Europe-Africa reporting unit did not perform in-line with forecasted results driven by a shift in volume to lower margin programs as well as increased commodity costs, which negatively impacted margins. As a result, an indicator of impairment was identified during the first quarter of 2018. The Company performed an interim quantitative assessment as of March 31, 2018, utilizing a combination of the income and market approaches, which were weighted evenly. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded the fair value of the reporting unit by
$43.4 million
, and accordingly an impairment was recorded. Key assumptions used in the analysis were a discount rate of
13.5%
, a terminal growth rate of
2.5%
and EBITDA margin.
Due to the impairment indicators noted above, the Company also performed an interim impairment assessment of indefinite-lived intangible assets in the first quarter of 2018 in the Horizon Europe-Africa operating segment. Based on the results of the analyses, there were certain trade names where the estimated fair values approximated the carrying values. Key assumptions used in the analysis were discount rates of
13.5%
to
16.0%
and royalty rates ranging from
0.5%
to
1.0%
.
During the second quarter of 2018, the Company continued to experience a decline in market capitalization. Additionally, the Europe-Africa reporting unit did not perform in-line with forecasted results driven by an unfavorable shift in volume to lower margin channels as well as increased commodity costs, which negatively impacted margins. Further, the expected benefits of shifting production to lower cost manufacturing sites had not been realized. As a result, an indicator of impairment was identified during the second quarter of 2018. The Company performed an interim quantitative assessment as of June 30, 2018, utilizing a combination of the income and market approaches. The income approach was weighted
75%
, while the market approach was weighted
25%
. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded the fair value of the reporting unit by
$54.6 million
and, accordingly, an impairment was recorded. Key assumptions used in the analysis were a discount rate of
14.0%
, a terminal growth rate of
2.5%
and EBITDA margin.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the impairment indicators noted above, the Company performed an interim impairment assessment for indefinite-lived intangible assets within the Horizon Europe-Africa operating segment, for which the gross carrying amounts totaled approximately
$12.1 million
as of June 30, 2018. Based on the results of the Company’s analyses, it was determined that the carrying values of the Westfalia and Terwa trade names exceeded their fair values by
$1.1 million
and, accordingly, an impairment charge was recorded. Key assumptions used in the analysis were discount rates of
15.0%
and royalty rates ranging from
0.5%
to
1.0%
.
During the third quarter of 2018, the Europe-Africa reporting unit continued to underperform in relation to forecasted results driven by increased commodity costs and the failure to realize benefits from previously implemented synergy plans. The Company performed an interim quantitative assessment as of August 31, 2018, utilizing a combination of the income and market approaches. The income approach was weighted
75%
, while the market approach was weighted
25%
. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded fair value and, accordingly, an impairment of
$26.6 million
was recorded eliminating all remaining goodwill associated with the Europe-Africa reporting unit. Key assumptions used in the analysis were a discount rate of
13.5%
, a terminal growth rate of
2.5%
and EBITDA margin.
Due to impairment indicators noted above, the Company performed an interim impairment assessment for indefinite-lived intangible assets within the Europe-Africa operating segment as of August 31, 2018, for which the gross carrying amounts totaled approximately
$10.9 million
as of
September 30, 2018
. Based on the results of the Company’s analyses, the carrying value of the trademarks approximated fair value. Key assumptions used in the analysis were discount rates of
14.5%
, and royalty rates ranging from
0.5%
to
1.0%
.
As of its annual testing date for 2018, the Company no longer had any goodwill recorded for its Horizon Europe-Africa reporting unit due to the interim triggering events discussed above that occurred during the 2018 fiscal year. These triggering events resulted in a goodwill impairment charge of
$124.7 million
for the year-ended
December 31, 2018
. The Company performed an annual qualitative goodwill impairment assessment as of October 1, 2018, for the Horizon Americas and Horizon Asia-Pacific reporting units. The assessment indicated that it was more likely than not that the fair value of each of the reporting units exceeded its respective carrying value. We do not believe that any of our reporting units is at risk for impairment as of
December 31, 2018
.
Other Intangible Assets
The gross carrying amounts and accumulated amortization of the Company’s other intangibles are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
Intangible Category by Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
|
(dollars in thousands)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships, 5 - 20 years
|
|
$
|
177,910
|
|
|
$
|
(127,740
|
)
|
|
$
|
180,850
|
|
|
$
|
(121,750
|
)
|
Technology and other, 3 - 15 years
|
|
21,000
|
|
|
(15,910
|
)
|
|
19,950
|
|
|
(15,260
|
)
|
Trademark/Trade names, 1 - 8 years
|
|
730
|
|
|
(250
|
)
|
|
730
|
|
|
(190
|
)
|
Total finite-lived intangible assets
|
|
199,640
|
|
|
(143,900
|
)
|
|
201,530
|
|
|
(137,200
|
)
|
Trademark/Trade names, indefinite-lived
|
|
22,310
|
|
|
—
|
|
|
25,900
|
|
|
—
|
|
Total other intangible assets
|
|
$
|
221,950
|
|
|
$
|
(143,900
|
)
|
|
$
|
227,430
|
|
|
$
|
(137,200
|
)
|
Amortization expense related to intangible assets as included in the accompanying consolidated statements of operations is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Technology and other, included in cost of sales
|
|
$
|
1,840
|
|
|
$
|
710
|
|
|
$
|
170
|
|
Customer relationships & Trademark/Trade names, included in selling, general and administrative expenses
|
|
7,100
|
|
|
9,700
|
|
|
7,790
|
|
Total amortization expense
|
|
$
|
8,940
|
|
|
$
|
10,410
|
|
|
$
|
7,960
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Estimated amortization expense for the next five fiscal years beginning after
December 31, 2018
is as follows:
|
|
|
|
|
|
Year ended December 31,
|
|
Estimated Amortization Expense
|
|
|
(dollars in thousands)
|
2019
|
|
$
|
8,150
|
|
2020
|
|
7,890
|
|
2021
|
|
6,160
|
|
2022
|
|
5,540
|
|
2023
|
|
4,970
|
|
The Company performed an annual qualitative indefinite-lived impairment assessment as of October 1, 2018. 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. The Company specifically assessed its Terwa trade name during the fourth quarter of 2018 and identified an impairment. The trade name has been written off as of the year-ended
December 31, 2018
, resulting in a charge of approximately
$1.0 million
.
7. Inventories, Net
Inventories, net consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(dollars in thousands)
|
Finished goods
|
|
$
|
112,620
|
|
|
$
|
113,740
|
|
Work in process
|
|
21,470
|
|
|
17,960
|
|
Raw materials
|
|
55,640
|
|
|
53,950
|
|
Total inventories
|
|
$
|
189,730
|
|
|
$
|
185,650
|
|
Reserves
|
|
(16,040
|
)
|
|
(14,150
|
)
|
Inventories, net
|
|
$
|
173,690
|
|
|
$
|
171,500
|
|
8. Property and Equipment, Net
Property and equipment, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(dollars in thousands)
|
Land and land improvements
|
|
$
|
460
|
|
|
$
|
480
|
|
Buildings
|
|
21,440
|
|
|
23,370
|
|
Machinery and equipment
|
|
161,750
|
|
|
162,830
|
|
|
|
183,650
|
|
|
186,680
|
|
Less: Accumulated depreciation
|
|
81,370
|
|
|
73,660
|
|
Property and equipment, net
|
|
$
|
102,280
|
|
|
$
|
113,020
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Depreciation expense as included in the accompanying consolidated statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Depreciation expense, included in cost of sales
|
|
$
|
15,110
|
|
|
$
|
13,730
|
|
|
$
|
8,800
|
|
Depreciation expense, included in selling, general and administrative expense
|
|
1,330
|
|
|
1,200
|
|
|
1,460
|
|
Total depreciation expense
|
|
$
|
16,440
|
|
|
$
|
14,930
|
|
|
$
|
10,260
|
|
9. Accrued and Other Long-term Liabilities
Accrued liabilities consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(dollars in thousands)
|
Customer claims
|
|
14,160
|
|
|
2,170
|
|
Accrued compensation
|
|
10,230
|
|
|
10,360
|
|
Customer incentives
|
|
10,100
|
|
|
8,800
|
|
Restructuring
|
|
7,530
|
|
|
3,940
|
|
Accrued professional services
|
|
4,770
|
|
|
4,140
|
|
Deferred purchase price
|
|
3,400
|
|
|
1,930
|
|
Short-term tax liabilities
|
|
1,930
|
|
|
7,700
|
|
Cross currency swap
|
|
1,610
|
|
|
—
|
|
Other
|
|
12,090
|
|
|
14,030
|
|
Total accrued liabilities
|
|
$
|
65,820
|
|
|
$
|
53,070
|
|
Other long-term liabilities consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(dollars in thousands)
|
Long-term tax liabilities
|
|
$
|
6,270
|
|
|
$
|
13,750
|
|
Restructuring
|
|
2,580
|
|
|
3,100
|
|
Deferred purchase price
|
|
30
|
|
|
3,350
|
|
Cross currency swap
|
|
—
|
|
|
7,830
|
|
Other
|
|
11,080
|
|
|
10,340
|
|
Total other long-term liabilities
|
|
$
|
19,960
|
|
|
$
|
38,370
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10
. Long-term Debt
The Company’s long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
December 31,
2017
|
|
|
(dollars in thousands)
|
ABL Facility
|
|
$
|
61,570
|
|
|
$
|
10,000
|
|
Term B Loan
|
|
190,520
|
|
|
149,620
|
|
Convertible Notes
|
|
125,000
|
|
|
125,000
|
|
Bank facilities, capital leases and other long-term debt
|
|
18,990
|
|
|
25,780
|
|
|
|
396,080
|
|
|
310,400
|
|
Less:
|
|
|
|
|
Unamortized debt issuance costs and original issuance discount on Term B Loan
|
|
7,380
|
|
|
4,940
|
|
Unamortized debt issuance costs and discount on the Convertible Notes
|
|
24,190
|
|
|
29,870
|
|
Current maturities, long-term debt
|
|
13,860
|
|
|
16,710
|
|
Long-term debt
|
|
$
|
350,650
|
|
|
$
|
258,880
|
|
Convertible Notes
On February 1, 2017, the Company completed a public offering of
2.75%
Convertible Senior Notes due 2022 (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 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
2018
, 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
2018
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, 2018
, 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, 2018
and
December 31, 2017
, was
$100.8 million
and
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$95.1 million
, respectively, including total unamortized debt discount and debt issuance costs of
$24.2 million
and
$29.9 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, 2018
and
December 31, 2017
, respectively, net of issuance costs and taxes.
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:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
Contractual interest coupon on convertible debt
|
|
$
|
3,490
|
|
|
$
|
3,190
|
|
Amortization of debt issuance costs
|
|
$
|
530
|
|
|
$
|
490
|
|
Amortization of "equity discount" related to debt
|
|
$
|
5,150
|
|
|
$
|
4,380
|
|
The estimated fair value of the Convertible Notes based on a market approach as of
December 31, 2018
was approximately
$68.2 million
, which represents 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 approximately
$0.7 million
. The Convertible Note Hedges are accounted for as equity transactions in accordance with ASC 815-40
,
“
Derivatives and Hedging-Contracts in Entity’s own Equity.
”
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
$0.6 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.
ABL Facility
On December 22, 2015, the Company entered into an Amended and Restated Loan Agreement among the Company, Horizon Global Americas Inc. (f/k/a Cequent Performance Products, Inc., successor by merger to Cequent Consumer Products, Inc.) (“HGA”), Cequent UK Limited, Cequent Towing Products of Canada Ltd., 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
.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The ABL Loan Agreement establishes (i) a U.S. sub-facility, in an aggregate principal amount of up to
$94.0 million
(subject to availability under a U.S.-specific borrowing base) (the “U.S. Facility”), (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) (the “Canadian Facility”), and (iii) a U.K. sub-facility in an aggregate principal amount of up to
$3.0 million
(subject to availability under a U.K.-specific borrowing base) (the “U.K. Facility”). The ABL Facility also includes a
$20.0 million
U.S. letter of credit sub-facility, which matures on
June 30, 2020
.
Borrowings under the ABL Facility bear interest, at the Company’s election, at either (i) with respect to the U.S. Facility and the U.K. Facility, (a) the Base Rate (as defined per the ABL Loan Agreement, the “Base Rate”) plus the Applicable Margin (as defined per the ABL Loan Agreement “Applicable Margin”), or (b) the London Interbank Offered Rate (“LIBOR”) plus the Applicable Margin, and (ii) with respect to the Canadian Facility, (a) the Base Rate plus the Applicable Margin, or (b) the Canadian Prime Rate (as defined per the ABL Loan Agreement).
The Company incurs fees with respect to the ABL Facility, including (i) an unused line fee of
0.25%
times the amount by which the revolver commitments exceed the average daily revolver usage during any month, (ii) facility fees equal to the applicable margin in effect for (a) LIBOR Revolving Loans (as defined per the ABL Loan Agreement), with respect to the U.S. Facility and the U.K. Facility or (b) Canadian Base Rate Loans (as defined per the ABL Loan Agreement), with respect to the Canadian Facility, times the average daily stated amount of letters of credit, (iii) a fronting fee equal to
0.125%
per annum on the stated amount of each letter of credit and (iv) customary administrative fees.
All of the indebtedness of the U.S. Facility is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. In connection with the ABL Loan Agreement, HGA and certain other subsidiaries of the Company party to the ABL Loan Agreement entered into a foreign facility guarantee and collateral agreement (the “Foreign Collateral Agreement”) in order to secure and guarantee the obligation under the Canadian Facility and the U.K. Facility. Under the Foreign Collateral Agreement, HGA and the other subsidiaries of the Company party thereto granted a lien on certain of their assets to Bank of America, N.A., as the agent for the lenders and other secured parties under the Canadian Facility and U.K. Facility.
The ABL Loan Agreement contains customary negative covenants and does not include any financial maintenance covenants other than a springing minimum fixed charge coverage ratio of at least
1.00
to
1.00
on a trailing twelve-month basis, which will be tested only upon the occurrence of an event of default or certain other conditions as specified in the agreement. At
December 31, 2018
, the Company was in compliance with its financial covenants contained in the ABL Facility.
Debt issuance costs of approximately
$2.5 million
were incurred in connection with the entry into an amendment of the ABL Facility. These debt issuance costs will be amortized into interest expense over the contractual term of the loan. The Company recognized
$0.5 million
during each of the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
, respectively, related to the amortization of debt issuance costs, which is included in the accompanying consolidated statements of operations. There were
$0.8 million
and
$1.3 million
of unamortized debt issuance costs included in other assets in the accompanying consolidated balance sheet as of
December 31, 2018
and
December 31, 2017
, respectively.
There were
$61.6 million
and
$10 million
outstanding under the ABL Facility as of
December 31, 2018
and
December 31, 2017
with a weighted average interest rate of
4.4%
and
3.6%
, respectively. Total letters of credit issued under the ABL Facility at
December 31, 2018
and
2017
were
$3.4 million
and
$6.3 million
, respectively. The Company had
$10.3 million
and
$58.5 million
in availability under the ABL Facility as of
December 31, 2018
and
2017
, respectively.
Term Loan
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
(“Original Term B Loan”), which matures on
June 30, 2021
. On September 19, 2016, the Company entered into the First Amendment to the Credit Agreement (“Term Loan Amendment”), which amended the Original Term B Loan to provide for incremental commitments in an aggregate principal amount of
$152.0 million
(“2016 Incremental Term Loans”) that were extended to the Company on October 3, 2016. The Original Term B Loan and 2016 Incremental Term Loans are collectively referred to as “Term B Loan”. On March 31, 2017, the Company entered into the 2017 Replacement Term Loan Agreement Amendment (Third Amendment to Credit Agreement) (the “2017 Replacement Term Loan Amendment”); the Term Loan Agreement, as amended by the Term Loan Amendment, the 2017 Replacement Term Loan Amendment and as otherwise amended prior to July 1, 2018, the “Amended Term Loan Agreement”), which replaced the Term B Loan to provide for a new term loan commitment (the “2017 Replacement Term
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loan”). The proceeds from the 2017 Replacement Term Loan were used to repay in full the outstanding principal amount of the Term B Loan. As a result of the 2017 Replacement Term Loan Amendment, the interest rate was reduced by
1.5%
per annum.
The Amended Term Loan Agreement permits the Company to request incremental term loan facilities, subject to certain conditions, in an aggregate principal amount, together with the aggregate principal amount of incremental equivalent debt incurred by the Company, of up to
$75.0 million
, plus an additional amount such that the Company’s pro forma first lien net leverage ratio (as defined in the term loan agreement) would not exceed
3.50
to
1.00
as a result of the incurrence thereof.
Borrowings under the 2017 Replacement Loan bear interest, at the Company’s election, at either (i) the Base Rate plus
3.5%
per annum, or (ii) LIBOR, with a
1%
floor, plus
4.5%
per annum. Principal payments required under the Term B Loan are
$2.6 million
due each calendar quarter beginning June 2017.
During the first quarter of 2017, the Company used a portion of the net proceeds from the Convertible Notes offering as described above, along with proceeds from the Common Stock Offering as described in Note
15
,
“Earnings per Share”
, to prepay a total of
$177.0 million
of the Term B Loan. In accordance with ASC 470, “Debt - Modifications and Extinguishments”, the prepayment was determined to be an extinguishment of the existing debt. As a result, the pro-rata share of the unamortized debt issuance costs and original issuance discount related to the prepayment, aggregating to
$4.6 million
, was recorded as a loss on the extinguishment of debt in the consolidated statements of operations. The remaining unamortized debt issuance costs and original issuance discount, including
$2.4 million
additional transactions fees incurred in connection to the Replacement Term Loan Amendment, was approximately
$6.1 million
. Both the aggregate debt issuance costs and the original issue discount will be amortized into interest expense over the remaining life of the Term B Loan. On February 16, 2018, the Company entered into an amendment to the 2017 Replacement Term Loan (the “February 2018 Replacement Term Loan Amendment”), which would have replaced the 2017 Replacement Term Loan to provide for a new term loan commitment in an original aggregate principal amount of
$385.0 million
(the “2018 Replacement Term Loan”). The proceeds from the 2018 Replacement Term Loan were to be used to (i) repay in full the outstanding principal amount of the existing term loans, (ii) to consummate the acquisition of Brink International B.V. and its subsidiaries (collectively, the “Brink Group”) and pay a portion of the acquisition consideration thereof and the fees and expenses incurred in connection therewith, and (iii) for general corporate purposes. On June 14, 2018, the Company and H2 Equity Partners mutually agreed to terminate the Brink Group acquisition agreement. As part of the termination agreement, the Company agreed to pay a break fee of approximately
$5.5 million
to H2 Equity Partners and incurred
$5.5 million
of transaction fees during the year ended
December 31, 2018
, which are all included in selling, general and administrative expenses in the consolidated statements of operations. During the year ended
December 31, 2018
, the Company incurred
$5.1 million
of financing costs in connection with the pursuit of the Brink Group acquisition which are included in other expense, net in the consolidated statements of operations. Due to the termination of the Brink Group acquisition, the February 2018 Replacement Term Loan Amendment was not effective.
On July 31, 2018, the Company entered into the Fourth Amendment to Credit Agreement (the “Fourth Amendment”; the Amended Term Loan Agreement, as amended by the Fourth Amendment, the “2018 Term Loan Agreement”). The Fourth Amendment 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”) that were used to pay outstanding balances under the ABL Loan Agreement, pay fees and expenses in connection with the amendment and for general corporate purposes. Debt issuance costs of approximately
$4.6 million
were incurred in connection with the Fourth Amendment. These debt issuance costs will be amortized into interest expense over the contractual term of the loan. Borrowings under the 2018 Term B Loan bear interest, at the Company’s election, at either (i) the Base Rate plus
5.0%
per annum, or (ii) LIBOR, with a
1.0%
floor, plus
6.0%
per annum. Principal payments required under the 2018 Term B Loan are
$2.6 million
due each calendar quarter beginning September 2018. Under the 2018 Term Loan Agreement, commencing with the fiscal year ended December 31, 2017, and for each fiscal year thereafter, the Company is required to make prepayments of outstanding amounts under the Term B Loan in an amount up to
75.0%
of the Company’s excess cash flow for such fiscal year, as defined in the 2018 Term B Loan, subject to adjustments based on the Company’s leverage ratio and optional prepayments of term loans and certain other indebtedness.
The Company recognized
$2.1 million
,
$1.6 million
and
$1.6 million
during the years ended
December 31, 2018
,
December 31, 2017
and
December 31, 2016
related to the amortization of debt issuance costs and original issue discount, which is included in the accompanying consolidated statements of operations. The Company had an aggregate principal amount outstanding of
$190.5 million
and
$149.6 million
as of
December 31, 2018
and
2017
, respectively, under the Amended Term Loan Agreement bearing interest at
8.8%
and
6.1%
, respectively. The Company had
$7.4 million
and
$4.9 million
as of
December 31, 2018
and
2017
, respectively, of unamortized debt issuance costs and original issue discount, all of which are recorded as a reduction of the debt balance on the Company’s consolidated balance sheet.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s Term B Loan traded at approximately
92.2%
and
101.4%
of par value as of
December 31, 2018
and
December 31, 2017
. The valuation of the Term B Loan was determined based on Level 2 inputs under the fair value hierarchy.
All of the indebtedness under the 2018 Term B Loan is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. The 2018 Term Loan Agreement contains customary negative covenants, and also contains a financial maintenance covenant which requires the Company to maintain a net leverage ratio, as defined in the agreement, not exceeding
7.00
to
1.00
on the last day of each fiscal quarter commencing with the fiscal quarter ending on June 30, 2018 and ending, and including, the fiscal quarter ending on December 31, 2018;
6.50
to
1.00
on the last day of the fiscal quarter ending March 31, 2019;
5.00
to
1.00
on the last day of the fiscal quarter ending June 30, 2019;
4.75
to
1.00
on the last day of the fiscal quarter ending September 30, 2019; and
4.50
to
1.00
on the last day of each fiscal quarter thereafter.
Covenant and Liquidity Matters
Refer to Note 22, “
Subsequent Events,”
for additional information on the Company’s ABL Facility, Term Loan and debt facilities and related covenants.
Bank facilities
On July 3, 2017, the Company’s Australian subsidiaries entered into an agreement (collectively, the “Australia Loans”) to provide for revolving borrowings. The Australia Loans included
two
sub-facilities: (i)
Facility A
, with a borrowing capacity of
$18.3 million
that matures on
July 3, 2020
and (ii)
Facility B
, which was canceled on November 1, 2018. There were
$2.9 million
and
$6.6 million
outstanding under the Australian Loan as of
December 31, 2018
and 2017, respectively.
Borrowings under
Facility A
bear interest at the Bank Bill Swap Bid Rate (“BBSY”) plus a margin determined based on the most recent net leverage ratio (as defined per the Australian credit agreement). The margin is to be determined on the first day of the period as follows: (i)
1.10%
per annum if the net leverage ratio is less than
1.50
to 1.00; (ii)
1.20%
per annum if the net leverage ratio is less than
2.00
to 1.00 and (iii)
1.30%
if the net leverage ratio is less than
2.50
to 1.00. Borrowings under Facility B bore interest at the BBSY plus a margin of
0.9%
per annum.
The Australian Loans contain financial covenants, which require the Company’s Australian subsidiaries to maintain: (i) a net leverage ratio as defined not exceeding
2.50
to 1.00 during the period commencing on the date of the agreement and ending on the first anniversary of the date of the agreement; and
2.00
to 1.00 thereafter; (ii) a working capital coverage ratio (as defined per the Australian credit agreement) greater than
1.75
to 1.00 at all times; and (iii) a gearing ratio (defined as the ratio of senior debt to senior debt plus equity) not to exceed
50%
. At
December 31, 2018
, the Company was in compliance with its financial covenants under the Australian Loans.
Long-term Debt Maturities
Future maturities of the face value of long-term debt at
December 31, 2018
are as follows:
|
|
|
|
|
|
Years ending December 31,
|
|
Future maturities of long-term debt
|
|
|
(dollars in thousands)
|
2019
|
|
$
|
13,860
|
|
2020
|
|
76,890
|
|
2021
|
|
170,000
|
|
2022
|
|
125,000
|
|
2023
|
|
—
|
|
Thereafter
|
|
10,330
|
|
Total
|
|
$
|
396,080
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11
. Derivative Instruments
Foreign Currency Exchange Rate Risk
As of
December 31, 2018
, the Company was party to forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately
$23.8 million
. The Company uses 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 hedge currency exposure between the Mexican peso and the U.S. dollar and between the Australian dollar and the U.S. dollar and mature 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-designates the foreign currency forward contract.
On October 4, 2016, the Company entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. As of
December 31, 2018
, the notional amount of the cross currency swap was approximately
$110.0 million
. The Company uses 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 accumulated other comprehensive income (loss) (“AOCI”) of
$0.6 million
. 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. 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 accumulated other comprehensive income (loss) to earnings to offset the re-measurement gain or loss on the non-U.S. denominated intercompany loan.
On August 16, 2017, the Company’s Australian subsidiary entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. As of
December 31, 2018
, the notional amount of the cross currency was approximately
$3.4 million
. The Australian subsidiary uses the cross currency swap to mitigate the risk associated with fluctuations in currency rates related to a non-U.S. functional currency intercompany loan of NZ
$10.0 million
. The floating-to-floating cross currency swap hedges currency exposure between the New Zealand dollar and the Australian dollar and matures on June 30, 2020. The Australian subsidiary makes quarterly principal payments of NZ
$0.8 million
, plus interest at the 3-month Bank Bill Benchmark Rate in New Zealand plus a margin of
0.3%
per annum, in exchange for A
$0.8 million
, plus interest at the 3-month BBSY in Australia per annum. At inception, the cross currency swap was not designated as a hedging instrument.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial Statement Presentation
The fair value carrying amount of the Company’s derivative instruments were recorded as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset / (Liability) Derivatives
|
|
|
Balance Sheet Caption
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
(dollars in thousands)
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
1,910
|
|
|
$
|
—
|
|
Foreign currency forward contracts
|
|
Accrued liabilities
|
|
—
|
|
|
(670
|
)
|
Cross currency swap
|
|
Accrued Liabilities
|
|
(2,480
|
)
|
|
—
|
|
Cross currency swap
|
|
Other long-term liabilities
|
|
—
|
|
|
(7,830
|
)
|
Total derivatives designated as hedging instruments
|
|
|
|
(570
|
)
|
|
(8,500
|
)
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
290
|
|
|
110
|
|
Foreign currency forward contracts
|
|
Accrued liabilities
|
|
—
|
|
|
(90
|
)
|
Cross currency swap
|
|
Other assets
|
|
—
|
|
|
90
|
|
Cross currency swap
|
|
Accrued liabilities
|
|
(90
|
)
|
|
—
|
|
Total derivatives de-designated as hedging instruments
|
|
|
|
200
|
|
|
110
|
|
Total derivatives
|
|
|
|
$
|
(370
|
)
|
|
$
|
(8,390
|
)
|
The following table summarizes the gain or loss recognized in AOCI and the amounts reclassified from AOCI into earnings and the amounts recognized directly into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss)
Recognized in AOCI
on Derivative
(Effective Portion, net of tax)
|
|
Location of Gain (Loss) Reclassified from AOCI into Earnings
(Effective Portion)
|
|
Amount of Gain (Loss) Reclassified from
AOCI into Earnings
|
|
|
December 31,
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
|
|
|
(dollars in thousands)
|
Derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
1,870
|
|
|
$
|
(580
|
)
|
|
Cost of sales
|
|
$
|
1,070
|
|
|
$
|
940
|
|
|
$
|
(1,620
|
)
|
Cross currency swap
|
|
$
|
90
|
|
|
$
|
270
|
|
|
Other expense, net
|
|
$
|
5,330
|
|
|
$
|
(15,820
|
)
|
|
$
|
7,510
|
|
Over the next
12
months, the Company expects to reclassify approximately
$2.0 million
of pre-tax deferred gains, related to the foreign currency forward contracts, from AOCI to cost of sales as the contract manufacturing and inventory purchases are settled. Over the next
12
months, the Company expects to reclassify approximately
$0.1 million
of pre-tax deferred gains, related to the cross currency swap, from AOCI to other expense, net as an offset to the re-measurement gains or losses on the non-U.S. denominated intercompany loan.
Derivatives not designated as hedging instruments
The gain or loss resulting from the change in fair value on de-designated forward contracts is reported within cost of sales on the Company’s consolidated statements of operations. There was a
$0.3 million
loss on de-designated derivatives for the year ended
December 31, 2018
. There was
no
gain or loss on de-designated derivatives for the year ended
December 31, 2017
, and a
$0.3 million
gain for the year ended
December 31, 2016
. The gain or loss resulting from the change in fair value on the floating-to-floating cross currency swap is recorded within other expense, net on the Company’s consolidated statements of operations. The loss on this cross currency swap was
$0.2 million
for the year ended
December 31, 2018
.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During May 2018, the Company entered into foreign currency option contracts known as zero-cost collars with an aggregate notional amount of
€63.4 million
to hedge changes in foreign currency related to the cash portion of the purchase price of the pending acquisition of the Brink Group; the acquisition was later terminated as described in Note
10
“Long-term Debt.”
During June 2018, these zero-cost collar arrangements matured, resulting in a loss of
$1.2 million
which is included within other expense, net in the Company’s consolidated statements of operations for the year ended
December 31, 2018
.
Fair Value Measurements
The fair value of the Company’s derivatives are estimated using an income approach based on valuation techniques to convert future amounts to a single, discounted amount. The Company’s derivatives are recorded at fair value in its consolidated balance sheets and are valued using pricing models that are primarily based on market observable external inputs, including spot and forward currency exchange rates, benchmark interest rates, and discount rates consistent with the instrument’s tenor, and consider the impact of the Company’s own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of
December 31, 2018
and
December 31, 2017
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Frequency
|
|
Asset / (Liability)
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
(dollars in thousands)
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Recurring
|
|
$
|
2,200
|
|
|
$
|
—
|
|
|
$
|
2,200
|
|
|
$
|
—
|
|
Cross currency swaps
|
|
Recurring
|
|
$
|
(2,570
|
)
|
|
$
|
—
|
|
|
$
|
(2,570
|
)
|
|
$
|
—
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Recurring
|
|
$
|
(650
|
)
|
|
$
|
—
|
|
|
$
|
(650
|
)
|
|
$
|
—
|
|
Cross currency swap
|
|
Recurring
|
|
$
|
(7,740
|
)
|
|
$
|
—
|
|
|
$
|
(7,740
|
)
|
|
$
|
—
|
|
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.
The following table provides a summary of the Company’s consolidated restructuring liabilities and related activity for each type of exit cost as of and for the years ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Costs
|
|
Facility Closure and Other Costs
|
|
Total
|
|
|
(dollars in thousands)
|
Balances at December 31, 2017
|
|
1,850
|
|
|
5,190
|
|
|
7,040
|
|
Restructuring charges
|
|
10,440
|
|
|
2,680
|
|
|
13,120
|
|
Payments and other
(1)
|
|
(7,300
|
)
|
|
(2,750
|
)
|
|
(10,050
|
)
|
Balances at December 31, 2018
|
|
$
|
4,990
|
|
|
$
|
5,120
|
|
|
$
|
10,110
|
|
(1)
Other consists of changes in the liability balance due to foreign currency translation.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
$10.1 million
restructuring liability at December 31, 2018 includes
$7.5 million
of accrued liabilities and
$2.6 million
of other long-term liabilities.
Restructuring expenses for the year ended December 31, 2018 primarily relate to the Americas aimed at reducing inefficiencies in indirect and fixed costs structure, coupled with the restructuring of certain of the executive management team including separation of the former CEO. In the first quarter of 2018, the Company announced plans to close its facility in Solon, Ohio along with an engineering center in Mosinee, Wisconsin. The activities at these locations have been consolidated and moved to the headquarters of the Horizon Americas segment, located in Plymouth, Michigan. During the second quarter of 2018, the Company finalized workforce consolidation plans related to the facility closures, as well as the corporate severance costs resulting from the management restructuring. We completed these programs in 2018.
Restructuring expenses incurred prior to December 31, 2017 primarily relate to America locations aimed at reducing production complexities and streamlining manufacturing operations and were completed by December 31, 2017.
13. Commitments
The Company leases certain equipment and facilities under non-cancellable operating leases. Rental expense for the Company totaled approximately
$21.8 million
in
2018
,
$20.0 million
in
2017
and
$16.8 million
in
2016
.
Minimum payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year at
December 31, 2018
are summarized below (in thousands):
|
|
|
|
|
|
December 31,
|
|
Minimum payments
|
|
|
(dollars in thousands)
|
2019
|
|
$
|
15,820
|
|
2020
|
|
14,790
|
|
2021
|
|
12,590
|
|
2022
|
|
7,900
|
|
2023
|
|
4,830
|
|
Thereafter
|
|
13,090
|
|
Total
|
|
$
|
69,020
|
|
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 supplier. The claims resulted from the failure of products not functioning to specifications, but the claims do not allege any damage and only seek replacement of the product. One of the claims has since resulted in a recall campaign while the manner in which the other claim will be resolved is pending. 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. Based on this assessment, the Company determined the probable range of the liability to be between
$12.3 million
and
$20.0 million
, with no amount within that range a better estimate than any other amount. As a result, the Company recorded a liability of
$12.3 million
and an asset of
$10.8 million
as of December 31, 2018. The asset recorded represents the amount the Company believes is probable of recovery and has appropriate legal basis for recovery in accordance with its recall insurance policy. The Company cannot give any assurances that the final resolution of the claims, if adverse to the Company, will not have a material adverse effect to our financial position, results of operations or cash flows.
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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands, except for per share amounts)
|
Numerator:
|
|
|
|
|
|
|
Net loss attributable to Horizon Global
|
|
$
|
(203,960
|
)
|
|
$
|
(3,550
|
)
|
|
$
|
(12,360
|
)
|
Denominator:
|
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
25,053,013
|
|
|
24,781,349
|
|
|
18,775,500
|
|
Dilutive effect of stock-based awards
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average shares outstanding, diluted
|
|
25,053,013
|
|
|
24,781,349
|
|
|
18,775,500
|
|
|
|
|
|
|
|
|
Basic loss per share attributable to Horizon Global
|
|
$
|
(8.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.66
|
)
|
Diluted loss per share attributable to Horizon Global
|
|
$
|
(8.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.66
|
)
|
Due to net losses for the years ended December 31,
2018
,
2017
and
2016
, 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 is provided in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Number of options
|
|
240,647
|
|
|
343,782
|
|
|
331,485
|
|
Exercise price of options
|
|
$9.20 - $11.29
|
|
|
$9.20 - $11.29
|
|
|
$9.20 - $11.29
|
|
Restricted stock units
|
|
646,336
|
|
|
584,335
|
|
|
526,751
|
|
Convertible Notes
|
|
5,005,000
|
|
|
4,566,205
|
|
|
—
|
|
Warrants
|
|
5,005,000
|
|
|
4,566,205
|
|
|
—
|
|
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 earnings 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.
On February 1, 2017, the Company completed an underwritten public offering of
4.6 million
shares of common stock, which includes the exercise in full by the underwriters of their option to purchase
0.6 million
shares of common stock, at a public offering price of
$18.50
per share (the “Common Stock Offering”). Proceeds from the Common Stock Offering were approximately
$79.9 million
, net of underwriting discounts, commissions, and offering-related transaction costs.
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
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
directors. No more than
4.4 million
Horizon common shares may be delivered under the Horizon 2015 Plan.
Stock Options
The following table summarizes Horizon stock option activity from
December 31, 2017
to
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
|
Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
Outstanding at December 31, 2017
|
|
338,349
|
|
|
$
|
10.38
|
|
|
—
|
|
|
—
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Canceled, forfeited
|
|
(245,382
|
)
|
|
10.37
|
|
|
—
|
|
|
—
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Outstanding at December 31, 2018
|
|
92,967
|
|
|
$
|
10.40
|
|
|
4.6
|
|
|
$
|
—
|
|
As of
December 31, 2018
, the unrecognized compensation cost related to stock options is immaterial. For the year ended
December 31, 2018
, the stock-based compensation expense recognized by the Company related to stock options was immaterial. The Company recognized approximately
$0.3 million
and
$0.8 million
of stock-based compensation expense related to stock options for the years ended
December 31, 2017
and
2016
, respectively. There was
no
aggregate intrinsic value on the outstanding options at
December 31, 2018
. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
Restricted Shares
During
2018
, the Company granted an aggregate of
477,963
restricted stock units and performance stock units to certain key employees and non-employee directors. The total grants consisted of: (i)
5,680
time-based restricted stock units that vested on July 1, 2018; (ii)
43,799
time-based restricted stock units that vest ratably on (1) March 1, 2019, (2) March 1, 2020 and (3) March 1, 2021; (iii)
101,204
time-based restricted stock units that vest ratably on (1) March 1, 2019, (2) March 1, 2020, (3) March 1, 2021 and (4) March 1, 2022; (iv)
145,003
market-based performance stock units that vest on March 1, 2021; (v)
43,416
time-based restricted stock units that vest on March 1, 2021; (vi)
17,575
time-based restricted stock units that vest on May 8, 2019; (vii)
84,210
time-based restricted stock units that vest on May 15, 2018; (viii)
11,404
time-based restricted stock units that vest on May 15, 2020; (ix)
14,472
time-based restricted stock units that vest on August 1, 2020; (x)
8,400
time-based restricted stock units that vest on October 1, 2020; and (xi)
2,800
time-based restricted stock units that vest on December 3, 2020.
During 2017, the Company granted an aggregate of
185,423
restricted stock units and performance stock units to certain key employees and non-employee directors. The total grants consisted of: (i)
22,449
time-based restricted stock units that vest ratably on (1) March 1, 2018, (2) March 1, 2019 and (3) March 1, 2020; (ii)
50,416
time-based restricted stock units that vest ratably on (1) March 1, 2018, (2) March 1, 2019, (3) March 1, 2020 and (4) March 1, 2021; (iii)
72,865
market-based performance stock units that vest on March 1, 2020 (the “2017 PSUs”); (iv)
33,426
time-based restricted stock units that vest on July 1, 2018, and (v)
6,267
time-based restricted stock units that vest on July 1, 2019.
The performance criteria for the market-based performance stock units 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. For the 2018 PSUs, TSR is measured over a period beginning January 1, 2018 and ending December 31, 2020. For the 2017 PSUs, TSR is measured over a period beginning January 1, 2017 and ending December 31, 2019. 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
2.34%
and
1.52%
for the 2018 PSUs and 2017 PSUs, respectively, and annualized volatility of
37.4%
and
38.5%
for the 2018 PSUs and 2017 PSUs, respectively. Due to the lack of
adequate stock price history of Horizon common stock, the volatility is based on the median of the peer group. The grant date fair value of the performance stock units were
$7.08
and
$18.41
for the 2018 PSUs and 2017 PSUs, respectively.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The grant date fair value of restricted stock units is expensed over the vesting period. Restricted stock unit 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 restricted stock units outstanding for the year ended
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at December 31, 2017
|
|
582,611
|
|
|
$
|
13.51
|
|
Granted
|
|
477,963
|
|
|
7.43
|
|
Vested
|
|
(331,456
|
)
|
|
11.67
|
|
Canceled, forfeited
|
|
(309,190
|
)
|
|
11.12
|
|
Outstanding at December 31, 2018
|
|
419,928
|
|
|
$
|
9.75
|
|
As of
December 31, 2018
, there was
$1.6 million
in unrecognized compensation costs related to unvested restricted stock units that is expected to be recognized over a weighted average period of
1.8
years.
The Company recognized approximately
$1.6 million
,
$3.3 million
and
$3.0 million
of stock-based compensation expense related to restricted shares during the years ended
December 31, 2018
,
2017
and
2016
, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
17
. Shareholders’ Equity
Preferred Stock
The Company is authorized to issue
100,000,000
shares of Horizon Global preferred stock, par value of
$0.01
per share. There were
no
preferred shares outstanding at
December 31, 2018
or
December 31, 2017
.
Common Stock
The Company is authorized to issue
400,000,000
shares of Horizon Global common stock, par value of
$0.01
per share. At
December 31, 2018
, there were
25,866,747
shares of common stock issued and
25,180,241
shares of common stock outstanding. At
December 31, 2017
, there were
25,625,571
shares of common stock issued and
24,939,065
outstanding.
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 and ending May 5, 2020 (the “Share Repurchase Program”). The Share Repurchase Program provides for share purchases in the open market or otherwise, depending on share price, market conditions and other factors, as determined by the Company. In addition, the Company’s ABL Loan Agreement and Term B Loan place certain limitations on the Company’s ability to repurchase its common stock. As of
December 31, 2018
, 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, on the consolidated balance sheets.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in AOCI attributable to Horizon Global by component, net of tax, for the years ended
December 31, 2018
,
2017
, and
2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Foreign Currency Translation and Other
|
|
Total
|
|
(dollars in thousands)
|
Balances at January 1, 2016
|
|
$
|
(710
|
)
|
|
$
|
3,180
|
|
|
$
|
2,470
|
|
Net unrealized losses arising during the period
(a)
|
|
3,170
|
|
|
(10,590
|
)
|
|
(7,420
|
)
|
Less: Net realized losses reclassified to net income
(b)
|
|
3,390
|
|
|
—
|
|
|
3,390
|
|
Net current-period change
|
|
(220
|
)
|
|
(10,590
|
)
|
|
(10,810
|
)
|
Balances at December 31, 2016
|
|
(930
|
)
|
|
(7,410
|
)
|
|
(8,340
|
)
|
Net unrealized gains (losses) arising during the period
(a)
|
|
(8,810
|
)
|
|
17,810
|
|
|
9,000
|
|
Less: Net realized gains reclassified to net income
(b)
|
|
(9,350
|
)
|
|
—
|
|
|
(9,350
|
)
|
Net current-period change
|
|
540
|
|
|
17,810
|
|
|
18,350
|
|
Balances at December 31, 2017
|
|
(390
|
)
|
|
10,400
|
|
|
10,010
|
|
Impact of ASU 2018-02
|
|
80
|
|
|
480
|
|
|
560
|
|
Balances at December 31, 2017, as restated
|
|
(310
|
)
|
|
10,880
|
|
|
10,570
|
|
Net unrealized gains (losses) arising during the period
(a)
|
|
7,440
|
|
|
(5,080
|
)
|
|
2,360
|
|
Less: Net realized losses reclassified to net income
(b)
|
|
5,170
|
|
|
—
|
|
|
5,170
|
|
Net current-period change
|
|
2,270
|
|
|
(5,080
|
)
|
|
(2,810
|
)
|
Balances at December 31, 2018
|
|
$
|
1,960
|
|
|
$
|
5,800
|
|
|
$
|
7,760
|
|
__________________________
(a)
Derivative instruments, net of income tax benefit (expense) of
$(1.4) million
,
$5.2 million
, and
$(2.5) million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. See Note
11
, “
Derivative Instruments
,” for further details.
(b)
Derivative instruments, net of income tax benefit (expense) of
$1.3 million
,
$5.5 million
, and
$(2.5) million
for the years ended
December 31, 2018
,
2017
, and
2016
, respectively. See Note
11
, “
Derivative Instruments
,” for further details.
18
. Segment Information
The Company groups its business into operating segments 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
three
operating segments:
Horizon Americas
,
Horizon Europe‑Africa
, and
Horizon Asia‑Pacific
. Horizon Americas is comprised of the Company’s North American and South American operations.
Horizon Europe‑Africa
is comprised of the European and South African operations, while
Horizon Asia‑Pacific
is comprised of the Australia, Thailand, and New Zealand operations. See below for further information regarding the types of products and services provided within each operating segment.
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 OEMs, 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 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.
Horizon Asia‑Pacific
-
With a product offering similar to
Horizon Americas
,
Horizon Asia‑Pacific
focuses its sales and manufacturing efforts in the Asia-Pacific region of the world.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Segment activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Net Sales
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
390,690
|
|
|
$
|
439,700
|
|
|
$
|
443,240
|
|
Horizon Europe‑Africa
|
|
323,260
|
|
|
325,970
|
|
|
104,080
|
|
Horizon Asia‑Pacific
|
|
136,000
|
|
|
127,310
|
|
|
101,880
|
|
Total
|
|
$
|
849,950
|
|
|
$
|
892,980
|
|
|
$
|
649,200
|
|
Operating Profit (Loss)
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
(6,850
|
)
|
|
$
|
44,060
|
|
|
$
|
38,680
|
|
Horizon Europe‑Africa
|
|
(148,630
|
)
|
|
(1,790
|
)
|
|
(13,320
|
)
|
Horizon Asia‑Pacific
|
|
20,250
|
|
|
18,740
|
|
|
11,230
|
|
Corporate
|
|
(35,160
|
)
|
|
(26,250
|
)
|
|
(30,290
|
)
|
Total
|
|
$
|
(170,390
|
)
|
|
$
|
34,760
|
|
|
$
|
6,300
|
|
Capital Expenditures
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
6,760
|
|
|
$
|
10,150
|
|
|
$
|
5,550
|
|
Horizon Europe‑Africa
|
|
4,500
|
|
|
13,190
|
|
|
4,670
|
|
Horizon Asia‑Pacific
|
|
2,610
|
|
|
2,440
|
|
|
3,310
|
|
Corporate
|
|
—
|
|
|
1,510
|
|
|
1,010
|
|
Total
|
|
$
|
13,870
|
|
|
$
|
27,290
|
|
|
$
|
14,540
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
Horizon Americas
|
|
$
|
8,160
|
|
|
$
|
10,660
|
|
|
$
|
10,750
|
|
Horizon Europe‑Africa
|
|
12,090
|
|
|
10,110
|
|
|
3,290
|
|
Horizon Asia‑Pacific
|
|
4,800
|
|
|
4,310
|
|
|
4,090
|
|
Corporate
|
|
330
|
|
|
260
|
|
|
90
|
|
Total
|
|
$
|
25,380
|
|
|
$
|
25,340
|
|
|
$
|
18,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
Total Assets
|
|
|
|
|
Horizon Americas
|
|
$
|
219,680
|
|
|
$
|
209,210
|
|
Horizon Europe - Africa
|
|
173,980
|
|
|
341,750
|
|
Horizon Asia‑Pacific
|
|
119,590
|
|
|
88,210
|
|
Corporate
|
|
8,100
|
|
|
21,860
|
|
Total
|
|
$
|
521,350
|
|
|
$
|
661,030
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present the Company’s net sales and net fixed assets attributed to each subsidiary’s continent of domicile:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Net Sales
|
|
|
|
|
|
|
Total U.S.
|
|
$
|
380,480
|
|
|
$
|
423,090
|
|
|
$
|
428,770
|
|
Non-U.S.
|
|
|
|
|
|
|
Australia
|
|
69,440
|
|
|
69,760
|
|
|
60,020
|
|
Germany
|
|
186,430
|
|
|
194,120
|
|
|
52,350
|
|
Other Europe
|
|
117,960
|
|
|
114,940
|
|
|
39,520
|
|
Asia
|
|
67,420
|
|
|
58,140
|
|
|
41,940
|
|
Africa
|
|
19,880
|
|
|
16,320
|
|
|
12,130
|
|
Other Americas
|
|
8,340
|
|
|
16,610
|
|
|
14,470
|
|
Total non-U.S.
|
|
469,470
|
|
|
469,890
|
|
|
220,430
|
|
Total
|
|
$
|
849,950
|
|
|
$
|
892,980
|
|
|
$
|
649,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
Property and equipment, net
|
|
|
|
|
Total U.S.
|
|
$
|
26,560
|
|
|
$
|
5,770
|
|
Non-U.S.
|
|
|
|
|
Australia
|
|
8,480
|
|
|
10,730
|
|
Germany
|
|
43,010
|
|
|
48,400
|
|
United Kingdom
|
|
620
|
|
|
22,920
|
|
Other Europe
|
|
8,820
|
|
|
9,830
|
|
Asia
|
|
7,370
|
|
|
7,720
|
|
Africa
|
|
5,320
|
|
|
5,260
|
|
Other Americas
|
|
2,100
|
|
|
2,390
|
|
Total non-U.S.
|
|
75,720
|
|
|
107,250
|
|
Total
|
|
$
|
102,280
|
|
|
$
|
113,020
|
|
The Company’s export sales from the U.S. approximated
$44.3 million
,
$34.6 million
and
$32.6 million
for the years ended December 31,
2018
,
2017
and
2016
, respectively.
The following table presents the Company’s net sales contributed by product group:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
Towing
|
|
68.5
|
%
|
|
70.3
|
%
|
|
62.7
|
%
|
Trailering
|
|
16.1
|
%
|
|
16.8
|
%
|
|
21.5
|
%
|
Cargo Management
|
|
6.2
|
%
|
|
6.3
|
%
|
|
8.9
|
%
|
Other
|
|
9.2
|
%
|
|
6.6
|
%
|
|
6.9
|
%
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19
. Income Taxes
The Company’s income (loss) before income tax, by tax jurisdiction, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Domestic
|
|
$
|
(43,200
|
)
|
|
$
|
(3,880
|
)
|
|
$
|
(14,630
|
)
|
Foreign
|
|
(168,060
|
)
|
|
8,860
|
|
|
(1,760
|
)
|
Income (loss) before income tax
|
|
$
|
(211,260
|
)
|
|
$
|
4,980
|
|
|
$
|
(16,390
|
)
|
The income tax benefit (expense) is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Current income tax benefit (expense):
|
|
|
|
|
|
|
Federal
|
|
$
|
10,070
|
|
|
$
|
(7,680
|
)
|
|
$
|
(1,170
|
)
|
State and local
|
|
(190
|
)
|
|
(240
|
)
|
|
(970
|
)
|
Foreign
|
|
(7,880
|
)
|
|
(2,190
|
)
|
|
(2,560
|
)
|
Total current income tax expense
|
|
2,000
|
|
|
(10,110
|
)
|
|
(4,700
|
)
|
Deferred income tax benefit (expense):
|
|
|
|
|
|
|
Federal
|
|
(1,870
|
)
|
|
(3,000
|
)
|
|
3,800
|
|
State and local
|
|
160
|
|
|
(390
|
)
|
|
450
|
|
Foreign
|
|
6,070
|
|
|
3,750
|
|
|
4,180
|
|
Total deferred income tax benefit
|
|
4,360
|
|
|
360
|
|
|
8,430
|
|
Income tax benefit (expense)
|
|
$
|
6,360
|
|
|
$
|
(9,750
|
)
|
|
$
|
3,730
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
|
(dollars in thousands)
|
Deferred tax assets:
|
|
|
|
|
Receivables, net
|
|
$
|
980
|
|
|
$
|
460
|
|
Inventories
|
|
3,610
|
|
|
3,280
|
|
Accrued liabilities and other long-term liabilities
|
|
10,410
|
|
|
10,600
|
|
Tax loss and credit carryforwards
|
|
26,720
|
|
|
12,930
|
|
Gross deferred tax asset
|
|
41,720
|
|
|
27,270
|
|
Valuation allowances
|
|
(26,650
|
)
|
|
(10,560
|
)
|
Net deferred tax asset
|
|
15,070
|
|
|
16,710
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment, net
|
|
(5,470
|
)
|
|
(4,300
|
)
|
Intangibles, net
|
|
(18,670
|
)
|
|
(19,710
|
)
|
Other
|
|
(2,390
|
)
|
|
(3,280
|
)
|
Gross deferred tax liability
|
|
(26,530
|
)
|
|
(27,290
|
)
|
Net deferred tax liability
|
|
$
|
(11,460
|
)
|
|
$
|
(10,580
|
)
|
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. Given the recent decline in U.S. gross profit the Company is in a three-year cumulative pre-tax loss position. Therefore, during the fourth quarter of
2018
, the Company recorded a valuation allowance of
$8.8 million
against its U.S. deferred tax assets. In addition, due to certain foreign jurisdictions being in three-year cumulative pre-tax loss position, the Company also recorded valuation allowance of
$5.7 million
against certain of its deferred tax assets. 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. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. The accounting for deferred taxes is based upon an estimate of future results. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on the Company’s consolidated results of operations or financial position.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of our provision for income taxes to income tax benefit (expense) computed at the U.S. federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
U.S. federal statutory rate
|
|
21
|
%
|
|
35
|
%
|
|
35
|
%
|
Tax at U.S. federal statutory rate
|
|
$
|
44,360
|
|
|
$
|
(1,740
|
)
|
|
$
|
5,730
|
|
State and local taxes, net of federal tax benefit
|
|
1,500
|
|
|
(340
|
)
|
|
(340
|
)
|
Differences in statutory foreign tax rates
|
|
13,180
|
|
|
3,680
|
|
|
1,230
|
|
Uncertain tax positions
|
|
2,680
|
|
|
3,950
|
|
|
1,260
|
|
Tax holiday
(1)
|
|
—
|
|
|
950
|
|
|
460
|
|
Withholding taxes
|
|
(990
|
)
|
|
(300
|
)
|
|
(300
|
)
|
Tax credits
|
|
3,980
|
|
|
590
|
|
|
(70
|
)
|
Net change in valuation allowance
|
|
(19,210
|
)
|
|
(3,020
|
)
|
|
(1,600
|
)
|
Transaction costs
|
|
—
|
|
|
(1,610
|
)
|
|
(2,670
|
)
|
Tax reform/SAB 118 true-up
|
|
(2,280
|
)
|
|
(11,850
|
)
|
|
—
|
|
Goodwill
|
|
(36,580
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
|
(280
|
)
|
|
(60
|
)
|
|
30
|
|
Income tax benefit (expense)
|
|
$
|
6,360
|
|
|
$
|
(9,750
|
)
|
|
$
|
3,730
|
|
__________________________
(1)
Tax holiday related to Thailand which expired on December 31, 2017.
The Company has recorded deferred tax assets on
$23.2 million
of various state operating loss carryforwards and
$75.4 million
of various foreign operating loss carryforwards. The majority of the state tax loss carryforwards expire between
2030 - 2038
and the majority of foreign losses have indefinite carryforward periods.
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
The Company has approximately
$5.7 million
and
$7.3 million
of uncertain tax positions (“UTPs”) as of
December 31, 2018
and
2017
, respectively. If the UTPs were recognized, the impact to the Company’s effective tax rate would be to reduce reported income tax expense for the years ended
December 31, 2018
and
2017
approximately
$5.7 million
and
$7.3 million
, respectively.
A reconciliation of the change in the UTPs and related accrued interest and penalties for the years ended
December 31, 2018
and
2017
is as follows:
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
Uncertain Tax Positions
|
|
|
(dollars in thousands)
|
Balance at December 31, 2016
|
|
$
|
8,850
|
|
Tax positions related to current year:
|
|
|
Additions
|
|
—
|
|
Reductions
|
|
—
|
|
Tax positions related to prior years:
|
|
|
Additions
|
|
50
|
|
Reductions
|
|
(30
|
)
|
Lapses in the statutes of limitations
|
|
(2,110
|
)
|
Cumulative Translation Adjustment
|
|
550
|
|
Balance at December 31, 2017
|
|
$
|
7,310
|
|
Tax positions related to current year:
|
|
|
Additions
|
|
—
|
|
Reductions
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
Additions
|
|
270
|
|
Reductions
|
|
—
|
|
Settlements
|
|
—
|
|
Lapses in the statutes of limitations
|
|
(1,580
|
)
|
Cumulative Translation Adjustment
|
|
(340
|
)
|
Balance at December 31, 2018
|
|
$
|
5,660
|
|
The Company recognizes interest accrued related to UTPs and penalties as income tax expense. Related to the UTPs noted above, the Company has a current benefit of
$1.4 million
related to interest and penalties incurred during
2018
, and recognized a liability for interest and penalties of
$1.4 million
as of
December 31, 2018
. During
2017
, the Company had accrued penalties and interest of
$2.1 million
and recognized a liability for interest and penalties of
$3.4 million
.
The decrease in UTPs and liabilities for interest and penalties for tax positions related to prior years is primarily related to the roll-off of certain statutes of limitations and changes in currency exchange rates during
2017
and
2018
.
Income tax returns are filed in multiple domestic and foreign jurisdictions, which are subject to examinations by taxing authorities. As of
December 31, 2018
, the Company is subject to U.S. federal tax examination for tax years
2015
through
2018
. The Company is subject to state, local, and foreign income tax examinations for tax years
2010
through
2018
. 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.
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, 2018
, the Company estimated that approximately
$0.8 million
of UTPs in foreign jurisdictions is expected to be released in the next twelve months.
Other Matters
On December 22, 2017, the Act was signed into law. The Act changed many aspects of corporate income taxation, including the reduction of the corporate income tax rate from 35% to 21% and imposition of a one-time tax on deemed repatriated earnings of foreign subsidiaries.
The SEC issued a Staff Accounting Bulletin No. 118 (“SAB 118”), which allows a provisional estimate when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 allows for adjustments to provisional amounts during a measurement period of up to one year. In accordance with SAB 118, the Company has made reasonable estimates related to the liability associated with the transition
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
tax, the remeasurement of U.S. deferred tax balances and other deferred tax adjustments based on provisions of the Act. As a result, the Company has recognized income tax expense of
$11.9 million
associated with these items in
2017
.
Further analysis was completed related to the provisional estimates recorded at December 31. 2017 under SAB 118 based on guidance provided by the Internal Revenue Service and Department of Treasury in notices and regulations. The company finalized the Transition Tax liability calculation and corresponding allowable foreign tax credit during 2018 and adjusted its December 31, 2017 provisional amount by an additional tax expense of
$2.3 million
. The balance of the 2018 Transition Tax liability was determined to be satisfied with existing U.S. tax attributes resulting in no current income tax payable. No additional adjustment was required under SAB118.
The Act includes new U.S. provisions, the global intangible low-taxed income (“GILTI”) provision, the base-erosion and anti-abuse tax (“BEAT”) provision and a limitation to the deductibility of interest expense. GILTI requires the Company to include in its U.S. income tax return non-U.S. subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary’s tangible assets. BEAT eliminates the deduction of certain base-erosion payments made to related non-U.S. corporations, and imposes a minimum tax if the amount is greater than the regular tax. GILTI will apply to the Company starting in tax year 2019 due to the fiscal year end of the foreign subsidiaries. The company has elected to treat GILTI as a period cost. The Company is not subject to BEAT based on the level of gross receipts. The Company’s interest deduction is not limited based on the new interest deductibility rules in 2018.
20. Other Expense, Net
Other expense, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
|
(dollars in thousands)
|
Brink acquisition ticking fee
|
|
$
|
5,130
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Brazil acquisition indemnification asset
|
|
4,300
|
|
|
1,520
|
|
|
1,500
|
|
Customer pay discounts
|
|
1,600
|
|
|
1,540
|
|
|
1,210
|
|
Foreign currency (gain) / loss
|
|
960
|
|
|
800
|
|
|
(480
|
)
|
Accretion arising from lease recovery
|
|
240
|
|
|
270
|
|
|
320
|
|
Gain on sale of Broom & Brush
|
|
—
|
|
|
(1,300
|
)
|
|
—
|
|
Currency option premium purchase
|
|
—
|
|
|
—
|
|
|
840
|
|
Other
|
|
900
|
|
|
(100
|
)
|
|
(780
|
)
|
Total other expense, net
|
|
$
|
13,130
|
|
|
$
|
2,730
|
|
|
$
|
2,610
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
21. Summary Quarterly Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2018
|
|
June 30, 2018
|
|
September 30, 2018
|
|
December 31, 2018
|
|
|
(unaudited, dollars in thousands, except for per share data)
|
Net sales
|
|
$
|
216,810
|
|
|
$
|
233,340
|
|
|
$
|
227,840
|
|
|
$
|
171,960
|
|
Gross profit
|
|
$
|
38,450
|
|
|
$
|
47,570
|
|
|
$
|
43,620
|
|
|
$
|
14,240
|
|
Net loss
|
|
$
|
(57,760
|
)
|
|
$
|
(67,160
|
)
|
|
$
|
(33,000
|
)
|
|
$
|
(46,980
|
)
|
Net loss attributable to Horizon Global
|
|
$
|
(57,510
|
)
|
|
$
|
(66,930
|
)
|
|
$
|
(32,760
|
)
|
|
$
|
(46,760
|
)
|
Net loss per share attributable to Horizon Global:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(2.30
|
)
|
|
$
|
(2.68
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(1.86
|
)
|
Diluted
|
|
$
|
(2.30
|
)
|
|
$
|
(2.68
|
)
|
|
$
|
(1.31
|
)
|
|
$
|
(1.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
March 31, 2017
|
|
June 30, 2017
|
|
September 30, 2017
|
|
December 31, 2017
|
|
|
(unaudited, dollars in thousands, except for per share data)
|
Net sales
|
|
$
|
203,280
|
|
|
$
|
253,590
|
|
|
$
|
240,120
|
|
|
$
|
195,990
|
|
Gross profit
|
|
$
|
45,390
|
|
|
$
|
67,670
|
|
|
$
|
58,420
|
|
|
$
|
36,120
|
|
Net income (loss)
|
|
$
|
(10,160
|
)
|
|
$
|
19,970
|
|
|
$
|
6,560
|
|
|
$
|
(21,140
|
)
|
Net income (loss) attributable to Horizon Global
|
|
$
|
(9,860
|
)
|
|
$
|
20,260
|
|
|
$
|
6,890
|
|
|
$
|
(20,840
|
)
|
Net income (loss) per share attributable to Horizon Global:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.41
|
)
|
|
$
|
0.80
|
|
|
$
|
0.28
|
|
|
$
|
(0.84
|
)
|
Diluted
|
|
$
|
(0.41
|
)
|
|
$
|
0.79
|
|
|
$
|
0.27
|
|
|
$
|
(0.84
|
)
|
22
. Subsequent Events
On March 1, 2019, the Company entered into an agreement of sale of certain business assets in its 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, including the trade name, that operated using the Terwa brand for
$5.5 million
. The Sale will be accounted for in the first quarter of 2019, pending customary closing conditions.
Senior Term Loan Agreement
On February 20, 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 Term Loan Agreement, are 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. Borrowings under the Senior Term Loan Agreement originally matured on March 7, 2019, but were extended to March 15, 2019. The Senior Term Loan Agreement was repaid on March 15, 2019, in conjunction with the additional financing further detailed below.
Second Lien Term Loan Agreement
On March 15, 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 certain funds managed by Corre Partners Management LLC and any assignees thereof as the lenders. The Second Lien Term Loan Agreement provides for a term loan facility in the aggregate principal amount of
$51.0 million
and matures on September 30, 2021. The Second Lien Term Loan Agreement is secured by a second lien on substantially the same collateral as the Term B Loan, bears an interest rate of LIBOR
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
plus
11.5%
payable in kind through an increase in principal balance, and is subject to various affirmative and negative covenants including a secured net leverage ratio tested quarterly, commencing with the fiscal quarter ending on December 31, 2019, which shall not exceed (x)
6.75
to 1.00 as of the last day of any fiscal quarter ending on or prior to June 30, 2020 and (y)
5.25
to 1.00 as of the last day of any fiscal quarter ending on or after September 30, 2020.
Pursuant to the Second Lien Term Loan Agreement, the Company will issue
6.25 million
detachable warrants to purchase common stock of the Company, which can be exercised on a cashless basis with a
5
-year term with an exercise price of
$1.50
per share. A portion of the warrants will not be issued unless approved by a shareholder vote, and
18%
interest paid in kind preferred stock will be issued in the interim and will be cancelled and converted into warrants upon receipt of shareholder approval.
In connection with the entry into the Second Lien Term Loan Agreement, we agreed to appoint four new members to our board of directors within seven business days of closing, and that the four new members of our board will constitute a majority of our board of directors.
The proceeds, net of applicable fees, of the Second Lien Term Loan Agreement were used to repay the Senior Term Loan Agreement and to provide additional liquidity and working capital for the Company.
Term Loan Agreement
On February 20, 2019, the Company entered into the Fifth Amendment to Credit Agreement (the “Fifth Term Amendment”) to amend the 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.
On March 15, 2019, the Company entered into the Sixth Amendment to Credit Agreement (the “Sixth Term Amendment”) to amend the Term Loan Agreement to permit the Company to enter into the Second Lien Term Loan Agreement, which amended certain financial covenants to provide for relief based on the Company’s 2018 results and 2019 budget, and to make certain other affirmative and negative covenants more restrictive.
The prior net leverage covenant ratio was eliminated and replaced with a first lien leverage covenant starting with the 12-month period ending September 2019 as follows:
September 30, 2019:
8.25
:1.00
December 31, 2019:
6.25
:1.00
March 31, 2020:
5.50
:1.00
June 30, 2020:
5.00
:1.00
September 30, 2020 and each fiscal quarter ending thereafter:
4.75
:1.00
The Sixth Term Amendment also adds a fixed charge coverage covenant starting with fiscal quarter ending March 31, 2020, a minimum liquidity covenant of
$15.0 million
starting March 31, 2019, and a maximum capital expenditure covenant of
$15.0 million
for 2019 and
$25.0 million
annually thereafter. The interest rate on the Term Loan Agreement is also amended to add
3.0%
paid in kind interest in addition to the existing cash pay interest.
Because of the Sixth Term Amendment, the Company is in compliance with all of its financial covenants as of the period ending December 31, 2018.
ABL Facility
On February 20, 2019, the Company entered into the Fourth Amendment to amend the ABL Loan Agreement (the “Fourth ABL Amendment”). The Fourth ABL Amendment, among other modifications, permitted the Company to enter into the Senior Term Loan Agreement and make certain indebtedness, asset sale, investment and restricted payment baskets covenants more restrictive.
On March 7, 2019, the Company entered into the Fifth Amendment to amend the ABL Loan Agreement (the “Fifth ABL Amendment”). The Fifth ABL Amendment allowed for the extension of the Senior Term Loan Agreement to March 15, 2019.
On March 15, 2019, the Company entered into the Sixth Amendment to amend the ABL Loan Agreement (the “Sixth ABL Amendment”). The Sixth ABL Amendment allowed for the Company to enter into the Second Lien Term Loan Agreement and
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
provided for certain other modifications of the ABL Loan Agreement. In particular, the ABL Loan Agreement was modified to (a) increase the interest rate by
1%
, (b) reduce the total facility size to
$90.0 million
, and to limit ability to add debt in the future.
Covenant and Liquidity Matters
As a result of the above series of modifications and additional debt facilities and our current forecast through March 2020, the Company believes it has sufficient liquidity to operate its business. In addition to meeting its working capital needs, the Sixth Term Amendment requires the Company to raise a minimum of
$100.0 million
through a combination of asset sales, junior debt, or equity raise to make a contractually obligated prepayment of the Term Loan on or before March 31, 2020. We are currently evaluating all strategic alternatives related to the options to raise the funds necessary to comply with this contractual prepayment obligation. If we cannot generate the required cash, we may not be able to make the necessary payments required under our debt as of March 31, 2020, which would result in an event of default. Such a default, if not cured, would allow the lenders to accelerate the maturity of the debt, making it due and payable at that time.
The Company estimates it incurred approximately
$10.0 million
of debt issuance costs and amendment fees associated with the above transactions. The transactions will be accounted for in the first quarter of 2019.