NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. As a result of the Company’s sale of its Horizon Asia-Pacific operating segment (“APAC”) in 2019, the Company’s operating segments are Horizon Americas and Horizon Europe‑Africa. See Note 18, Segment Information, for further information on each of the Company’s operating segments. Historical information has been retrospectively adjusted to reflect the classification of APAC as discontinued operations. Discontinued operations are further discussed in Note 4, Discontinued Operations.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of Americas (“U.S. GAAP”).
2. New Accounting Pronouncements
New accounting pronouncements not yet adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 replaces the current incurred loss model guidance with a new method that reflects expected credit losses. Under this guidance an entity would recognize an impairment allowance equal to its estimate of credit losses on financial assets measured at amortized cost. In November 2019, the FASB extended the effective date of ASU 2016-13 for smaller reporting companies. As a result, ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2022 with early adoption permitted. The standard is not expected to have a significant impact on the Company's consolidated financial statements.
Accounting pronouncements recently adopted
In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 expands the scope of Accounting Standards 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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. The Company adopted ASU 2018-07 on January 1, 2019, and there was no 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 was 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 Company adopted ASU 2017-12 on January 1, 2019, and there was no 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 ASC 840, “Leases” (“ASC 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 (“ROU”) 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 is measured as the present value of the lease payments. The ROU asset represents the lessee’s right to use a specified asset for the lease term, and is measured at the lease liability amount, adjusted for lease prepayments, lease incentives received and the lessee’s initial direct costs.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 adopted the standard on January 1, 2019, by applying the modified retrospective method without restatement of comparative periods' financial information, as permitted by the transition guidance. The standard had a material impact on the Company’s consolidated balance sheet, but did not have a material impact on its consolidated statements of operations and cash flows. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while the Company’s accounting for finance leases remained substantially unchanged.
See Note 13, Leases for the impact of the adoption which resulted in the recognition of ROU assets and corresponding lease liabilities.
In December 2019, the FASB issued ASU 2019-12 “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The Company elected to early adopt this guidance in the fourth quarter of 2019, as allowed by ASU 2019-12. The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. The adoption of ASU 2019-12 resulted in immaterial reclassifications related to the accounting for franchise taxes on the Company’s consolidated financial statements.
3. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the assets, liabilities, revenues and expenses of Horizon Global and its wholly-owned subsidiaries. In addition, the consolidated financial statements include the consolidation of a variable interest entity for which the Company has been deemed to be the primary beneficiary. Intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and other intangibles, valuation allowances for receivables, inventories and deferred income tax assets, valuation of derivatives, estimated future unrecoverable lease costs, estimates related to lease liability and ROU asset valuations, 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. The Company has no restricted cash.
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 $3.2 million and $4.8 million at December 31, 2019 and 2018, 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 $258.4 million and $242.8 million as of December 31, 2019 and 2018, respectively. The sales of accounts receivable in accordance with the factoring arrangements are reflected as a reduction of Receivables, net in the consolidated balance sheets as they meet the applicable criteria of ASC 860, “Transfers and Servicing.” The holdback amounts due from the factoring institutions were $5.7 million and $3.1 million as of December 31, 2019 and 2018, 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 $1.0 million and $0.7 million for the twelve months ended December 31, 2019 and 2018, respectively.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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
|
Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, short-term operating lease liabilities, and long-term operating lease liabilities in our consolidated balance sheets. Finance leases are included in property and equipment, net, short-term borrowings and current maturities, long-term debt, and long-term debt in our consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at commencement date. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets. The Company reviews, 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 evaluating operating results. Goodwill is reviewed by the Company for impairment on a reporting unit basis annually on October 1st or more frequently if indicators are present or changes in circumstances suggest that impairment may exist. The Company performs a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount. If not, no further goodwill impairment testing is performed. If so, then the Company performs testing for possible impairment in a one-step quantitative process. The fair value of a reporting unit is compared with its carrying value, including goodwill. If fair value exceeds the carrying value, goodwill is not considered to be impaired. If the fair value of a reporting unit is below the carrying value, then goodwill is considered to be impaired in the amount of the excess of a reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
For purposes of the Company’s annual goodwill impairment test, the Company had one reporting unit with a goodwill balance which is also one of its operating segments, Horizon Americas. This reporting unit had goodwill of $4.2 million at the 2019 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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 twelve months ended December 31, 2018. See Note 6, Goodwill and Other Intangible Assets, for further information.
Revenue Recognition. Revenue is measured based on 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 5, Revenues, 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 $13.2 million and $12.9 million for the twelve months ended December 31, 2019 and 2018, 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.
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 $20.6 million and $19.5 million for the twelve months ended December 31, 2019 and 2018, respectively.
Advertising and Sales Promotion Costs. Advertising and sales promotion costs are expensed as incurred. Advertising costs were $2.3 million and $3.8 million for the twelve months ended December 31, 2019 and 2018, 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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 was a $0.1 million gain for the twelve months ended December 31, 2019 and a $0.9 million loss for the twelve months ended December 31, 2018.
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 at the time of transaction.
Fair Value of Financial Instruments. In accounting for and disclosing the fair value of these instruments, the Company uses the following hierarchy:
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▪
|
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;
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|
|
|
▪
|
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
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|
|
|
▪
|
Level 3 inputs are unobservable inputs for the asset or liability.
|
Valuation of the Company’s foreign currency forward contracts and cross currency swaps are based on the income approach, which uses observable inputs such as forward currency exchange rates and swap rates. 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.
Earnings (Loss) Per Share. Basic earnings (loss) per share (“EPS”) is computed based upon the weighted average number of common shares outstanding for each period. Diluted EPS is computed based on the weighted average number of common shares and common equivalent shares outstanding for each period. Common equivalent shares represent the effect of stock-based awards, warrants, and convertible notes during each period presented, which, if exercised, earned, or converted, would have a dilutive effect on EPS. Dilutive EPS is calculated to give effect to stock options and warrants, restricted shares outstanding, and convertible notes during each period. Loss per share excludes certain dilutive securities as inclusion results in an anti-dilutive effect.
Environmental Obligations. The Company is subject to environmental laws and regulations, including those relating to air emissions, wastewater discharges and chemical and hazardous waste management and disposal. Some of these environmental laws hold owners or operators of land or businesses liable for their own and for previous owners’ or operators’ releases of hazardous or toxic substances or wastes. Other environmental laws and regulations require the obtainment and compliance with environmental permits. To date, costs of complying with environmental requirements have not been material; however, the Company cannot quantify with certainty the potential impact of future compliance efforts and environmental remediation actions.
While the Company must comply with existing and pending climate change legislation, regulation and international treaties or accords, current laws and regulations have not had a material impact on the Company’s business, capital expenditures or financial position. Future events, including those relating to climate change or greenhouse gas regulation could require the Company to incur expenses related to the modification or curtailment of operations, installation of pollution control equipment or investigation and cleanup of contaminated sites.
Contingencies and Ordinary Course Claims. In the ordinary course of business, the Company is subject of, or party to, various pending or threatened legal actions, 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. Discontinued Operations
On September 19, 2019, the Company completed the sale of its subsidiaries that comprised APAC to Hayman Pacific BidCo Pty Ltd., an affiliate of Pacific Equity Partners, for $209.6 million in net cash proceeds after payment of transaction costs, in a net debt free sale. The closure of the sale is pending customary closing conditions, such as a net working capital true up, which is expected to be finalized during the first quarter of 2020. The sale resulted in the recognition of a gain of $180.5 million, of which $17.3 million was related to the cumulative translation adjustment that was reclassified to earnings, which is reflected within the income from discontinued operations, net of income taxes line of the consolidated statement of operations.
The Company classified APAC assets and liabilities as held-for-sale as of December 31, 2018 in the accompanying consolidated balance sheet and has classified APAC’s operating results and the gain on the sale as discontinued operations in the accompanying consolidated statement of operations for all periods presented in accordance with ASC 205, “Discontinued Operations.” Prior to being classified as held-for-sale, APAC was included as a separate operating segment.
The following table presents the Company’s results from discontinued operations through the date of sale of APAC, September 19, 2019.
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|
|
|
|
|
|
Twelve Months Ended December 31,
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|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net sales
|
|
$
|
92,300
|
|
|
$
|
135,940
|
|
|
Cost of sales
|
|
(68,530
|
)
|
|
(101,540
|
)
|
|
Gross profit
|
|
23,770
|
|
|
34,400
|
|
|
Selling, general and administrative expenses
|
|
(9,580
|
)
|
|
(14,230
|
)
|
|
Net gain on dispositions of property and equipment
|
|
—
|
|
|
70
|
|
|
Other expense, net
|
|
(400
|
)
|
|
(330
|
)
|
|
Interest expense
|
|
(310
|
)
|
|
(290
|
)
|
|
Income before income tax expense
|
|
13,480
|
|
|
19,620
|
|
|
Income tax expense
|
|
(4,450
|
)
|
|
(5,160
|
)
|
|
Gain on sale of discontinued operations
|
|
180,490
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|
|
—
|
|
|
Income from discontinued operations, net of income taxes
|
|
$
|
189,520
|
|
|
$
|
14,460
|
|
The following table details the Company’s APAC assets and liabilities held for sale as of December 31, 2018.
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December 31, 2018
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|
(dollars in thousands)
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|
Assets
|
|
Current assets:
|
|
|
Receivables, net of allowance for doubtful accounts
|
$
|
13,170
|
|
|
Inventories
|
21,490
|
|
|
Prepaid expenses and other current assets
|
1,420
|
|
|
Total current assets
|
36,080
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|
|
Non-current assets:
|
|
|
Property and equipment, net
|
15,780
|
|
|
Goodwill
|
8,160
|
|
|
Other intangibles, net
|
8,650
|
|
|
Deferred income taxes
|
2,030
|
|
|
Other assets
|
170
|
|
|
Total non-current assets
|
34,790
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|
|
Assets held-for-sale
|
$
|
70,870
|
|
|
Liabilities
|
|
Current liabilities:
|
|
|
Accounts payable
|
$
|
20,780
|
|
|
Accrued liabilities
|
7,300
|
|
|
Total current liabilities
|
28,080
|
|
|
Non-current liabilities:
|
|
|
Deferred income taxes
|
1,530
|
|
|
Other long-term liabilities
|
210
|
|
|
Total non-current liabilities
|
1,740
|
|
|
Total liabilities held-for-sale
|
$
|
29,820
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. 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, 2019 and 2018:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2019
|
|
|
|
Horizon Americas
|
|
Horizon Europe-Africa
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
87,700
|
|
|
$
|
181,490
|
|
|
$
|
269,190
|
|
|
Automotive OES
|
|
6,950
|
|
|
58,080
|
|
|
65,030
|
|
|
Aftermarket
|
|
96,910
|
|
|
69,370
|
|
|
166,280
|
|
|
Retail
|
|
105,970
|
|
|
—
|
|
|
105,970
|
|
|
Industrial
|
|
29,390
|
|
|
2,850
|
|
|
32,240
|
|
|
E-commerce
|
|
45,750
|
|
|
1,880
|
|
|
47,630
|
|
|
Other
|
|
50
|
|
|
4,060
|
|
|
4,110
|
|
|
Total
|
|
$
|
372,720
|
|
|
$
|
317,730
|
|
|
$
|
690,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2018
|
|
|
|
Horizon Americas
|
|
Horizon Europe-Africa
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
|
|
Automotive OEM
|
|
$
|
80,300
|
|
|
$
|
174,040
|
|
|
$
|
254,340
|
|
|
Automotive OES
|
|
5,610
|
|
|
50,890
|
|
|
56,500
|
|
|
Aftermarket
|
|
114,450
|
|
|
77,190
|
|
|
191,640
|
|
|
Retail
|
|
115,920
|
|
|
—
|
|
|
115,920
|
|
|
Industrial
|
|
38,810
|
|
|
3,440
|
|
|
42,250
|
|
|
E-commerce
|
|
34,220
|
|
|
4,570
|
|
|
38,790
|
|
|
Other
|
|
1,440
|
|
|
13,130
|
|
|
14,570
|
|
|
Total
|
|
$
|
390,750
|
|
|
$
|
323,260
|
|
|
$
|
714,010
|
|
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 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.
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
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
write-off of uncollectible amounts are immaterial for all periods presented. At December 31, 2019 and 2018, the Company’s accounts receivable, net of reserves were $71.7 million and $95.2 million, respectively.
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 for the twelve months ended December 31, 2019 and 2018.
Practical Expedients
The Company elected 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 elected 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.
6. Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill as of and for the twelve months ended December 31, 2019 and 2018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon Americas
|
|
Horizon Europe‑Africa
|
|
Total
|
|
|
(dollars in thousands)
|
|
Balances at January 1, 2018
|
|
$
|
5,280
|
|
|
$
|
126,160
|
|
|
$
|
131,440
|
|
|
Impairment
|
|
—
|
|
|
(124,660
|
)
|
|
(124,660
|
)
|
|
Foreign currency translation and other
|
|
(780
|
)
|
|
(1,500
|
)
|
|
(2,280
|
)
|
|
Balances at December 31, 2018
|
|
4,500
|
|
|
—
|
|
|
4,500
|
|
|
Foreign currency translation
|
|
(150
|
)
|
|
—
|
|
|
(150
|
)
|
|
Balances at December 31, 2019
|
|
$
|
4,350
|
|
|
$
|
—
|
|
|
$
|
4,350
|
|
During the first quarter of 2018, the Company continued to experience a decline in market capitalization. Additionally, the Horizon 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 performed an interim impairment assessment of indefinite-lived intangible assets within the Horizon Europe-Africa operating segment. Based on the results of the analysis, there were certain trade names where the estimated fair values approximated the carrying values, and therefore no impairment was recorded. 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%.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 $12.1 million as of June 30, 2018. Based on the results of the Company’s analysis, 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 $10.9 million as of September 30, 2018. Based on the results of the Company’s analysis, the carrying value of the trademarks approximated fair value, and therefore no impairment was recorded. 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 twelve months ended December 31, 2018.
The Company performed an annual goodwill impairment test as of October 1, 2019 and 2018, for the Horizon Americas reporting unit. The assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
Other Intangible Assets
The gross carrying amounts and accumulated amortization of the Company’s other intangibles are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
Intangible Category by Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
|
|
(dollars in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships, 2 - 20 years
|
|
$
|
164,150
|
|
|
$
|
(129,310
|
)
|
|
$
|
34,840
|
|
|
Technology and other, 3 - 15 years
|
|
21,420
|
|
|
(17,260
|
)
|
|
4,160
|
|
|
Trademark/Trade names, 1 - 8 years
|
|
150
|
|
|
(150
|
)
|
|
—
|
|
|
Total finite-lived intangible assets
|
|
185,720
|
|
|
(146,720
|
)
|
|
39,000
|
|
|
Trademark/Trade names, indefinite-lived
|
|
21,120
|
|
|
—
|
|
|
21,120
|
|
|
Total other intangible assets
|
|
$
|
206,840
|
|
|
$
|
(146,720
|
)
|
|
$
|
60,120
|
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Intangible Category by Useful Life
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying Amount
|
|
|
|
(dollars in thousands)
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
Customer relationships, 2 - 20 years
|
|
$
|
168,230
|
|
|
$
|
(124,510
|
)
|
|
$
|
43,720
|
|
|
Technology and other, 3 - 15 years
|
|
20,490
|
|
|
(15,400
|
)
|
|
5,090
|
|
|
Trademark/Trade names, 1 - 8 years
|
|
150
|
|
|
(150
|
)
|
|
—
|
|
|
Total finite-lived intangible assets
|
|
188,870
|
|
|
(140,060
|
)
|
|
48,810
|
|
|
Trademark/Trade names, indefinite-lived
|
|
20,590
|
|
|
—
|
|
|
20,590
|
|
|
Total other intangible assets
|
|
$
|
209,460
|
|
|
$
|
(140,060
|
)
|
|
$
|
69,400
|
|
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 that operated using the Terwa brand for $5.5 million, which included a $0.5 million note receivable. The Sale resulted in a $3.6 million loss recorded in Other expense, net in the consolidated statements of operations, including a $3.0 million reduction of net intangibles related to customer relationships.
Amortization expense related to intangible assets as included in the accompanying consolidated statements of operations is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Technology and other, included in cost of sales
|
|
$
|
530
|
|
|
$
|
1,840
|
|
|
Customer relationships & Trademark/Trade names, included in selling, general and administrative expenses
|
|
5,220
|
|
|
6,410
|
|
|
Total amortization expense
|
|
$
|
5,750
|
|
|
$
|
8,250
|
|
Estimated amortization expense for the next five fiscal years beginning after December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
Estimated Amortization Expense
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
$
|
6,820
|
|
|
2021
|
|
$
|
5,100
|
|
|
2022
|
|
$
|
4,830
|
|
|
2023
|
|
$
|
4,480
|
|
|
2024
|
|
$
|
4,270
|
|
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 was written off during the twelve months ended December 31, 2018, resulting in a charge of $1.0 million.
The Company performed an annual qualitative indefinite-lived impairment assessment as of October 1, 2019, for which the fair value exceeded their carrying value, indicating no impairment. The assessment indicated that it was more likely than not that the
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fair value of each of the indefinite-lived intangible assets exceeded its respective carrying value. We do not believe there is risk for impairment as of December 31, 2019.
7. Inventories
Inventories consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
(dollars in thousands)
|
|
Finished goods
|
|
$
|
82,080
|
|
|
$
|
89,000
|
|
|
Work in process
|
|
12,820
|
|
|
16,160
|
|
|
Raw materials
|
|
41,750
|
|
|
47,040
|
|
|
Total inventories
|
|
$
|
136,650
|
|
|
$
|
152,200
|
|
8. Property and Equipment, Net
Property and equipment, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
(dollars in thousands)
|
|
Land and land improvements
|
|
$
|
470
|
|
|
$
|
460
|
|
|
Buildings
|
|
21,290
|
|
|
18,680
|
|
|
Machinery and equipment
|
|
121,740
|
|
|
121,230
|
|
|
|
|
143,500
|
|
|
140,370
|
|
|
Accumulated depreciation
|
|
(67,670
|
)
|
|
(53,870
|
)
|
|
Property and equipment, net
|
|
$
|
75,830
|
|
|
$
|
86,500
|
|
Depreciation expense as included in the accompanying consolidated statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Depreciation expense, included in cost of sales
|
|
$
|
13,360
|
|
|
$
|
11,330
|
|
|
Depreciation expense, included in selling, general and administrative expense
|
|
2,580
|
|
|
1,000
|
|
|
Total depreciation expense
|
|
$
|
15,940
|
|
|
$
|
12,330
|
|
9. Accrued and Other Long-term Liabilities
Accrued liabilities consist of the following components:
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
(dollars in thousands)
|
|
Customer incentives
|
|
$
|
14,270
|
|
|
$
|
9,990
|
|
|
Customer claims
|
|
7,540
|
|
|
14,130
|
|
|
Accrued compensation
|
|
6,760
|
|
|
5,680
|
|
|
Accrued professional services
|
|
4,790
|
|
|
4,380
|
|
|
Restructuring
|
|
2,340
|
|
|
7,530
|
|
|
Deferred purchase price
|
|
790
|
|
|
3,400
|
|
|
Short-term tax liabilities
|
|
90
|
|
|
1,130
|
|
|
Cross currency swap
|
|
—
|
|
|
1,610
|
|
|
Other
|
|
12,270
|
|
|
10,670
|
|
|
Total accrued liabilities
|
|
$
|
48,850
|
|
|
$
|
58,520
|
|
Other long-term liabilities consist of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2019
|
|
December 31,
2018
|
|
|
|
(dollars in thousands)
|
|
Long-term tax liabilities
|
|
$
|
340
|
|
|
$
|
6,270
|
|
|
Deferred purchase price
|
|
2,370
|
|
|
30
|
|
|
Restructuring
|
|
1,600
|
|
|
2,580
|
|
|
Other
|
|
9,480
|
|
|
10,870
|
|
|
Total other long-term liabilities
|
|
$
|
13,790
|
|
|
$
|
19,750
|
|
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,
2019
|
|
December 31,
2018
|
|
|
|
(dollars in thousands)
|
|
ABL Facility
|
|
$
|
20,020
|
|
|
$
|
61,570
|
|
|
First Lien Term Loan
|
|
25,210
|
|
|
190,520
|
|
|
Second Lien Term Loan
|
|
56,960
|
|
|
—
|
|
|
Convertible Notes
|
|
125,000
|
|
|
125,000
|
|
|
Bank facilities, capital leases and other long-term debt
|
|
13,670
|
|
|
18,990
|
|
|
Gross debt
|
|
240,860
|
|
|
396,080
|
|
|
Less:
|
|
|
|
|
|
Current maturities, long-term debt
|
|
4,310
|
|
|
13,860
|
|
|
Gross long-term debt
|
|
236,550
|
|
|
382,220
|
|
|
Less:
|
|
|
|
|
|
Unamortized debt issuance costs and original issuance discount on First Lien Term Loan
|
|
700
|
|
|
7,380
|
|
|
Unamortized debt issuance costs and discount on Second Lien Term Loan
|
|
12,730
|
|
|
—
|
|
|
Unamortized debt issuance costs and discount on Convertible Notes
|
|
18,070
|
|
|
24,190
|
|
|
Unamortized debt issuance costs and discount
|
|
31,500
|
|
|
31,570
|
|
|
Long-term debt
|
|
$
|
205,050
|
|
|
$
|
350,650
|
|
ABL Facility
On December 22, 2015, the Company entered into an Amended and Restated Loan Agreement among the Company, Horizon Global Americas Inc. (“HGA”), Cequent UK Limited, Cequent Towing Products of Canada Ltd., 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.
In February 2019, the Company amended the ABL Facility to permit the Company to enter into the Senior Term Loan Agreement (as defined below) and make certain indebtedness, asset sale, investment and restricted payment baskets covenants more restrictive.
In March 2019, the Company amended the ABL Facility to permit the Company to enter into the Second Lien Term Loan Agreement (as defined below) and provide for certain other modifications of the ABL Facility. In particular, the ABL Facility was modified to increase the interest rate by 1.0%, reduce the total facility size to $90.0 million and limit the ability to incur additional indebtedness in the future.
In September 2019, the Company amended the ABL Facility to provide consent for the sale of APAC, provide consent for the Company’s prepayment of the First Lien Term Loan, as discussed below, and increase the existing block by $5.0 million to a total block of $10.0 million, making the effective facility size $80.0 million.
The ABL Facility consists of (i) a U.S. sub-facility, in an aggregate principal amount of up to $85.0 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”). All facilities under the ABL Facility mature on June 30, 2020. As a result of the ABL refinancing on March 13, 2020, the facilities are presented in “long-term debt” in the accompanying consolidated balance sheet as of December 31, 2019. Refer to Note 21, Subsequent Events, for additional information.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2019, the Company was in compliance with its financial covenants contained in the ABL Facility.
The Company incurred debt issuance costs of $0.5 million in connection with the September 2019 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 $1.6 million and $0.5 million during the twelve months ended December 31, 2019 and 2018, respectively, related to the amortization of debt issuance costs, which is included in the accompanying consolidated statements of operations. There were $1.2 million and $0.8 million of unamortized debt issuance costs included in other assets in the accompanying consolidated balance sheet as of December 31, 2019 and 2018, respectively.
There were $20.0 million and $61.6 million outstanding under the ABL Facility as of December 31, 2019 and 2018, with a weighted average interest rate of 5.5% and 4.4%, respectively. Total letters of credit issued under the ABL Facility at December 31, 2019 and 2018 were $7.7 million and $3.4 million, respectively. The Company had $33.1 million and $10.3 million in availability under the ABL Facility as of December 31, 2019 and 2018, respectively.
First Lien Term Loan (formerly “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 (the “Original Term B Loan”), which matures on June 30, 2021. The Term Loan Agreement has been subsequently amended and restated on several occasions and is collectively referred to as the “Amended Term Loan Agreement”. The Original Term B Loan has also been subsequently amended on several occasions and is collectively referred to as the “2017 Replacement Term Loan”.
On July 31, 2018, the Company entered into the Fourth Amendment to the Term Loan Agreement (the “2018 Term Loan Agreement”). The amendment, or 2018 Term Loan Agreement, 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 $4.6 million were incurred in connection with the amendment. These debt issuance costs are 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, 2018, 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
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Term B Loan, subject to adjustments based on the Company’s leverage ratio and optional prepayments of term loans and certain other indebtedness.
In February 2019, the Company amended and restated the existing 2018 Term Loan Agreement (the “First Lien Term Loan Agreement”) to permit the Company to enter into the Senior Term Loan Agreement and tightened certain indebtedness, asset sale, investment and restricted payment baskets.
In March 2019, the Company amended the existing term loan agreement (“Sixth Term Amendment”) to permit the Company to enter into the Second Lien Term Loan Agreement, amend certain financial covenants to make them less restrictive and make certain other affirmative and negative covenants more restrictive.
The Sixth Term Amendment also added 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 First Lien Term Loan Agreement was also amended to add 3.0% paid-in-kind interest in addition to the existing cash pay interest.
In May 2019, the Company entered into the seventh amendment to credit agreement (the “Seventh Term Amendment”) to amend the First Lien Term Loan Agreement, which extended its $100.0 million prepayment requirement from on or before March 31, 2020, to on or before May 15, 2020.
In September 2019, the Company amended the existing First Lien Term Loan Agreement (“Eighth Term Amendment”) to provide consent for the sale of the Company’s APAC segment, provide consent for the Company to meet its prepayment obligation of the First Lien Term Loan, remove prepayment penalties and make certain negative covenants less restrictive. In September 2019, the Company paid down a portion of its First Lien Term Loan’s outstanding principal plus fees and paid-in-kind interest in the amount of $172.9 million.
Pursuant to the Eighth Term Amendment, the prior first lien leverage covenant was eliminated and replaced with the secured net leverage ratio starting with the fiscal quarter ending December 31, 2020 as follows:
|
|
|
|
•
|
December 31, 2020: 6.00 to 1.00
|
|
|
|
|
•
|
March 31, 2021: 6.00 to 1.00
|
|
|
|
|
•
|
June 30, 2021 and each fiscal quarter ending thereafter: 5.00 to 1.00
|
In accordance with ASC 470-50, “Modifications and Extinguishments”, the Company recorded $0.7 million of issuance costs in selling, general and administrative expense in the accompanying consolidated statements of operations during the twelve months ended December 31, 2019. The Company also wrote off $5.2 million of debt issuance costs due to the modification of the First Lien Term Loan for the September 2019 amendment, which were recorded to selling, general and administrative expense within the accompanying consolidated statements of operations.
The Company recognized $3.2 million of paid-in-kind interest on the First Lien Term Loan for the twelve months ended December 31, 2019. The Company had an aggregate principal amount outstanding of $25.2 million and $190.5 million as of December 31, 2019 and 2018, respectively, under the First Lien Term Loan bearing interest at 8.1% and 8.8%, respectively.
The Company recorded $8.7 million of unamortized debt issuance costs to interest expense for the twelve months ended December 31, 2019, due to the extinguishment of debt for certain lenders in the loan syndicate in connection with the Sixth, Seventh and Eighth Term Amendments.
The Company recognized $5.6 million and $2.1 million during the twelve months ended December 31, 2019 and 2018, respectively, 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 $0.7 million and $7.4 million as of December 31, 2019 and 2018, 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.
The Company’s First Lien Term Loan traded at approximately 97.8% and 92.2% of par value as of December 31, 2019 and 2018, respectively. The valuation of the First Lien Term Loan was determined based on Level 2 inputs under the fair value hierarchy.
All of the indebtedness under the First Lien Term 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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Term Loan Agreement
In February 2019, the Company entered into a credit agreement (the “Senior Term Loan Agreement”) with Cortland Capital Markets Services LLC, as administrative agent and collateral agent, and the lenders party thereto. The Senior Term Loan Agreement provided for a short-term loan facility in the aggregate principal amount of $10.0 million, all of which was borrowed by the Company. Certain of the lenders under the Company’s First Lien Term Loan Agreement were the lenders under the Senior Term Loan Agreement.
The Senior Term Loan Agreement required the Company to obtain additional financing in amounts and on terms acceptable to the lenders. The Senior Term Loan Agreement was repaid on March 15, 2019, in conjunction with the additional financing further detailed below. The Company incurred debt issuance costs of $0.5 million in connection with the Senior Term Loan Agreement, which were recorded to selling, general and administrative expense within the accompanying consolidated statements of operations.
Second Lien Term Loan Agreement
In March 2019, the Company entered into a credit agreement (the “Second Lien Term Loan Agreement”) with Cortland Capital Markets Services LLC, as administrative agent and collateral agent, and Corre Partners Management L.L.C., as representative of the lenders, and the lenders party thereto. The Second Lien Term Loan Agreement provides for a term loan facility in the aggregate principal amount of $51.0 million and matures on September 30, 2021. The interest on the Second Lien Term Loan Agreement may be paid, at the Company’s election, in cash, at the customary eurocurrency rate plus a margin of 10.50% per annum, or in-kind, at the customary eurocurrency rate plus a margin of 11.50%. The Second Lien Term Loan Agreement is secured by a second lien on substantially the same collateral as the First Lien Term Loan, bears an interest rate of LIBOR 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.
In September 2019, the Company amended the existing Second Lien Term Loan Agreement (“Second Lien Amendment”) to remove the prepayment requirement related to the use of APAC sale proceeds and made certain negative covenants less restrictive. Pursuant to the Second Lien Amendment, the prior first lien leverage covenant was eliminated and replaced with the secured net leverage ratio starting with the fiscal quarter ending December 31, 2020, as outlined in the above section, First Lien Term Loan.
The proceeds, net of applicable fees, of the Second Lien Term Loan Agreement were used to repay all amounts outstanding under the Senior Term Loan Agreement and to provide additional liquidity and working capital for the Company.
Pursuant to the Second Lien Term Loan Agreement, the Company was required to issue detachable warrants to purchase up to 6.25 million shares of its common stock, which can be exercised on a cashless basis over a five-year term with an exercise price of $1.50 per share. In March 2019, warrants to purchase 3,601,902 shares of common stock were issued and the Company also issued 90,667 shares of Series A Preferred Stock in the interim that were convertible into additional warrants to purchase 2,952,248 shares of common stock upon receipt of shareholder approval of the issuance of such additional warrants and the shares of common stock issuable upon exercise thereof.
In accordance with guidance in ASC 480, “Distinguishing Liabilities from Equity” (“ASC 480”), and ASC 815, “Derivatives and Hedging” (“ASC 815”), the (i) Second Lien Term Loan; (ii) Series A Preferred Stock, and (iii) warrants are all freestanding instruments and proceeds were allocated to each instrument on March 15, 2019 on a relative fair value basis: (i) $40.3 million; (ii) $5.3 million and (iii) $5.4 million, respectively.
The Series A Preferred Stock was not within the scope of ASC 480 and did not meet the criteria for liability classification. The Series A Preferred Stock was classified as temporary equity as of March 31, 2019, as the Series A Preferred Stock was entitled to receive two times its liquidation value in cash upon occurrence of a liquidation or deemed liquidation event, which is outside the control of the Company. After receipt of shareholder approval at the Company’s annual meeting of shareholders on June 25, 2019, the 90,667 shares of Series A Preferred Stock were automatically converted into warrants to purchase 2,952,248 shares of common stock and $5.3 million was reclassified to common stock warrants within Shareholders’ equity in the Company’s consolidated balance sheet. The warrants also do not meet the criteria for liability classification under ASC 480. However, the warrants meet the definition of a derivative under ASC 815, and are determined to be indexed to the Company’s common stock and meet the requirements for equity classification pursuant to ASC 815-40, Derivatives and Hedging-Contracts in Entity’s Own Equity (“ASC 815-40”).
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company determined the fair value of the Second Lien Term Loan using a discount rate build up approach. The fair values of the Series A Preferred Stock and warrants were determined using an option pricing method. The debt discount of $10.7 million created by the relative fair value allocation of the equity component is being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the loan. The Company’s Second Lien Term Loan had a fair value of $46.0 million as of December 31, 2019. The valuation of the Second Lien Term Loan was determined based on Level 2 inputs under the fair value hierarchy.
Debt issuance costs of $3.8 million and original issuance discount of $1.0 million were incurred in connection with entry into the Second Lien Term Loan Agreement. The debt issuance and original issuance discount costs will be amortized into interest expense over the contractual term of the loan using the effective interest method. The Company had total unamortized debt issuance and discount costs of $12.7 million, all of which are recorded as a reduction of the debt balance on the Company’s accompanying consolidated balance sheet as of December 31, 2019.
The Company recognized $6.5 million of paid-in-kind interest on its Second Lien Term Loan for the twelve months ended December 31, 2019. The Company had an aggregate principal amount outstanding of $57.0 million as of December 31, 2019 under the Second Lien Term Loan, bearing interest at 13.3%.
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 $1,000 and the conversion rate on each such trading day; (iii) upon the occurrence of specified corporate events; and (iv) on or after January 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date. During the fourth quarter of 2019, 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 2019 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, 2019, 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, 2019 and 2018, was $106.9 million and $100.8 million, respectively, including total unamortized debt discount and debt issuance costs of $18.1 million and $24.2 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, 2019 and 2018, respectively, net of issuance costs and taxes.
Interest expense recognized relating to the contractual interest coupon, amortization of debt discount and amortization of debt
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
issuance costs on the Convertible Notes included in the accompanying consolidated statements of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Contractual interest coupon on convertible debt
|
|
$
|
3,490
|
|
|
$
|
3,490
|
|
|
Amortization of debt issuance costs
|
|
$
|
530
|
|
|
$
|
530
|
|
|
Amortization of "equity discount" related to debt
|
|
$
|
5,590
|
|
|
$
|
5,150
|
|
The estimated fair value of the Convertible Notes based on a market approach as of December 31, 2019 and 2018 was $100.0 million and $68.2 million, respectively, which both represent a Level 2 valuation. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on the last business day of the period.
In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) in privately negotiated transactions with certain of the underwriters or their affiliates (in this capacity, the “option counterparties”). The Convertible Note Hedges provide the Company with the option to acquire, on a net settlement basis, 5,005,000 shares of its common stock, which is equal to the number of shares of common stock that notionally underlie the Convertible Notes, at a strike price of $24.98, which corresponds to the conversion price of the Convertible Notes. The Convertible Note Hedges have an expiration date that is the same as the maturity date of the Convertible Notes, subject to earlier exercise. The Convertible Note Hedges have customary anti-dilution provisions similar to the Convertible Notes. The Convertible Note Hedges have a default settlement method of net-share settlement but may be settled in cash or shares, depending on the Company’s method of settlement for conversion of the corresponding Convertible Notes. If the Company exercises the Convertible Note Hedges, the shares of common stock it will receive from the option counterparties to the Convertible Note Hedges will cover the shares of common stock that it would be required to deliver to the holders of the converted Convertible Notes in excess of the principal amount thereof. The aggregate cost of the Convertible Note Hedges was $29.0 million (or $7.5 million net of the total proceeds from the Warrants sold, as discussed below), before the allocation of issuance costs of $0.7 million. The Convertible Note Hedges are accounted for as equity transactions in accordance with ASC 815-40.
In connection with the issuance of the Convertible Notes, the Company also sold net-share-settled warrants (the “Warrants”) in privately negotiated transactions with the option counterparties for the purchase of up to 5,005,000 shares of its common stock at a strike price of $29.60 per share, for total proceeds of $21.5 million before the allocation of $0.6 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.
Covenant and Liquidity Matters
As a result of amendments entered into on March 13, 2020 for the Company’s First Lien Term Loan and Second Lien Term Loan, as well as the Loan and Security Agreement entered into on March 13, 2020, as defined in Note 21, Subsequent Events, and our current forecast through March 31, 2021, the Company believes it has sufficient liquidity to operate its business.
The Company is in compliance with all of its financial covenants as of December 31, 2019.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Long-term Debt Maturities
Future maturities of the face value of long-term debt at December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Future maturities of long-term debt
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
$
|
4,310
|
|
|
2021
|
|
102,420
|
|
|
2022
|
|
125,000
|
|
|
2023
|
|
—
|
|
|
2024
|
|
—
|
|
|
Thereafter
|
|
9,130
|
|
|
Total
|
|
$
|
240,860
|
|
11. Derivative Instruments
Foreign Currency Exchange Rate Risk
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 hedged currency exposure between the Mexican peso and the U.S. dollar and matured at specified monthly settlement dates through December 2019. At inception, the Company designated the foreign currency forward contracts as cash flow hedges. Upon the performance of contract manufacturing or purchase of certain inventories the Company de-designated the foreign currency forward contract.
On October 4, 2016, the Company entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. The Company used the cross currency swap to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to a non-functional currency intercompany loan of €110.0 million. The cross currency swap hedged currency exposure between the euro and the U.S. dollar and matured on January 3, 2019 with a liability of $2.5 million. The company entered into forward contracts to settle the cross currency swap which resulted in a $0.9 million offset to the liability. These settlements resulted in a net realized gain reclassified from 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.
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, 2019
|
|
December 31, 2018
|
|
|
|
|
|
(dollars in thousands)
|
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
$
|
—
|
|
|
$
|
1,910
|
|
|
Cross currency swap
|
|
Accrued liabilities
|
|
—
|
|
|
(2,480
|
)
|
|
Total derivatives designated as hedging instruments
|
|
|
|
—
|
|
|
(570
|
)
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Prepaid expenses and other current assets
|
|
—
|
|
|
70
|
|
|
Total derivatives de-designated as hedging instruments
|
|
|
|
—
|
|
|
70
|
|
|
Total derivatives
|
|
|
|
$
|
—
|
|
|
$
|
(500
|
)
|
The following table summarizes the gain or loss recognized in AOCI on derivatives (net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivatives
(net of tax)
|
|
|
As of December 31,
|
|
|
2019
|
|
2018
|
|
|
(dollars in thousands)
|
|
Derivative classified as cash flow hedges:
|
|
|
|
|
Foreign currency forward contracts
|
$
|
—
|
|
|
$
|
1,870
|
|
|
Cross currency swap
|
$
|
—
|
|
|
$
|
90
|
|
The following table summarizes the amounts reclassified from AOCI into earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
Cost of sales
|
|
Interest expense
|
|
Cost of sales
|
|
Interest expense
|
|
|
|
(dollars in thousands)
|
|
Total Amounts of Expense Line Items Presented in the Statement of Operations in Which the Effects of Cash Flow Hedges are Recorded
|
|
$
|
(594,220
|
)
|
|
$
|
(58,270
|
)
|
|
$
|
(604,530
|
)
|
|
$
|
(27,450
|
)
|
|
Amount of Gain Reclassified from AOCI into Earnings
|
|
|
|
|
|
|
|
|
|
Derivative classified as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
$
|
1,850
|
|
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
—
|
|
|
Cross currency swap
|
|
$
|
—
|
|
|
$
|
900
|
|
|
$
|
—
|
|
|
$
|
5,330
|
|
Derivatives not designated as hedging instruments
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 twelve months 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, 2019 and 2018 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, 2019
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Recurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cross currency swaps
|
|
Recurring
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
|
Recurring
|
|
$
|
1,980
|
|
|
$
|
—
|
|
|
$
|
1,980
|
|
|
$
|
—
|
|
|
Cross currency swap
|
|
Recurring
|
|
$
|
(2,480
|
)
|
|
$
|
—
|
|
|
$
|
(2,480
|
)
|
|
$
|
—
|
|
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.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 twelve months ended December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Costs
|
|
Facility Closure and Other Costs
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Balances at December 31, 2018
|
|
$
|
4,990
|
|
|
$
|
5,120
|
|
|
$
|
10,110
|
|
|
Restructuring charges
|
|
960
|
|
|
—
|
|
|
960
|
|
|
Payments and other(1)
|
|
(4,120
|
)
|
|
(3,010
|
)
|
|
(7,130
|
)
|
|
Balances at December 31, 2019
|
|
$
|
1,830
|
|
|
$
|
2,110
|
|
|
$
|
3,940
|
|
(1)Other primarily consists of changes in the liability balance due to foreign currency translation.
The $3.9 million restructuring liability at December 31, 2019 includes $2.3 million of accrued liabilities and $1.6 million of other long-term liabilities. 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 activities primarily relate to location inefficiencies in indirect and fixed costs structure, coupled with the restructuring of certain of the executive management team, including separation of the former Chief Executive Officer, that were initiated primarily in 2018.
13. Leases
On January 1, 2019, the Company adopted the new accounting guidance under ASC 842 “Leases”, as issued by the FASB under ASU 2016-02, by applying the modified retrospective method without restatement of comparative periods’ financial information, as more fully described in Note 2, New Accounting Pronouncements.
The Company leases certain facilities, automobiles and equipment under non-cancellable operating leases. Our leases have remaining lease terms of one year to twelve years, some of which include options to extend the leases for up to five years, and some of which include options to terminate the leases within one year. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheets; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company’s financing leases are immaterial.
Most leases include one or more options to renew. The exercise of lease renewal options is typically at the Company’s sole discretion; therefore, the majority of renewals to extend the lease terms are not included in the Company’s ROU assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in the lease term. The Company combines lease and non-lease components which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases.
As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company has a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, the Company applies a portfolio approach by reporting segment for determining the incremental borrowing rate.
Operating lease cost was $18.8 million for the twelve months ended December 31, 2019. Operating cash flow used for operating leases was $18.0 million for the twelve months ended December 31, 2019. ROU assets obtained in exchange for operating lease obligations was $56.5 million total, including the impact of adopting ASC 842, for the twelve months ended December 31, 2019, net of $24.2 million of disposals. The weighted average remaining term of these leases was 6.8 years and the weighted average discount rate used to measure lease liabilities was 8.7%.
In 2019, the Company abandoned two operating lease ROU assets. First, in September 2019, the Company ceased use of its former Troy, Michigan headquarters office lease. In conjunction with the lease abandonment, the Company accelerated the recognition of expense of its ROU asset and wrote it off, which resulted in a $4.3 million charge. Second, in November 2019, the Company ceased use of leased equipment in its Kansas City location. In conjunction with the lease abandonment, the Company accelerated
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the recognition of expense of its ROU asset and wrote it off, which resulted in a $6.5 million charge. Each of these charges are recorded in selling, general and administrative expense in the accompanying consolidated statements of operations for the twelve months ended December 31, 2019.
Maturities of lease liabilities were as follows as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
|
(dollars in thousands)
|
|
2020
|
|
$
|
14,140
|
|
|
2021
|
|
13,180
|
|
|
2022
|
|
11,180
|
|
|
2023
|
|
8,870
|
|
|
2024
|
|
6,740
|
|
|
2025 and thereafter
|
|
22,710
|
|
|
Total lease payments
|
|
76,820
|
|
|
Less imputed interest
|
|
(18,870
|
)
|
|
Present value of lease liabilities
|
|
$
|
57,950
|
|
Minimum payments for operating leases having initial or remaining non-cancellable lease terms in excess of one year at December 31, 2018, under the prior accounting guidance of ASC 840, are summarized below. This historical information has also been retrospectively adjusted to reflect the removal of discontinued operations. Discontinued operations are further discussed in Note 4, Discontinued Operations.
|
|
|
|
|
|
|
|
|
December 31,
|
|
Minimum Payments
|
|
|
|
(dollars in thousands)
|
|
2019
|
|
$
|
12,380
|
|
|
2020
|
|
11,350
|
|
|
2021
|
|
10,120
|
|
|
2022
|
|
7,350
|
|
|
2023
|
|
4,350
|
|
|
Thereafter
|
|
12,480
|
|
|
Total
|
|
$
|
58,030
|
|
14. Contingencies
During the fourth quarter of 2018, the Company was notified by two OEM customers of potential claims related to product sold by Horizon Europe-Africa arising from potentially faulty components provided by a third-party supplier. The claims resulted from the failure of products not functioning to specifications, but the claims did not allege any damage and only sought replacement of the product. The Company recorded a liability of $12.3 million and an insurance-related asset of $10.8 million as of December 31, 2018, which resulted in a $1.5 million charge for the twelve months ended December 31, 2018.
On November 6, 2019, the Company reached a commercial settlement with an OEM customer that settles the exposure for certain claims related to the potentially faulty components for $5.5 million. On January 24, 2020, the Company reached a commercial settlement with the second OEM customer that settles the exposure for certain claims related to the potentially faulty components for $1.1 million. As a result of the January 24, 2020 settlement, the Company adjusted its claims liability as of December 31, 2019 for the $1.1 million. As a result of the 2019 activity, the Company recorded a $1.7 million charge for the twelve months ended December 31, 2019.
As of December 31, 2019, the Company had $3.9 million recorded in “accrued liabilities” for the remaining unpaid settlement obligations and an insurance-related asset of $0.4 million recorded in “prepaid expenses and other current assets” in the accompanying consolidated balance sheet.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands, except for per share amounts)
|
|
Numerator:
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(110,010
|
)
|
|
$
|
(219,360
|
)
|
|
Income from discontinued operations, net of tax
|
|
$
|
189,520
|
|
|
$
|
14,460
|
|
|
Less: Net loss attributable to noncontrolling interest
|
|
$
|
(1,240
|
)
|
|
$
|
(940
|
)
|
|
Net income (loss) attributable to Horizon Global
|
|
$
|
80,750
|
|
|
$
|
(203,960
|
)
|
|
Denominator:
|
|
|
|
|
|
Weighted average shares outstanding, basic
|
|
25,297,576
|
|
|
25,053,013
|
|
|
Dilutive effect of stock-based awards
|
|
—
|
|
|
—
|
|
|
Weighted average shares outstanding, diluted
|
|
25,297,576
|
|
|
25,053,013
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributable to Horizon Global
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(4.30
|
)
|
|
$
|
(8.72
|
)
|
|
Discontinued Operations
|
|
$
|
7.49
|
|
|
$
|
0.58
|
|
|
Total
|
|
$
|
3.19
|
|
|
$
|
(8.14
|
)
|
|
Diluted income (loss) per share attributable to Horizon Global
|
|
|
|
|
|
Continuing Operations
|
|
$
|
(4.30
|
)
|
|
$
|
(8.72
|
)
|
|
Discontinued Operations
|
|
$
|
7.49
|
|
|
$
|
0.58
|
|
|
Total
|
|
$
|
3.19
|
|
|
$
|
(8.14
|
)
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to losses from continuing operations for the twelve months ended December 31, 2019 and 2018, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
Number of options
|
|
54,847
|
|
|
240,647
|
|
|
Exercise price of options
|
|
$9.20 - $11.29
|
|
|
$9.20 - $11.29
|
|
|
Restricted stock units
|
|
1,172,228
|
|
|
646,336
|
|
|
Convertible Notes
|
|
5,005,000
|
|
|
5,005,000
|
|
|
Convertible Notes warrants
|
|
5,005,000
|
|
|
5,005,000
|
|
|
Second Lien Term Loan warrants
|
|
4,381,411
|
|
|
—
|
|
For purposes of determining diluted loss per share, the Company has elected a policy to assume that the principal portion of the Convertible Notes, as described in Note 10, Long-term Debt, is settled in cash and the conversion premium is settled in shares. Therefore, the Company has adopted a policy of calculating the diluted loss per share effect of the Convertible Notes using the treasury stock method. As a result, the dilutive effect of the Convertible Notes is limited to the conversion premium, which is reflected in the calculation of diluted loss per share as if it were a freestanding written call option on the Company’s shares. Using the treasury stock method, the Warrants issued in connection with the issuance of the Convertible Notes are considered to be dilutive when they are in the money relative to the Company’s average common stock price during the period. The Convertible Note Hedges purchased in connection with the issuance of the Convertible Notes are always considered to be anti-dilutive and therefore do not impact the Company’s calculation of diluted loss per share.
16. Equity Awards
Description of the Plan
Horizon employees and non-employee directors participate in the Horizon Global Corporation 2015 Equity and Incentive Compensation Plan (as amended and restated, the “Horizon 2015 Plan”). The Horizon 2015 Plan authorizes the Compensation Committee of the Horizon Board of Directors to grant stock options (including “incentive stock options” as defined in Section 422 of the U.S. Internal Revenue Code), restricted shares, restricted stock units, performance shares, performance stock units, cash incentive awards, and certain other awards based on or related to our common stock to Horizon employees and non-employee directors. No more than 4.4 million Horizon common shares may be delivered under the Horizon 2015 Plan.
Stock Options
The following table summarizes Horizon stock option activity from December 31, 2018 to December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options
|
|
Weighted Average Exercise Price
|
|
Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2018
|
|
92,967
|
|
|
$
|
10.40
|
|
|
—
|
|
|
—
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Canceled, forfeited
|
|
(55,230
|
)
|
|
10.31
|
|
|
—
|
|
|
—
|
|
|
Expired
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Outstanding at December 31, 2019
|
|
37,737
|
|
|
$
|
10.52
|
|
|
5.5
|
|
|
$
|
—
|
|
As of December 31, 2019, the unrecognized compensation cost related to stock options is immaterial. For the twelve months ended December 31, 2019 and 2018, the stock-based compensation expense recognized by the Company related to stock options was immaterial. There was no aggregate intrinsic value on the outstanding options at December 31, 2019. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted Shares
During 2019, the Company granted an aggregate of 1,950,296 restricted stock units and performance stock units to certain key employees. The total grants consisted of: (i) 353,592 time-based restricted stock units that vest on May 15, 2020; (ii) 27,840 time-based restricted stock units that vest on September 10, 2020; (iii) 245,134 time-based restricted stock units that vest on September 19, 2020; (iv) 25,000 time-based restricted stock units that vest on November 13, 2020; (v) 25,000 time-based restricted stock units that vest on December 9, 2020; (vi) 5,000 time-based restricted stock units that vest on May 15, 2021; (vii) 411,373 time-based restricted stock units that vest on March 19, 2022; (viii) 857,357 market-based performance stock units (the “2019 PSUs”), of which 757,357 vest on March 19, 2022 with the remaining 100,000 vesting on a ratable basis on September 23, 2020, September 23, 2021 and September 23, 2022.
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 (the “2018 PSUs”) ; (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.
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 2019 PSUs, TSR is measured over a period beginning January 1, 2019 and ending December 31, 2021. For the 2018 PSUs, TSR is measured over a period beginning January 1, 2018 and ending December 31, 2020. TSR is calculated as the Company’s average closing stock price for the 20-trading days at the end of the performance period plus Company dividends, divided by the Company’s average closing stock price for the 20-trading days prior to the start of the performance period. Depending on the performance achieved, the amount of shares earned can vary from 0% of the target award to a maximum of 200% of the target award. The Company estimated the grant-date fair value of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted-average assumptions: risk-free interest rate of 2.43% and 2.34% for the 2019 PSUs and 2018 PSUs, respectively, and annualized volatility of 84.1% and 37.4% for the 2019 PSUs and 2018 PSUs, respectively. Due to the lack of adequate stock price history of Horizon common stock during 2018, the volatility was based on the median of the peer group. In 2019, the Company had sufficient historical data that was used to calculate the volatility. The grant date fair value of the performance stock units were $3.69 and $7.08 for the 2019 PSUs and 2018 PSUs, respectively.
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 twelve months ended December 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Outstanding at December 31, 2018
|
|
419,928
|
|
|
$
|
9.75
|
|
|
Granted
|
|
1,950,296
|
|
|
3.59
|
|
|
Vested
|
|
(145,981
|
)
|
|
7.40
|
|
|
Canceled, forfeited
|
|
(831,158
|
)
|
|
4.84
|
|
|
Outstanding at December 31, 2019
|
|
1,393,085
|
|
|
$
|
4.30
|
|
As of December 31, 2019, there was $3.2 million in unrecognized compensation costs related to unvested restricted stock units that is expected to be recognized over a weighted average period of 1.6 years.
The Company recognized $2.2 million and $1.6 million of stock-based compensation expense related to restricted shares during the twelve months ended December 31, 2019 and 2018, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. Shareholders’ Equity
Preferred Stock
The Company is authorized to issue 100,000,000 shares of preferred stock, par value of $0.01 per share. There were no preferred shares outstanding at December 31, 2019 or December 31, 2018.
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, 2019, there were 26,073,894 shares of common stock issued and 25,387,388 shares of common stock outstanding. At December 31, 2018, there were 25,866,747 shares of common stock issued and 25,180,241 shares of common stock outstanding.
Common Stock Warrants
In connection with the Second Lien Term Loan the Company entered into in March 2019, the Company became obligated to issue detachable warrants to purchase up to 6.25 million shares of its common stock, which can be exercised on a cashless basis over a five year term with an exercise price of $1.50 per share.
The Company also issued 90,667 shares of Series A Preferred Stock in March 2019 in connection with the Second Lien Term Loan that were convertible into additional warrants upon receipt of shareholder approval of the issuance of such additional warrants and the shares of common stock issuable upon exercise thereof. The Series A Preferred Stock was presented as temporary equity in the March 31, 2019 condensed consolidated balance sheet. Upon receipt of such shareholder approval on June 25, 2019, the 90,667 shares of Series A Preferred Stock were converted into warrants to purchase 2,952,248 shares of common stock. See Note 10, Long-term Debt, for additional information. During the twelve months ended December 31, 2019, warrants were exercised for 66,476 shares of the Company’s common stock with a value of $0.1 million in a non-cash transaction. As of December 31, 2019, warrants to purchase 6,487,674 shares of common stock remain 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, 2019, cumulative shares purchased totaled 686,506 at an average purchase price per share of $14.55, excluding commissions. The repurchased shares are presented as treasury stock, at cost, 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 twelve months ended December 31, 2019 and 2018 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Foreign Currency Translation and Other
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
Balances at January 1, 2018, as reported
|
|
$
|
(390
|
)
|
|
$
|
10,400
|
|
|
$
|
10,010
|
|
|
Impact of ASU 2018-02(c)
|
|
80
|
|
|
480
|
|
|
560
|
|
|
Balances at January 1, 2018, 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 gains 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
|
|
|
Net unrealized gains arising during the period(a)
|
|
820
|
|
|
1,650
|
|
|
2,470
|
|
|
Less: Net realized gains reclassified to net income(b)
|
|
2,760
|
|
|
—
|
|
|
2,760
|
|
|
Amounts Reclassified from AOCI(d)
|
|
(20
|
)
|
|
(17,240
|
)
|
|
(17,260
|
)
|
|
Net current-period change
|
|
(1,960
|
)
|
|
(15,590
|
)
|
|
(17,550
|
)
|
|
Balances at December 31, 2019
|
|
$
|
—
|
|
|
$
|
(9,790
|
)
|
|
$
|
(9,790
|
)
|
__________________________
(a) Derivative instruments, net of income tax benefit (expense) of $0.0 million and $(1.4) million for the twelve months ended December 31, 2019 and 2018, respectively. See Note 11, Derivative Instruments, for further details.
(b) Derivative instruments, net of income tax benefit (expense) of $0.0 million and $1.3 million for the twelve months ended December 31, 2019 and 2018, respectively. See Note 11, Derivative Instruments, for further details.
(c) 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 “2017 Tax Act”). The Company adopted the standard during the third quarter of 2018, and the impact of the adoption was 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.
(d) Recognition of loss associated with the sale of the Company’s APAC segment. See Note 4, Discontinued Operations, for further details.
18. Segment Information
The Company groups its business into operating segments by the region in which sales and manufacturing efforts are focused, which are grouped on the basis of similar product, market and operating factors. Each operating segment has discrete financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance. The Company reports the results of its business in two operating segments: Horizon Americas and Horizon Europe‑Africa. Horizon Americas is comprised of the Company’s North American and South American operations. Horizon Europe‑Africa is comprised of the European and South African operations. See below for further information regarding the types of products and services provided within each operating segment.
Previously, the Company had three operating segments. However, as a result of its sale in the third quarter of 2019, we have removed APAC as a separate operating segment and its results are presented as a discontinued operation in the accompanying consolidated financial statements. Historical information has been retrospectively adjusted to reflect these changes. Please see Note 4, Discontinued Operations, for additional information.
Horizon Americas - A market leader in the design, manufacture and distribution of a wide variety of high-quality, custom engineered towing, trailering and cargo management products and related accessories. These products are designed to support 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 GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Horizon Europe‑Africa - With a product offering similar to Horizon Americas, Horizon Europe‑Africa focuses its sales and manufacturing efforts in the Europe and Africa regions of the world.
The following table presents the Company’s operating segment activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
Horizon Americas
|
|
$
|
372,720
|
|
|
$
|
390,750
|
|
|
Horizon Europe‑Africa
|
|
317,730
|
|
|
323,260
|
|
|
Total
|
|
$
|
690,450
|
|
|
$
|
714,010
|
|
|
Operating Loss
|
|
|
|
|
|
Horizon Americas
|
|
$
|
(10,390
|
)
|
|
$
|
(6,840
|
)
|
|
Horizon Europe‑Africa
|
|
(12,100
|
)
|
|
(148,630
|
)
|
|
Corporate
|
|
(34,680
|
)
|
|
(35,160
|
)
|
|
Total
|
|
$
|
(57,170
|
)
|
|
$
|
(190,630
|
)
|
|
Capital Expenditures
|
|
|
|
|
|
Horizon Americas
|
|
$
|
6,590
|
|
|
$
|
6,760
|
|
|
Horizon Europe‑Africa
|
|
3,080
|
|
|
4,500
|
|
|
Corporate
|
|
50
|
|
|
—
|
|
|
Total
|
|
$
|
9,720
|
|
|
$
|
11,260
|
|
|
Depreciation and Amortization of Intangible Assets
|
|
|
|
|
|
Horizon Americas
|
|
$
|
8,670
|
|
|
$
|
8,160
|
|
|
Horizon Europe‑Africa
|
|
11,720
|
|
|
12,090
|
|
|
Corporate
|
|
1,300
|
|
|
330
|
|
|
Total
|
|
$
|
21,690
|
|
|
$
|
20,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Total Assets
|
|
|
|
|
|
Horizon Americas
|
|
$
|
224,430
|
|
|
$
|
219,680
|
|
|
Horizon Europe-Africa
|
|
185,810
|
|
|
205,480
|
|
|
Corporate
|
|
10,800
|
|
|
25,320
|
|
|
Subtotal
|
|
421,040
|
|
|
450,480
|
|
|
Net assets held-for-sale
|
|
—
|
|
|
70,870
|
|
|
Total
|
|
$
|
421,040
|
|
|
$
|
521,350
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Net Sales
|
|
|
|
|
|
Total U.S.
|
|
$
|
362,690
|
|
|
$
|
380,720
|
|
|
Non-U.S.
|
|
|
|
|
|
Germany
|
|
209,120
|
|
|
186,430
|
|
|
Other Europe
|
|
95,700
|
|
|
118,590
|
|
|
Africa
|
|
15,940
|
|
|
19,880
|
|
|
Other Americas
|
|
7,000
|
|
|
8,390
|
|
|
Total non-U.S.
|
|
327,760
|
|
|
333,290
|
|
|
Total
|
|
$
|
690,450
|
|
|
$
|
714,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Property and equipment, net
|
|
|
|
|
|
Total U.S.
|
|
$
|
25,650
|
|
|
$
|
26,550
|
|
|
Non-U.S.
|
|
|
|
|
|
Germany
|
|
36,480
|
|
|
43,010
|
|
|
United Kingdom
|
|
—
|
|
|
620
|
|
|
Other Europe
|
|
7,780
|
|
|
8,820
|
|
|
Africa
|
|
3,930
|
|
|
5,320
|
|
|
Other Americas
|
|
1,990
|
|
|
2,180
|
|
|
Total non-U.S.
|
|
50,180
|
|
|
59,950
|
|
|
Total
|
|
$
|
75,830
|
|
|
$
|
86,500
|
|
The Company’s export sales from the U.S. approximated $36.5 million and $44.3 million for the twelve months ended December 31, 2019 and 2018, respectively.
19. Income Taxes
The Company’s loss from continuing operations before income tax, by tax jurisdiction, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Domestic
|
|
$
|
(91,100
|
)
|
|
$
|
(44,870
|
)
|
|
Foreign
|
|
(29,730
|
)
|
|
(186,010
|
)
|
|
Loss from continuing operations before income tax
|
|
$
|
(120,830
|
)
|
|
$
|
(230,880
|
)
|
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The income tax benefit (expense) is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Current income tax benefit (expense):
|
|
|
|
|
|
Federal
|
|
$
|
(1,660
|
)
|
|
$
|
10,070
|
|
|
State and local
|
|
60
|
|
|
(190
|
)
|
|
Foreign
|
|
5,140
|
|
|
(2,540
|
)
|
|
Total current income tax benefit
|
|
3,540
|
|
|
7,340
|
|
|
Deferred income tax benefit (expense):
|
|
|
|
|
|
Federal
|
|
140
|
|
|
(1,870
|
)
|
|
State and local
|
|
(290
|
)
|
|
160
|
|
|
Foreign
|
|
7,430
|
|
|
5,890
|
|
|
Total deferred income tax benefit
|
|
7,280
|
|
|
4,180
|
|
|
Income tax benefit
|
|
$
|
10,820
|
|
|
$
|
11,520
|
|
The components of deferred taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Deferred tax assets:
|
|
|
|
|
|
Receivables, net
|
|
$
|
600
|
|
|
$
|
890
|
|
|
Inventories
|
|
3,750
|
|
|
3,000
|
|
|
Disallowed interest deduction
|
|
19,210
|
|
|
5,250
|
|
|
Operating lease liabilities
|
|
14,150
|
|
|
—
|
|
|
Accrued liabilities and other long-term liabilities
|
|
7,970
|
|
|
8,270
|
|
|
Tax loss and credit carryforwards
|
|
31,670
|
|
|
21,470
|
|
|
Gross deferred tax asset
|
|
77,350
|
|
|
38,880
|
|
|
Valuation allowances
|
|
(50,370
|
)
|
|
(26,650
|
)
|
|
Net deferred tax asset
|
|
26,980
|
|
|
12,230
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Property and equipment, net
|
|
(3,190
|
)
|
|
(5,280
|
)
|
|
Other intangibles, net
|
|
(12,790
|
)
|
|
(16,890
|
)
|
|
Operating lease right-of-use assets
|
|
(11,240
|
)
|
|
—
|
|
|
Other
|
|
(3,370
|
)
|
|
(2,020
|
)
|
|
Gross deferred tax liability
|
|
(30,590
|
)
|
|
(24,190
|
)
|
|
Net deferred tax liability
|
|
$
|
(3,610
|
)
|
|
$
|
(11,960
|
)
|
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. As of December 31, 2018, given the decline in U.S. gross profit, the Company was 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 allowances of $5.7 million against certain of its deferred tax assets. As of December 31, 2019, certain foreign jurisdictions were in a three-year cumulative pre-tax
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
loss position; therefore, the Company recorded valuation allowances of $4.0 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.
The Company has recorded deferred tax assets of $37.4 million of federal operating loss carryforward, $61.9 million of various state operating loss carryforwards and $76.1 million of various foreign operating loss carryforwards. The federal loss carryforward has an indefinite carryforward period, the majority of the state tax loss carryforwards expire between 2030-2038, however, certain states now have indefinite carryforward periods. In addition, the majority of foreign losses have indefinite carryforward periods. A significant amount of the deferred tax assets discussed above are offset by a corresponding valuation allowance within the jurisdiction to which the deferred tax assets relate.
The following is a reconciliation of the Company’s provision for income taxes to income tax benefit computed at the U.S. federal statutory rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
U.S. federal statutory rate
|
|
21
|
%
|
|
21
|
%
|
|
Tax at U.S. federal statutory rate
|
|
$
|
25,370
|
|
|
$
|
48,480
|
|
|
State and local taxes, net of federal tax benefit
|
|
3,370
|
|
|
1,500
|
|
|
Differences in statutory foreign tax rates
|
|
4,310
|
|
|
13,930
|
|
|
Uncertain tax positions
|
|
6,620
|
|
|
2,680
|
|
|
Withholding taxes
|
|
—
|
|
|
(310
|
)
|
|
Tax credits
|
|
(4,460
|
)
|
|
3,980
|
|
|
Net change in valuation allowance
|
|
(24,970
|
)
|
|
(19,210
|
)
|
|
Transition tax
|
|
(1,740
|
)
|
|
(2,280
|
)
|
|
Goodwill
|
|
—
|
|
|
(36,560
|
)
|
|
Other, net
|
|
2,320
|
|
|
(690
|
)
|
|
Income tax benefit
|
|
$
|
10,820
|
|
|
$
|
11,520
|
|
Certain foreign subsidiary earnings are subject to U.S. taxation. No deferred taxes have been provided for taxes that would result upon repatriation of our foreign investments to the U.S. as it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations or should not give rise to additional income tax liabilities as a result of the distribution of such earnings.
Uncertain Tax Positions
The Company has $0.2 million and $5.7 million of uncertain tax positions (“UTPs”) as of December 31, 2019 and 2018, respectively. If the UTPs were recognized, the impact to the Company’s effective tax rate would be to increase reported income tax benefit for the twelve months ended December 31, 2019 and 2018, by $0.2 million and $5.7 million, respectively.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the change in the UTPs and related accrued interest and penalties as of December 31, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Uncertain Tax Positions
|
|
|
|
(dollars in thousands)
|
|
January 1, 2018
|
|
$
|
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
|
|
|
Tax positions related to current year:
|
|
|
|
Additions
|
|
—
|
|
|
Reductions
|
|
—
|
|
|
Tax positions related to prior years:
|
|
|
|
|
Additions
|
|
20
|
|
|
Reductions
|
|
(4,970
|
)
|
|
Settlements
|
|
—
|
|
|
Lapses in the statutes of limitations
|
|
(400
|
)
|
|
Cumulative translation adjustment
|
|
(100
|
)
|
|
Balance at December 31, 2019
|
|
$
|
210
|
|
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 $0.2 million related to interest and penalties incurred during the twelve months ended December 31, 2019, and recognized a liability for interest and penalties of $0.2 million as of December 31, 2019. During the twelve months ended December 31, 2018, the Company incurred interest and penalties of $1.4 million and recognized a liability for the interest and penalties of $1.4 million as of December 31, 2018.
The decrease in UTPs and liabilities for interest and penalties for tax positions related to prior years is primarily related to the income tax examination resolutions as well as the expiration of statutes of limitations in certain jurisdictions during the twelve months ended December 31, 2019 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, 2019, the Company is subject to U.S. federal tax examination for tax years 2017 through 2019. The Company is subject to state, local, and foreign income tax examinations for tax years 2011 through 2019. The Company’s German jurisdiction is subject to German federal tax examination for tax years 2017 through 2019. The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ from the amounts accrued. It is reasonably possible that within the next twelve months we may reach resolution of income tax examinations in one or more foreign jurisdictions. The Company does not believe that the results of these examinations will have a significant impact on the Company’s tax position or its effective tax rate.
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, 2019, the Company estimated $0.1 million of UTPs are expected to be released in the next twelve months.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
20. Other Expense, Net
Other expense, net consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(dollars in thousands)
|
|
Loss on sale of business
|
|
$
|
(3,630
|
)
|
|
$
|
—
|
|
|
Customer pay discounts
|
|
(1,510
|
)
|
|
(1,600
|
)
|
|
Accretion arising from lease recovery
|
|
(130
|
)
|
|
(240
|
)
|
|
Brazil acquisition indemnification asset
|
|
—
|
|
|
(4,300
|
)
|
|
Brink acquisition ticking fee
|
|
—
|
|
|
(5,130
|
)
|
|
Foreign currency gain / (loss)
|
|
50
|
|
|
(870
|
)
|
|
Other
|
|
(170
|
)
|
|
(660
|
)
|
|
Total
|
|
$
|
(5,390
|
)
|
|
$
|
(12,800
|
)
|
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% 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 H2 Equity Partners a breakup fee of $5.5 million. During the twelve months ended December 31, 2018, Horizon incurred transaction fees, including related financing costs, of $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 twelve months ended December 31, 2019.
21. Subsequent Events
Loan and Security Agreement
On March 13, 2020, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC, as agent for the lenders party thereto. The Loan Agreement provides for an asset-based revolving credit facility in the maximum aggregate principal amount of $75.0 million subject to customary borrowing base limitations contained therein, which amount may be increased at the Company’s request by up to $25.0 million. A portion of the proceeds received by the Company under the Loan Agreement were used to pay in full all outstanding debt incurred under the existing ABL Facility described in Note 10, Long-term Debt.
The interest on the loans under the Loan Agreement will be payable in cash at the interest rate of LIBOR plus 4.00% per annum, subject to a 1.00% LIBOR floor, provided that if for any reason the loans are converted to base rate loans, interest will be paid in cash at the customary base rate plus a margin of 3.00% per annum. There are no amortization payments required under the Loan Agreement. Borrowings under the Loan Agreement mature on the earlier of: (i) March 13, 2023 and (ii) 90 days prior to the maturity of any portion of the debt under the Company’s First Lien Term Loan or Second Lien Term Loan, as may be in effect from time to time, unless earlier terminated. Based on the maturity dates of the Company’s First Lien Term Loan and Second Lien Term Loan, the loans under the Loan Agreement would be due on March 31, 2021. All of the indebtedness under the Loan Agreement is and will be guaranteed by the Company and certain of the Company’s existing and future North American subsidiaries and is and will be secured by substantially all of the assets of the Company, such other guarantors, and the borrowers under the Loan Agreement.
The Loan Agreement also contains a financial covenant that stipulates the Company will not make Capital Expenditures (as defined in the Loan Agreement) exceeding $30.0 million during any fiscal year.
HORIZON GLOBAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
First Lien Term Loan Amendment and Second Lien Term Loan Amendment
Additionally, on March 13, 2020, the Company entered into the Ninth Amendment to the First Lien Term Loan Agreement (the “Ninth Term Amendment”) and Second Amendment to the Second Lien Term Loan Agreement (the “Second Lien Second Amendment”) to amend certain covenants. The Ninth Term Amendment and Second Lien Second Amendment each removed the $15.0 million minimum liquidity requirement under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement. The Ninth Term Amendment and Second Lien Second Amendment each amended net leverage ratio requirements under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement to remove the December 31, 2020 leverage ratio test, as set forth in the Eighth Term Amendment and Second Lien Amendment.
The Ninth Term Amendment and Second Lien Second Amendment also amended the fixed charge coverage ratio covenant under the First Lien Term Loan and Second Lien Term Loan to not be below 1.0 to 1.0 beginning with the fiscal quarter ending March 31, 2021.
The Company estimates it incurred $2.7 million of debt issuance costs and amendment fees associated with the above transactions. The transactions will be accounted for in the first quarter of 2020.
Covenant and Liquidity Matters
The Company is in compliance with all of its financial covenants as of December 31, 2019. As a result of the above series of amendments and entry into the Loan Agreement, and our current forecast through March 31, 2021, the Company believes it has sufficient liquidity to operate its business.