Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition contains forward-looking statements regarding industry outlook and our expectations regarding the performance of our business. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading “Forward-Looking Statements,” at the beginning of this report.Quarterly Report on Form 10-Q. Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with the Company’s reports on file with the Securities and Exchange Commission, as well as our Annual Report on Form 10-K for the year ended December 31, 20162019 (See Item 1A. Risk Factors).
If we are unable to do any of the foregoing successfully, our financial condition and results of operations could be materially and adversely impacted.
|
| | | | | | | | | | | | | | |
| | Three months ended September 30, |
| | 2017 | | As a Percentage of Net Sales | | 2016 | | As a Percentage of Net Sales |
| | (dollars in thousands) |
Net Sales | | | | | | | | |
Horizon Americas | | $ | 115,460 |
| | 48.1 | % | | $ | 110,730 |
| | 73.0 | % |
Horizon Europe-Africa | | 87,950 |
| | 36.6 | % | | 13,050 |
| | 8.6 | % |
Horizon Asia-Pacific | | 36,710 |
| | 15.3 | % | | 27,940 |
| | 18.4 | % |
Total | | $ | 240,120 |
| | 100.0 | % | | $ | 151,720 |
| | 100.0 | % |
Gross Profit | | | | | | | | |
Horizon Americas | | $ | 34,230 |
| | 29.6 | % | | $ | 33,590 |
| | 30.3 | % |
Horizon Europe-Africa | | 14,370 |
| | 16.3 | % | | 2,130 |
| | 16.3 | % |
Horizon Asia-Pacific | | 9,820 |
| | 26.8 | % | | 6,790 |
| | 24.3 | % |
Total | | $ | 58,420 |
| | 24.3 | % | | $ | 42,510 |
| | 28.0 | % |
Selling, General and Administrative Expenses | | | | | | | | |
Horizon Americas | | $ | 23,220 |
| | 20.1 | % | | $ | 20,690 |
| | 18.7 | % |
Horizon Europe-Africa | | 11,640 |
| | 13.2 | % | | 1,900 |
| | 14.6 | % |
Horizon Asia-Pacific | | 3,860 |
| | 10.5 | % | | 3,020 |
| | 10.8 | % |
Corporate | | 6,080 |
| | N/A |
| | 10,240 |
| | N/A |
|
Total | | $ | 44,800 |
| | 18.7 | % | | $ | 35,850 |
| | 23.6 | % |
Net Loss on Disposition of Property and Equipment | | | | | | | | |
Horizon Americas | | $ | (200 | ) | | (0.2 | )% | | $ | 10 |
| | — | % |
Horizon Europe-Africa | | (80 | ) | | (0.1 | )% | | (250 | ) | | (1.9 | %) |
Horizon Asia-Pacific | | (50 | ) | | (0.1 | )% | | 210 |
| | 0.8 | % |
Corporate | | — |
| | N/A |
| | — |
| | N/A |
|
Total | | $ | (330 | ) | | (0.1 | )% | | $ | (30 | ) | | — | % |
Operating Profit (Loss) | | | | | | | | |
Horizon Americas | | $ | 10,930 |
| | 9.5 | % | | $ | 12,910 |
| | 11.7 | % |
Horizon Europe-Africa | | 2,680 |
| | 3.0 | % | | 210 |
| | 1.6 | % |
Horizon Asia-Pacific | | 5,880 |
| | 16.0 | % | | 3,750 |
| | 13.4 | % |
Corporate | | (6,200 | ) | | N/A |
| | (10,240 | ) | | N/A |
|
Total | | $ | 13,290 |
| | 5.5 | % | | $ | 6,630 |
| | 4.4 | % |
Depreciation and Amortization | | | | | | | | |
Horizon Americas | | $ | 2,630 |
| | 2.3 | % | | $ | 2,910 |
| | 2.6 | % |
Horizon Europe-Africa | | 2,520 |
| | 2.9 | % | | 360 |
| | 2.8 | % |
Horizon Asia-Pacific | | 1,250 |
| | 3.4 | % | | 1,060 |
| | 3.8 | % |
Corporate | | 70 |
| | N/A |
| | 10 |
| | N/A |
|
Total | | $ | 6,470 |
| | 2.7 | % | | $ | 4,340 |
| | 2.9 | % |
The following table summarizes financial information for our reportableoperating segments for the nine months ended September 30, 20172Q20 and 2016:2Q19:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | Change | | | | Constant Currency Change | | |
| | 2020 | | As a Percentage of Net Sales | | 2019 | | As a Percentage of Net Sales | | $ | | % | | $ | | % |
| | (dollars in thousands) | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 74,120 | | | 61.5 | % | | $ | 108,950 | | | 56.6 | % | | $ | (34,830) | | | (32.0 | %) | | $ | (34,600) | | | (31.8 | %) |
Horizon Europe-Africa | | 46,370 | | | 38.5 | % | | 83,700 | | | 43.4 | % | | (37,330) | | | (44.6 | %) | | (36,520) | | | (43.6 | %) |
Total | | $ | 120,490 | | | 100.0 | % | | $ | 192,650 | | | 100.0 | % | | $ | (72,160) | | | (37.5 | %) | | $ | (71,120) | | | (36.9 | %) |
Gross Profit | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 18,140 | | | 24.5 | % | | $ | 26,900 | | | 24.7 | % | | $ | (8,760) | | | (32.6 | %) | | $ | (8,570) | | | (31.9 | %) |
Horizon Europe-Africa | | (90) | | | (0.2) | % | | 9,410 | | | 11.2 | % | | (9,500) | | | (101.0 | %) | | (9,560) | | | (101.6 | %) |
Total | | $ | 18,050 | | | 15.0 | % | | $ | 36,310 | | | 18.8 | % | | $ | (18,260) | | | (50.3 | %) | | $ | (18,130) | | | (49.9 | %) |
Selling, General and Administrative Expenses | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 14,720 | | | 19.9 | % | | $ | 17,450 | | | 16.0 | % | | $ | (2,730) | | | (15.6 | %) | | $ | (2,530) | | | (14.5 | %) |
Horizon Europe-Africa | | 5,860 | | | 12.6 | % | | 7,800 | | | 9.3 | % | | (1,940) | | | (24.9 | %) | | (1,780) | | | (22.8 | %) |
Corporate | | 5,420 | | | N/A | | 8,420 | | | N/A | | (3,000) | | | (35.6 | %) | | (3,000) | | | (35.6 | %) |
Total | | $ | 26,000 | | | 21.6 | % | | $ | 33,670 | | | 17.5 | % | | $ | (7,670) | | | (22.8 | %) | | $ | (7,310) | | | (21.7 | %) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating Profit (Loss) | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 3,430 | | | 4.6 | % | | $ | 9,490 | | | 8.7 | % | | $ | (6,060) | | | (63.9 | %) | | $ | (6,080) | | | (64.1 | %) |
Horizon Europe-Africa | | (5,970) | | | (12.9) | % | | 1,580 | | | 1.9 | % | | (7,550) | | | (477.8 | %) | | (7,770) | | | (491.8 | %) |
Corporate | | (5,430) | | | N/A | | (8,420) | | | N/A | | 2,990 | | | (35.5 | %) | | 2,990 | | | (35.5 | %) |
Total | | $ | (7,970) | | | (6.6) | % | | $ | 2,650 | | | 1.4 | % | | $ | (10,620) | | | (400.8 | %) | | $ | (10,860) | | | (409.8 | %) |
Capital Expenditures | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 900 | | | 1.2 | % | | $ | 3,070 | | | 2.8 | % | | $ | (2,170) | | | (70.7 | %) | | $ | (2,170) | | | (70.7 | %) |
Horizon Europe-Africa | | 490 | | | 1.1 | % | | 1,050 | | | 1.3 | % | | (560) | | | (53.3 | %) | | (200) | | | (19.0 | %) |
Corporate | | — | | | N/A | | 10 | | | N/A | | (10) | | | (100.0 | %) | | (10) | | | (100.0 | %) |
Total | | $ | 1,390 | | | 1.2 | % | | $ | 4,130 | | | 2.1 | % | | $ | (2,740) | | | (66.3 | %) | | $ | (2,380) | | | (57.6 | %) |
Depreciation and Amortization of Intangible Assets | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 2,040 | | | 2.8 | % | | $ | 2,280 | | | 2.1 | % | | $ | (240) | | | (10.5 | %) | | $ | (200) | | | (8.8 | %) |
Horizon Europe-Africa | | 3,370 | | | 7.3 | % | | 2,940 | | | 3.5 | % | | 430 | | | 14.6 | % | | 540 | | | 18.4 | % |
Corporate | | 60 | | | N/A | | 90 | | | N/A | | (30) | | | (33.3 | %) | | (30) | | | (33.3 | %) |
Total | | $ | 5,470 | | | 4.5 | % | | $ | 5,310 | | | 2.8 | % | | $ | 160 | | | 3.0 | % | | $ | 310 | | | 5.8 | % |
Adjusted EBITDA | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 5,900 | | | 8.0 | % | | $ | 12,060 | | | 11.1 | % | | $ | (6,160) | | | (51.1 | %) | | N/A | | N/A |
Horizon Europe-Africa | | (2,150) | | | (4.6) | % | | 4,410 | | | 5.3 | % | | (6,560) | | | (148.8 | %) | | N/A | | N/A |
Corporate | | (3,710) | | | N/A | | (4,190) | | | N/A | | 480 | | | (11.5 | %) | | N/A | | N/A |
Total | | $ | 40 | | | 0.03 | % | | $ | 12,280 | | | 6.4 | % | | $ | (12,240) | | | (99.7 | %) | | N/A | | N/A |
|
| | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | As a Percentage of Net Sales | | 2016 | | As a Percentage of Net Sales |
| | (dollars in thousands) |
Net Sales | | | | | | | | |
Horizon Americas | | $ | 351,400 |
| | 50.4 | % | | $ | 350,170 |
| | 75.2 | % |
Horizon Europe-Africa | | 253,070 |
| | 36.3 | % | | 39,600 |
| | 8.5 | % |
Horizon Asia-Pacific | | 92,520 |
| | 13.3 | % | | 75,820 |
| | 16.3 | % |
Total | | $ | 696,990 |
| | 100.0 | % | | $ | 465,590 |
| | 100.0 | % |
Gross Profit | | | | | | | | |
Horizon Americas | | $ | 105,780 |
| | 30.1 | % | | $ | 102,290 |
| | 29.2 | % |
Horizon Europe-Africa | | 42,070 |
| | 16.6 | % | | 6,550 |
| | 16.5 | % |
Horizon Asia-Pacific | | 23,630 |
| | 25.5 | % | | 16,990 |
| | 22.4 | % |
Total | | $ | 171,480 |
| | 24.6 | % | | $ | 125,830 |
| | 27.0 | % |
Selling, General and Administrative Expenses | | | | | | | | |
Horizon Americas | | $ | 66,810 |
| | 19.0 | % | | $ | 64,190 |
| | 18.3 | % |
Horizon Europe-Africa | | 36,120 |
| | 14.3 | % | | 5,700 |
| | 14.4 | % |
Horizon Asia-Pacific | | 10,310 |
| | 11.1 | % | | 8,120 |
| | 10.7 | % |
Corporate | | 21,040 |
| | N/A |
| | 19,500 |
| | N/A |
|
Total | | $ | 134,280 |
| | 19.3 | % | | $ | 97,510 |
| | 20.9 | % |
Net Loss on Disposition of Property and Equipment | | | | | | | | |
Horizon Americas | | $ | (240 | ) | | (0.1 | )% | | $ | (230 | ) | | (0.1 | %) |
Horizon Europe-Africa | | — |
| | — | % | | (270 | ) | | (0.7 | %) |
Horizon Asia-Pacific | | (80 | ) | | (0.1 | )% | | (20 | ) | | — | % |
Corporate | | (10 | ) | | N/A |
| | — |
| | N/A |
|
Total | | $ | (330 | ) | | — | % | | $ | (520 | ) | | (0.1 | %) |
Operating Profit (Loss) | | | | | | | | |
Horizon Americas | | $ | 38,840 |
| | 11.1 | % | | $ | 35,630 |
| | 10.2 | % |
Horizon Europe-Africa | | 5,950 |
| | 2.4 | % | | 600 |
| | 1.5 | % |
Horizon Asia-Pacific | | 13,240 |
| | 14.3 | % | | 8,830 |
| | 11.6 | % |
Corporate | | (21,160 | ) | | N/A |
| | (19,500 | ) | | N/A |
|
Total | | $ | 36,870 |
| | 5.3 | % | | $ | 25,560 |
| | 5.5 | % |
Depreciation and Amortization | | | | | | | | |
Horizon Americas | | $ | 8,020 |
| | 2.3 | % | | $ | 8,580 |
| | 2.5 | % |
Horizon Europe-Africa | | 6,570 |
| | 2.6 | % | | 1,290 |
| | 3.3 | % |
Horizon Asia-Pacific | | 3,150 |
| | 3.4 | % | | 3,070 |
| | 4.0 | % |
Corporate | | 200 |
| | N/A |
| | 30 |
| | N/A |
|
Total | | $ | 17,940 |
| | 2.6 | % | | $ | 12,970 |
| | 2.8 | % |
Results of Operations Three Months Ended SeptemberJune 30, 20172020 Compared withto Three Months Ended SeptemberJune 30, 20162019
Overall,Consolidated net sales decreased by $72.2 million, or 37.5%, to $120.5 million in 2Q20, as compared with $192.7 million in 2Q19, driven by a decrease in net sales in Horizon Americas and Horizon Europe-Africa, attributable to the continued impacts of economic uncertainty and business disruptions in these jurisdictions associated with the COVID-19 pandemic that began during the first quarter 2020. The decrease in net sales within Horizon Americas of $34.8 million was primarily driven by declines in sales volumes in the automotive OEM, retail and aftermarket sales channels. The decrease in net sales of $37.3 million in Horizon Europe-Africa was primarily driven by declines in sales volumes in the automotive OEM, automotive OES and aftermarket sales channels. However, the Company had positive momentum as the quarter progressed as economies and our manufacturing facilities began to reopen during this time period with consolidated net sales increasing each month.
The table below summarizes consolidated net sales for each month during the months ended March-June 2020 and 2019, as compared to the prior-year month ended:
| | | | | | | | | | | | | | | | | | | | |
| | Month Ended | | | | |
| | 2020 | | 2019 | | 2020 as a percentage of 2019 |
| | (dollars in thousands) | | | | |
March | | $ | 49,160 | | | $ | 75,360 | | | 65.2 | % |
April | | 20,030 | | | 58,370 | | | 34.3 | % |
May | | 38,820 | | | 60,250 | | | 64.4 | % |
June | | 61,640 | | | 74,030 | | | 83.3 | % |
Consolidated net sales increased approximately $88.4 million, or 58.3%, to $240.1 millionmonth-over-month in the three months ended September 30, 2017,substantially all of our sales channels in May and June 2Q20, as compared with $151.7 million into the three months ended September 30, 2016. During the third quarter of 2017,prior month’s net sales. The table below summarizes May to April and June to May net sales within our Horizon Europe-Africa reportable segment increased $74.9 million primarily driven by our fourth quarter 2016 acquisitionas percent of change over the Westfalia Group. Horizon Asia-Pacific reportable segment increased by $8.8 million attributable, in part, to a regional bolt-on acquisition in the quarter and net sales to a new customer. In our Horizon Americas reportable segment, net sales increased $4.7 million driven by increased net sales across most of our channels, except our retail channel, which remained relatively flat quarter-over-quarter.prior month:
| | | | | | | | | | | | | | |
| | Percentage Increase (Decrease) in Net Sales Month-over-Month | | |
| | May 2020 compared to April 2020 | | June 2020 compared to May 2020 |
Automotive OEM | | 348.6 | % | | 123.7 | % |
Automotive OES | | 40.8 | % | | 20.3 | % |
Aftermarket | | 70.3 | % | | 72.2 | % |
Retail | | 54.7 | % | | 14.2 | % |
Industrial | | 54.6 | % | | 27.9 | % |
E-commerce | | 87.7 | % | | 32.8 | % |
Total | | 93.8 | % | | 58.8 | % |
Gross profit margin (gross profit as a percentage of net sales) approximated 24.3%was 15.0% and 28.0% for the three months ended September 30, 201718.8% during 2Q20 and 2016,2Q19, respectively. The overall decrease in grossGross profit margin iswas negatively impacted in both operating segments primarily due to the resultcontinued impacts of a shiftCOVID-19 and related sales volume declines.
Selling, general and administrative (“SG&A”) expenses decreased by $7.7 million, primarily attributable to lower distribution center lease, operating and support costs in the concentration of net sales from our higher margin Horizon Americas reportable segment to our lower marginAmericas. In Horizon Europe-Africa, reportable segment. Further negatively impacting gross profit marginlower administrative and personnel cost savings were unfavorable commodity prices and higher freight costs in our Horizon Americas reportable segment which resulted in a decrease in gross profit margin quarter-over-quarter. These declines were partially offset by an improvement in our Horizon Asia-Pacific reportable segment primarilyrealized as a result of prior-year restructuring and business rationalization projects, as well as the reimbursement of certain payroll costs as part of a government payroll reimbursement program. Additionally, Corporate incurred $2.8 million of higher sales volumesprofessional service fees and productivity initiatives. Gross profit margin remained relatively flatother costs incurred in our Horizon Europe-Africa reportable segment.2Q19 related to a new debt issuance, amendments, and modifications and related structure changes.
Operating profit margin (operating profit (loss) as a percentage of net sales) approximated 5.5%was (6.6)% and 4.4%1.4% in the three months ended September 30, 20172Q20 and 2016,2Q19, respectively. Operating profitloss increased approximately $6.7by $10.7 million or 100.5%, to an operating loss of $8.0 million in 2Q20, from an operating profit of $13.3$2.7 million in 2Q19, primarily as a result of the three months ended September 30, 2017, from operating profit of $6.6 million in the three months ended September 30, 2016, primarily due to higher sales volumes from the aforementioned acquisitions along with lower corporate expenses as acquisition and integration costs were lower quarter-over-quarter. These positive impacts were partially offset by a decline in our Horizon Americas reportable segment as this segment was negatively impacted by higher commodity, freight, and legal costs.operational results detailed above.
Interest expense increased approximately $1.4 million, to $5.5 million, in the three months ended September 30, 2017, as compared to $4.1 million in the three months ended September 30, 2016, primarily due to additional interest and non-cash amortization of debt discount and issuance costs related to our Convertible Notes issued during the first quarter of 2017.
Other expense, net increased approximately $0.3by $1.0 million to $1.3$0.5 million in the three months ended September 30, 2017,2Q20, as compared to $1.0income of $0.5 million in 2Q19, primarily attributable to a $0.2 million foreign currency loss in 2Q20 as compared to a $0.7 million foreign currency gain in 2Q19.
Interest expense decreased by $7.1 million to $8.2 million in 2Q20, compared to $15.3 million in 2Q19. Interest expense decreased primarily as a result of the three months endedpay down of principal on the Company’s First Lien Term Loan (as defined below) in September 30, 2016, primarily due2019, which resulted in lower borrowings as well as lower interest rates compared to losses on financing transactions denominated in foreign currencies within certain of our Horizon Asia-Pacific locations.2Q19.
The effective income tax rate for the three months ended September 30, 2017continuing operations for 2Q20 and 20162Q19 was (1.9)(0.5)% and 75.8%8.5%, respectively. The 2Q20 lower effective tax rate compared to the statutory tax rate is attributable to the valuation allowance recorded in the US and several foreign jurisdictions at June 30, 2020, which resulted in no income tax rate in the three months ended September 30, 2017 is driven by a higher portion of income earned in jurisdictions with lower statutory rates and the recognition of additional tax creditsbenefit recognized in the U.S.for jurisdictional pretax losses.
Net incomeloss from continuing operations increased approximately $6.2by $5.6 million to $6.6a net loss of $16.7 million in the three months ended September 30, 2017,2Q20, compared to a net loss from net incomecontinuing operations of $0.4$11.1 million in the three months ended September 30, 2016. The increase was2Q19, primarily theas a result of a $6.7 million increasethe operational results detailed above.
Income from discontinued operations, net of tax is attributable to the sale of the Company’s former APAC operating segment, which was sold in operating profit driven by higher sales volumes and lower corporate expenses.September 2019. APAC has been presented as discontinued operations in our condensed consolidated financial statements in accordance with FASB ASC 205, Discontinued Operations. See Note 3, Discontinued Operations, included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” within this Quarterly Report on Form 10-Q for further description of the Company’s discontinued operations.
See below for a discussion of operating results by segment.
Horizon Americas.Americas
Net sales increased approximately $4.7by sales channel, in thousands, for Horizon Americas during 2Q20 and 2Q19 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Change | | |
| | 2020 | | 2019 | | $ | | % |
Net Sales | | | | | | | | |
Automotive OEM | | $ | 9,510 | | | $ | 23,680 | | | $ | (14,170) | | | (59.8) | % |
Automotive OES | | 1,080 | | | 1,810 | | | (730) | | | (40.3) | % |
Aftermarket | | 22,280 | | | 28,840 | | | (6,560) | | | (22.7) | % |
Retail | | 22,830 | | | 33,200 | | | (10,370) | | | (31.2) | % |
Industrial | | 5,040 | | | 6,930 | | | (1,890) | | | (27.3) | % |
E-commerce | | 13,370 | | | 14,470 | | | (1,100) | | | (7.6) | % |
Other | | 10 | | | 20 | | | (10) | | | N/A |
Total | | $ | 74,120 | | | $ | 108,950 | | | $ | (34,830) | | | (32.0) | % |
Horizon Americas 2Q20 results continued to be negatively impacted by the COVID-19 pandemic. As a result, net sales decreased by $34.8 million, or 4.3%32.0%, to $115.5$74.1 million in the three months ended September 30, 2017,2Q20, as compared to $110.7$109.0 million in the three months ended September 30, 2016. Net sales increased induring 2Q19, primarily attributable to lower volumes across all of our marketsales channels, exceptdue to the effects of the COVID-19 pandemic in 2Q20. This decrease was partially offset by a $3.2 million decrease in sales discounts, returns and allowances in 2Q20 as compared with 2Q19. The demand for our retail channel. Netproducts remained strong and we began to see a strong rebound in our net sales in May and June 2020 as economies and our automotive OE channel increased approximately $2.0 million, primarily dueprimary manufacturing facilities began to increased volume of brake controllersreopen and heavy duty products on existing programs. Netour Edgerton, Kansas, distribution facility ramped up to meet demand during this time period.
The table below summarizes Horizon Americas net sales in our e-commerce channel increased approximately $1.2 million primarily duefor each month during the months ended March-June 2020 and 2019, as compared to higher demand as we believe the way consumers do business appears to be evolving to online research and purchasing. Partially offsetting this increase was reduced sales to certain customers who did not maintain channel pricing discipline. Net sales in our aftermarket channel increased approximately $1.0 million based on increased sales with our warehouse distribution partners. In our industrial channel,prior-year month ended:
| | | | | | | | | | | | | | | | | | | | |
| | Month Ended | | | | |
| | 2020 | | 2019 | | 2020 as a percentage of 2019 |
| | (dollars in thousands) | | | | |
March | | $ | 29,200 | | | $ | 41,170 | | | 70.9 | % |
April | | 13,560 | | | 33,790 | | | 40.1 | % |
May | | 23,760 | | | 33,710 | | | 70.5 | % |
June | | 36,800 | | | 41,450 | | | 88.8 | % |
Horizon Americas’ net sales increased by approximately $0.6 million due to increased product availability and consumer demand for on-road trailers. Net sales were relatively flatmonth-over-month in our retail channel, with an approximate $0.1 million decrease, as higher sales in farm and fleet and auto retail were more than offset by a decrease with our mass merchant customers. The remaindersubstantially all of the change is a result of favorable currency exchangesales channels in May and June 2Q20, as the Brazilian real strengthened in relationcompared to the U.S. dollar.prior month’s net sales. The table below summarizes May to April and June to May net sales as percent of change over the prior month:
| | | | | | | | | | | | | | |
| | Percentage Increase (Decrease) in Net Sales Month-over-Month | | |
| | May 2020 compared to April 2020 | | June 2020 compared to May 2020 |
Automotive OEM | | 363.7 | % | | 169.6 | % |
Automotive OES | | (27.1) | % | | 31.8 | % |
Aftermarket | | 77.4 | % | | 90.1 | % |
Retail | | 54.7 | % | | 14.2 | % |
Industrial | | 48.0 | % | | 26.2 | % |
E-commerce | | 84.0 | % | | 30.3 | % |
Total | | 75.2 | % | | 54.9 | % |
Horizon Americas’ gross profit increased approximately $0.6decreased by $8.8 million to $34.2$18.1 million in 2Q20 compared to $26.9 million in 2Q19. The decrease in gross profit margin reflects the changes in sales detailed above. Additionally, gross profit was impacted by the following:
–$2.9 million of favorable manufacturing costs;
–$1.7 million lower scrap costs and inventory reserves; and
–$1.2 million in lower outbound freight costs.
SG&A expenses decreased by $2.8 million to $14.7 million, or 29.6%19.9% of net sales, in the three months ended September 30, 2017, from approximately $33.6 million, or 30.3% of net sales, in the three months ended September 30, 2016. The increase in gross profit was due to the higher sales volumes discussed above. The primary factors negatively impacting gross profit margin were $2.6 million of unfavorable commodity prices and higher freight costs. Partially offsetting these decreases were approximately $0.5 million of lower costs associated with the consolidation of our manufacturing facilities during the third
quarter of 2016 that did not reoccur in 2017. Also benefiting gross profit margin were improved customer and product sales mix and pricing increases we were able to pass on to customers.
Selling, general and administrative expenses increased approximately $2.5 million to $23.2 million, or 20.1% of net sales, in the three months ended September 30, 2017,2Q20, as compared to $20.7 million, or 18.7% of net sales, in the three months ended September 30, 2016. The increase is primarily due to costs associated with a project to optimize our distribution footprint, increased variable distribution costs, and higher legal costs associated with protecting our intellectual property.
Horizon Americas’ operating profit decreased approximately $2.0 million to $10.9 million, or 9.5% of net sales, in the three months ended September 30, 2017, as compared to $12.9 million, or 11.7% of net sales, in the three months ended September 30, 2016. Operating profit margin decreased due to unfavorable commodity prices and higher freight, variable distribution, and legal costs. Also contributing to the decline in operating profit were costs associated with optimizing our distribution footprint. These decreases were partially offset by increased sales levels.
Horizon Europe-Africa. Net sales increased approximately $74.9 million, or 573.9%, to $88.0 million in the three months ended September 30, 2017, compared to $13.1 million in the three months ended September 30, 2016, primarily due to the acquisition of the Westfalia Group in the fourth quarter of 2016.
Horizon Europe-Africa’s gross profit increased approximately $12.2 million to $14.4 million, or 16.3% of net sales, in the three months ended September 30, 2017, from approximately $2.1 million, or 16.3% of net sales, in the three months ended September 30, 2016. The increase in gross profit is attributable to the Westfalia Group acquisition.
Selling, general and administrative expenses increased approximately $9.7 million to $11.6 million, or 13.2% of net sales, in the three months ended September 30, 2017, as compared to $1.9 million, or 14.6% of net sales, in the three months ended September 30, 2016. The increase is primarily attributable to the aforementioned acquisition, which includes $2.0 million of depreciation and amortization related to purchase accounting. Further contributing to the increase was approximately $1.1 million of severance and integration related costs in connection with the acquisition during the quarter.
Horizon Europe-Africa’s operating profit increased approximately $2.5 million to $2.7 million, or 3.0% of net sales, in the three months ended September 30, 2017, as compared to $0.2 million, or 1.6% of net sales, in the three months ended September 30, 2016, primarily attributable to the acquisition mentioned above.
Horizon Asia-Pacific. Net sales increased approximately $8.8 million, or 31.4%, to $36.7 million in the three months ended September 30, 2017, compared to $27.9 million in the three months ended September 30, 2016. The increase in net sales is attributable, in part, to a regional bolt-on acquisition early in the quarter, which increased net sales by approximately $6.0 million. Excluding the impact from this acquisition, net sales in our automotive OE channel decreased $0.6 million, primarily attributable to volume from a program that did not continue into 2017. The aftermarket sales channel decreased approximately $0.5 million due to reduced sales with a customer that did not maintain market discipline. Net sales in the industrial channel increased approximately $2.5 million due to increased sales with a new customer acquired in late 2016. The remainder of the increase is primarily due to favorable currency exchange as the Australian dollar, Thai baht, and New Zealand dollar strengthened in relation to the U.S. dollar.
Horizon Asia-Pacific’s gross profit increased approximately $3.0 million to $9.8 million, or 26.8% of net sales, in the three months ended September 30, 2017, from approximately $6.8 million, or 24.3% of net sales, in the three months ended September 30, 2016. The increase in gross profit is primarily driven by the increased sales volumes, which increased gross profit by $2.1 million. Gross profit margin was positively impacted by the results of ongoing productivity initiatives in our Australian business and efficiencies realized in Thailand as a result of the restructuring of operations completed in the second quarter of 2017.
Selling, general and administrative expenses increased approximately $0.8 million to $3.9 million, or 10.5% of net sales, in the three months ended September 30, 2017, as compared to $3.0 million, or 10.8% of net sales, in the three months ended September 30, 2016. The increase in selling, general and administrative expenses is primarily due to the aforementioned acquisition, which contributed $0.4 million of acquisition-related costs. Further impacting selling, general and administrative expenses during the quarter was increased personnel costs of $0.3 million in support of growth and productivity initiatives. The balance of the increase in selling, general and administrative expenses was caused by unfavorable currency exchange.
Horizon Asia-Pacific’s operating profit increased approximately $2.1 million to $5.9$17.5 million, or 16.0% of net sales, in 2Q19. The decrease in SG&A expenses was attributable to the three months ended September 30, 2017, as comparedfollowing:
–$1.3 million of lower distribution center lease, operating and support costs; and
–$1.2 million of lower litigation and other administrative costs.
Horizon Americas’ operating margin decreased by $6.1 million to $3.8an operating profit of $3.4 million, or 13.4%4.6% of net sales, in 2Q20, as compared to an operating profit of $9.5 million, or 8.7% of net sales, in 2Q19. Operating margin declined primarily due to the threeoperational results detailed above.
Horizon Americas’ Adjusted EBITDA decreased by $6.2 million to $5.9 million in 2Q20, as compared to Adjusted EBITDA of $12.1 million in 2Q19. Adjusted EBITDA declined primarily due to the operational results above.
Horizon Europe-Africa
Net sales by sales channel, in thousands, for Horizon Europe-Africa during 2Q20 and 2Q19 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Change | | |
| | 2020 | | 2019 | | $ | | % |
Net Sales | | | | | | | | |
Automotive OEM | | $ | 20,620 | | | $ | 45,780 | | | $ | (25,160) | | | (55.0) | % |
Automotive OES | | 7,720 | | | 16,040 | | | (8,320) | | | (51.9) | % |
Aftermarket | | 16,680 | | | 20,070 | | | (3,390) | | | (16.9) | % |
| | | | | | | | |
Industrial | | 340 | | | 860 | | | (520) | | | (60.5) | % |
E-commerce | | 230 | | | 560 | | | (330) | | | (58.9) | % |
Other | | 780 | | | 390 | | | 390 | | | 100.0 | % |
Total | | $ | 46,370 | | | $ | 83,700 | | | $ | (37,330) | | | (44.6) | % |
Horizon Europe-Africa 2Q20 results continued to be negatively impacted by the COVID-19 pandemic as the Company temporarily idled certain manufacturing facilities in the first half of 2Q20, in line with customer demand and in accordance with applicable government mandated operational restrictions. As a result, net sales decreased by $37.3 million, or 44.6%, to $46.4 million in 2Q20, as compared to $83.7 million in 2Q19, primarily attributable to lower volumes in the automotive OEM, automotive OES and aftermarket sales channels. As the operational restrictions began to ease and economies of these
jurisdictions began to reopen, our primary manufacturing facilities also reopened with improving results as the quarter progressed.
The table below summarizes Horizon Europe-Africa net sales for each month during the months ended September 30, 2016,March-June 2020 and 2019, as compared to the prior-year month ended:
| | | | | | | | | | | | | | | | | | | | |
| | Month Ended | | | | |
| | 2020 | | 2019 | | 2020 as a percentage of 2019 |
| | (dollars in thousands) | | | | |
March | | $ | 19,960 | | | $ | 34,190 | | | 58.4 | % |
April | | 6,470 | | | 24,580 | | | 26.3 | % |
May | | 15,060 | | | 26,540 | | | 56.7 | % |
June | | 24,840 | | | 32,580 | | | 76.2 | % |
Horizon Europe-Africa’s net sales increased month-over-month in substantially all of the sales channels in May and June 2Q20, as compared to the prior month’s net sales. The table below summarizes May to April and June to May net sales as percent of change over the prior month:
| | | | | | | | | | | | | | |
| | Percentage Increase (Decrease) in Net Sales Month-over-Month | | |
| | May 2020 compared to April 2020 | | June 2020 compared to May 2020 |
Automotive OEM | | 343.1 | % | | 106.0 | % |
Automotive OES | | 56.6 | % | | 19.0 | % |
Aftermarket | | 62.4 | % | | 51.0 | % |
Industrial(1) | | NMF | | 153.8 | % |
E-commerce(1) | | NMF | | 62.3 | % |
Total | | 132.8 | % | | 64.9 | % |
(1)NMF is defined as No Meaningful Formula.
Horizon Europe-Africa’s gross profit decreased by $9.5 million to $0.1 million in 2Q20, as compared to $9.4 million in 2Q19. The decrease in gross profit margin reflects the changes in sales detailed above. In addition, gross profit was impacted by the following:
–$1.6 million of lower outbound freight costs; and
–$2.8 million of payroll reimbursement costs received in 2Q20 under terms of government payroll reimbursement programs, which includes the KUG (as defined in the Liquidity section below).
SG&A expenses decreased by $1.9 million to $5.9 million, or 12.6% of net sales, in 2Q20, as compared to $7.8 million, or 9.3% of net sales, in 2Q19. The decrease in SG&A expenses was primarily attributable to the following:
–$1.6 million of lower personnel and compensation costs, which includes $0.4 million of payroll reimbursement costs received in 2Q20 under terms of government payroll reimbursement programs, which includes the KUG.
Horizon Europe-Africa’s operating margin decreased by $7.6 million to an operating loss of $(6.0) million, or (12.9)% of net sales, in 2Q20, as compared to an operating profit of $1.6 million, or 1.9% of net sales, in 2Q19. Operating margin declined primarily due to increased sales volumes andthe operational improvements, partially offsetresults detailed above.
Horizon Europe-Africa’s Adjusted EBITDA decreased by acquisition costs.$6.6 million to $(2.2) million in 2Q20, as compared to Adjusted EBITDA of $4.4 million in 2Q19. Adjusted EBITDA decreased primarily due to the operational results described above.
Corporate Expenses.Expenses
Corporate expenses included in operating profitloss decreased approximately $4.0by $3.0 million to $6.2$5.4 million in the three months ended September 30, 2017,2Q20, as compared to $10.2$8.4 million in 2Q19. The decrease was primarily attributable to $2.8 million of higher professional service fees and other costs incurred in 2Q19 related to a new debt issuance, amendments, and modifications and related structure changes.
Corporate Adjusted EBITDA was $(3.7) million during 2Q20, which was an improvement of $0.5 million, as compared to Adjusted EBITDA of $(4.2) million in 2Q19. Adjusted EBITDA improved primarily due to lower discretionary and administrative support costs in 2Q20.
The following table summarizes Adjusted EBITDA for our operating segments for the threesix months ended SeptemberJune 30, 2016. 2020 (“2Q20 YTD”):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | | | | | |
| | Horizon Americas | | Horizon Europe-Africa | | Corporate | | Consolidated |
| | (dollars in thousands) | | | | | | |
Net loss attributable to Horizon Global | | | | | | | | $ | (33,080) | |
Net loss attributable to noncontrolling interest | | | | | | | | (670) | |
Net loss | | | | | | | | $ | (33,750) | |
Interest expense | | | | | | | | 16,410 | |
Income tax expense | | | | | | | | 70 | |
Depreciation and amortization | | | | | | | | 10,530 | |
EBITDA | | $ | 10,290 | | | $ | (4,340) | | | $ | (12,690) | | | $ | (6,740) | |
Net loss attributable to noncontrolling interest | | — | | | 670 | | | — | | | 670 | |
Loss from discontinued operations, net of tax | | — | | | — | | | 500 | | | 500 | |
Severance | | 530 | | | 20 | | | (10) | | | 540 | |
Restructuring, relocation and related business disruption costs | | 1,300 | | | 30 | | | 320 | | | 1,650 | |
| | | | | | | | |
Non-cash stock compensation | | — | | | — | | | 1,320 | | | 1,320 | |
| | | | | | | | |
Loss (gain) on business divestitures and other assets | | 600 | | | (180) | | | 40 | | | 460 | |
| | | | | | | | |
Product liability and litigation claims | | — | | | 1,510 | | | — | | | 1,510 | |
Debt issuance costs | | — | | | — | | | 1,310 | | | 1,310 | |
Unrealized foreign currency remeasurement costs | | (700) | | | 2,440 | | | 10 | | | 1,750 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 12,020 | | | $ | 150 | | | $ | (9,200) | | | $ | 2,970 | |
The decrease is attributed to approximately $4.6 millionfollowing table summarizes Adjusted EBITDA for our operating segments for the six months ended June 30, 2019 (“2Q19 YTD”):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | | | | | |
| | Horizon Americas | | Horizon Europe-Africa | | Corporate | | Consolidated |
| | (dollars in thousands) | | | | | | |
Net loss attributable to Horizon Global | | | | | | | | $ | (33,180) | |
Net loss attributable to noncontrolling interest | | | | | | | | (580) | |
Net loss | | | | | | | | $ | (33,760) | |
Interest expense | | | | | | | | 26,150 | |
Income tax benefit | | | | | | | | (1,310) | |
Depreciation and amortization | | | | | | | | 10,520 | |
EBITDA | | $ | 11,250 | | | $ | 580 | | | $ | (10,230) | | | $ | 1,600 | |
Net loss attributable to noncontrolling interest | | — | | | 580 | | | — | | | 580 | |
Income from discontinued operations, net of tax | | — | | | — | | | (6,770) | | | (6,770) | |
Severance | | (190) | | | — | | | — | | | (190) | |
Restructuring, relocation and related business disruption costs | | 1,310 | | | (1,410) | | | — | | | (100) | |
| | | | | | | | |
Non-cash stock compensation | | — | | | — | | | 970 | | | 970 | |
| | | | | | | | |
Loss on business divestitures and other assets | | 960 | | | 3,630 | | | 1,320 | | | 5,910 | |
Board transition support | | — | | | — | | | 1,450 | | | 1,450 | |
Product liability and litigation claims | | — | | | 4,320 | | | — | | | 4,320 | |
Debt issuance costs | | — | | | — | | | 3,040 | | | 3,040 | |
Unrealized foreign currency remeasurement costs | | (80) | | | 560 | | | 140 | | | 620 | |
Other | | 200 | | | (310) | | | (100) | | | (210) | |
Adjusted EBITDA | | $ | 13,450 | | | $ | 7,950 | | | $ | (10,180) | | | $ | 11,220 | |
The following table summarizes financial information for our operating segments for 2Q20 YTD and 2Q19 YTD:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | | Change | | | | Constant Currency Change | | |
| | 2020 | | As a Percentage of Net Sales | | 2019 | | As a Percentage of Net Sales | | $ | | % | | $ | | % |
| | (dollars in thousands) | | | | | | | | | | | | | | |
Net Sales | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 166,490 | | | 58.7 | % | | $ | 204,450 | | | 55.2 | % | | $ | (37,960) | | | (18.6) | % | | $ | (37,550) | | | (18.4) | % |
Horizon Europe-Africa | | 117,250 | | | 41.3 | % | | 165,870 | | | 44.8 | % | | (48,620) | | | (29.3) | % | | (45,850) | | | (27.6) | % |
Total | | $ | 283,740 | | | 100.0 | % | | $ | 370,320 | | | 100.0 | % | | $ | (86,580) | | | (23.4) | % | | $ | (83,400) | | | (22.5) | % |
Gross Profit | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 37,760 | | | 22.7 | % | | $ | 44,810 | | | 21.9 | % | | $ | (7,050) | | | (15.7) | % | | $ | (6,810) | | | (15.2) | % |
Horizon Europe-Africa | | 6,540 | | | 5.6 | % | | 15,060 | | | 9.1 | % | | (8,520) | | | (56.6) | % | | (8,440) | | | (56.0) | % |
Total | | $ | 44,300 | | | 15.6 | % | | $ | 59,870 | | | 16.2 | % | | $ | (15,570) | | | (26.0) | % | | $ | (15,250) | | | (25.5) | % |
Selling, General and Administrative Expenses | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 31,550 | | | 19.0 | % | | $ | 36,860 | | | 18.0 | % | | $ | (5,310) | | | (14.4) | % | | $ | (5,040) | | | (13.7) | % |
Horizon Europe-Africa | | 15,000 | | | 12.8 | % | | 18,080 | | | 10.9 | % | | (3,080) | | | (17.0) | % | | (2,670) | | | (14.8) | % |
Corporate | | 12,310 | | | N/A | | 17,100 | | | N/A | | (4,790) | | | (28.0) | % | | (4,790) | | | (28.0) | % |
Total | | $ | 58,860 | | | 20.7 | % | | $ | 72,040 | | | 19.5 | % | | $ | (13,180) | | | (18.3) | % | | $ | (12,500) | | | (17.4) | % |
Operating Profit (Loss) | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 6,160 | | | 3.7 | % | | $ | 7,990 | | | 3.9 | % | | $ | (1,830) | | | (22.9) | % | | $ | (1,870) | | | (23.4) | % |
Horizon Europe-Africa | | (8,480) | | | (7.2) | % | | (1,610) | | | (1.0 | %) | | (6,870) | | | 426.7 | % | | (7,200) | | | 447.2 | % |
Corporate | | (12,330) | | | N/A | | (17,100) | | | N/A | | 4,770 | | | (27.9) | % | | 4,770 | | | (27.9) | % |
Total | | $ | (14,650) | | | (5.2) | % | | $ | (10,720) | | | (2.9 | %) | | $ | (3,930) | | | 36.7 | % | | $ | (4,300) | | | 40.1 | % |
Capital Expenditures | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 1,470 | | | 0.9 | % | | $ | 3,830 | | | 1.9 | % | | $ | (2,360) | | | (61.6) | % | | $ | (2,360) | | | (61.6) | % |
Horizon Europe-Africa | | 3,980 | | | 3.4 | % | | 1,800 | | | 1.1 | % | | 2,180 | | | 121.1 | % | | 2,650 | | | 147.2 | % |
Corporate | | — | | | N/A | | 50 | | | N/A | | (50) | | | (100.0) | % | | (50) | | | (100.0) | % |
Total | | $ | 5,450 | | | 1.9 | % | | $ | 5,680 | | | 1.5 | % | | $ | (230) | | | (4.0) | % | | $ | 240 | | | 4.2 | % |
Depreciation and Amortization of Intangible Assets | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 4,200 | | | 2.5 | % | | $ | 4,310 | | | 2.1 | % | | $ | (110) | | | (2.6) | % | | $ | (60) | | | (1.4) | % |
Horizon Europe-Africa | | 6,220 | | | 5.3 | % | | 6,040 | | | 3.6 | % | | 180 | | | 3.0 | % | | 370 | | | 6.1 | % |
Corporate | | 110 | | | N/A | | 170 | | | N/A | | (60) | | | (35.3) | % | | (60) | | | (35.3) | % |
Total | | $ | 10,530 | | | 3.7 | % | | $ | 10,520 | | | 2.8 | % | | $ | 10 | | | 0.1 | % | | $ | 250 | | | 2.4 | % |
Adjusted EBITDA | | | | | | | | | | | | | | | | |
Horizon Americas | | $ | 12,020 | | | 7.2 | % | | $ | 13,450 | | | 6.6 | % | | $ | (1,430) | | | (10.6) | % | | N/A | | N/A |
Horizon Europe-Africa | | 150 | | | 0.1 | % | | 7,950 | | | 4.8 | % | | (7,800) | | | (98.1) | % | | N/A | | N/A |
Corporate | | (9,200) | | | N/A | | (10,180) | | | N/A | | 980 | | | (9.6) | % | | N/A | | N/A |
Total | | $ | 2,970 | | | 1.0 | % | | $ | 11,220 | | | 3.0 | % | | $ | (8,250) | | | (73.5) | % | | N/A | | N/A |
Results of lower costs associated with the acquisition of the Westfalia Group which was partially offset by an increase in severance and restructuring related costs.
NineOperationsSix Months Ended SeptemberJune 30, 20172020 Compared with NineSix Months Ended SeptemberJune 30, 20162019
Overall, net sales increased approximately $231.4decreased by $86.6 million, or 49.7%23.4%, to $697.0$283.7 million for the nine months ended September 30, 2017,in 2Q20 YTD, as compared with $465.6$370.3 million in 2Q19 YTD. As noted in the nine months ended September 30, 2016. Duringfollowing segment results discussions, the first nine months of 2017,decrease in net sales in ourthe Horizon Americas and Horizon Europe-Africa reportable segment increased $213.5was attributable to the continued impacts of economic uncertainty and business disruptions in these jurisdictions associated with the COVID-19 pandemic that began during the first quarter 2020. The decrease in net sales within Horizon Americas of $38.0 million was primarily driven by our fourth quarter 2016 acquisitiondeclines in sales volumes in the automotive OEM and retail sales channels. The decrease in net sales of $48.6 million in Horizon Europe-Africa was primarily driven by declines in sales volumes in the Westfalia Group.automotive OEM and automotive OES sales channels. Net sales of Horizon Europe-Africa were also negatively impacted by the sale of its non-automotive business in our Horizon Asia-Pacific reportable segment increased $16.7 million due to a regional bolt-on acquisitionthe first quarter 2019 and net sales to a new customer. Net sales increased approximately $1.2 million in our Horizon Americas reportable segment due to increases in our e-commerce, industrial and automotive OE channels, which were partially offset by decreases in our retail and aftermarket channels.unfavorable currency translation.
Gross profit margin (gross profit as a percentage of sales) approximated 24.6%was 15.6% and 27.0% for the nine months ended September 30, 201716.2% in 2Q20 YTD and 2016,2Q19 YTD, respectively. Gross profit margin increased across allwas negatively impacted in both operating segments primarily due to the continued impacts of our reportable segments; however, an overall decline is the COVID-19 pandemic and related sales volume declines.
SG&A expenses decreased by $13.2 million primarily attributable to lower distribution center lease, operating and support costs in Horizon Americas. In Horizon Europe-Africa, lower administration and personnel cost savings were realized as a result of a shift in the concentration of net sales from our higher margin Horizon Americas reportable segment to our lower margin Horizon Europe-Africa segment. Gross profit margin improved in our Horizon Americas reportable segmentprior-year restructuring and business rationalization projects, as well as the consolidationreimbursement of our manufacturing facilities that occurredcertain payroll costs as part of a government payroll reimbursement program. Additionally, Corporate incurred $4.5 million of higher professional service fees and other costs incurred in 2016 resulted2Q19 YTD related to new debt issuance, amendments, and modifications and related structure changes.
Operating margin (operating loss as a percentage of sales) was (5.2)% and (2.9)% in lower costs2Q20 YTD and cost savings2Q19 YTD, respectively. Operating loss increased $4.0 million to an operating loss of $14.7 million in 2017, which more than offset the negative impacts2Q20 YTD, compared to an operating loss of unfavorable commodity prices. An increase$10.7 million in gross profit margin in our Horizon Asia-Pacific reportable segment is attributable to increased sales volumes and productivity initiatives. Gross profit margin in our Horizon Europe-Africa reportable segment increased2Q19 YTD, primarily as a result of the acquisitionoperational results detailed above.
Other expense, net decreased by $2.9 million to $2.1 million in 2Q20 YTD compared to $5.0 million in 2Q19 YTD, primarily attributable to the $3.6 million loss on sale related to the Company’s divestiture of the Westfalia Group.its non-automotive business in Horizon Europe-Africa in 2Q19 YTD that did not recur in 2Q20 YTD, partially offset by $1.1 million of additional foreign currency loss in 2Q20 YTD as compared to 2Q19 YTD.
Operating profit margin (operating profitInterest expense decreased by $9.7 million to $16.4 million in 2Q20 YTD, as a percentage of sales) approximated 5.3% and 5.5% for the nine months ended September 30, 2017 and 2016, respectively. Operating profit increased approximately $11.3 million, or 44.2%,compared to $36.9$26.2 million for the nine months ended September 30, 2017, compared to $25.6 million for the nine months ended September 30, 2016,2Q19 YTD. Interest expense decreased primarily as a result of an operating profit margin improvement across allthe pay down of our reportable segments,principal on the Company’s First Lien Term Loan (as defined below) in September 2019, which was offset by higher corporate expenses driven by increased professional fees and people costs.
Interest expense increased approximately $4.1 million, to $16.7 million, for the nine months ended September 30, 2017,resulted in lower borrowings as well as lower interest rates compared to $12.6 million for the nine months ended September 30, 2016, primarily due to additional interest and non-cash amortization of debt discount and issuance costs related to our Convertible Notes issued during 2017.
Other expense, net increased approximately $0.4 million to $2.6 million for the nine months ended September 30, 2017 compared to $2.2 million for the nine months ended September 30, 2016, primarily due to losses on financing transactions denominated in foreign currencies within certain of our Horizon Asia-Pacific locations.2Q19 YTD.
The effective income tax ratesrate for the nine months ended September 30, 20172Q20 YTD and 2016 were (25.7)2Q19 YTD was (0.2)% and 8.3%3.1%, respectively. The 2Q20 YTD lower effective income tax rate compared to the statutory tax rate is attributable to the valuation allowance recorded in the nine months ended SeptemberUS and several foreign jurisdictions at June 30, 2017 is driven by the recognition of the income tax benefits associated with stock awards issued, the release of certain unrecognized tax positions, and the recognition of additional tax credits2020, which resulted in the U.S.
Net income increased by approximately $6.5 million, to $16.4 million for the nine months ended September 30, 2017, compared to $9.9 million for the nine months ended September 30, 2016. The increase is primarily the result of an increase in operating profit of $11.3 million and an increase inno income tax benefit recognized for jurisdictional pretax losses.
Net loss from continuing operations decreased by $7.3 million, to a net loss of $4.3 million. Partially offsetting these increases$33.3 million for 2Q20 YTD, compared to a net loss of $40.5 million for 2Q19 YTD, primarily as a result of the operational results detailed above.
(Loss) income from discontinued operations, net of tax is attributable to the sale of the Company’s former APAC operating segment, which was sold in September 2019. During 2Q20 YTD, the remaining post-closing conditions of the sale were $4.1 million increasecompleted, including a true up to net cash proceeds, which resulted in interest expense and a $4.6 million loss on extinguishmentsale of debt duediscontinued operations of $0.5 million. As a result, APAC has been presented as discontinued operations in our condensed consolidated financial statements in accordance with FASB ASC 205, Discontinued Operations. See Note 3, Discontinued Operations, included in Part I, Item 1, “Notes to a prepayment madeCondensed Consolidated Financial Statements,” within this Quarterly Report on our Term B Loan inForm 10-Q for further description of the first quarter of 2017.Company’s discontinued operations.
See below for a discussion of operating results by segment.
Horizon Americas.Americas
Net sales increased approximately $1.2by sales channel, in thousands, for Horizon Americas during 2Q20 YTD and 2Q19 YTD are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | Change | | |
| | 2019 | | 2018 | | $ | | % |
Net Sales | | | | | | | | |
Automotive OEM | | $ | 29,870 | | | $ | 43,920 | | | $ | (14,050) | | | (32.0) | % |
Automotive OES | | 2,350 | | | 3,420 | | | (1,070) | | | (31.3) | % |
Aftermarket | | 49,050 | | | 52,990 | | | (3,940) | | | (7.4) | % |
Retail | | 46,400 | | | 61,630 | | | (15,230) | | | (24.7) | % |
Industrial | | 12,890 | | | 16,210 | | | (3,320) | | | (20.5) | % |
E-commerce | | 25,880 | | | 26,260 | | | (380) | | | (1.4) | % |
Other | | 50 | | | 20 | | | 30 | | | N/A |
Total | | $ | 166,490 | | | $ | 204,450 | | | $ | (37,960) | | | (18.6) | % |
Horizon Americas began 2Q20 YTD with strong performance and our initial operating results for the first quarter 2020 reflected strong demand for our products. However, the COVID-19 pandemic began to negatively impact results in March 2020 as the Company flexed down operations at its manufacturing and distribution facilities in line with customer demand and in accordance with applicable government mandated operational restrictions. As a result, net sales decreased by $38.0 million or 0.4%, to $351.4$166.5 million in the nine months ended September 30, 2017,2Q20 YTD, as compared to $350.2$204.5 million in 2Q19 YTD, primarily attributable to lower volumes in the nine months ended September 30, 2016. Netautomotive OEM and retail sales in our e-commerce channel increased by approximately $3.4 million as higher demand from major e-commerce customers more than offset the decreased sales to certain customers who did not maintain channel pricing discipline. Net sales in our industrial channel increased approximately $2.1 million as product availability has increased throughout the year. Net sales in our automotive OE channel increased approximately $0.6 millionchannels, due to increased volumes on existing programs with major customers,the effects of the COVID-19 pandemic throughout 2Q20 YTD. This decrease was partially offset by higher volumesa $0.9 million decrease in 2016 due to the launch of a new programsales discounts, returns and allowances in 2Q20 YTD as compared with another major customer that did not reoccur. Partially offsetting these increases were decreases in our retail and aftermarket channels. Net sales in our retail channel decreased approximately $2.9 million. Point of sale weakness at our mass merchant retail customers, across their product lines, resulted in lower sales levels. Net sales in our aftermarket channel decreased by approximately $2.5 million primarily due to challenges faced during the integration of our ERP system in 2017, which were partially offset by increased sales within our warehouse distribution partners. The remainder of the change is due to favorable currency exchange as the Brazilian real strengthened in relation to the U.S. dollar.2Q19 YTD.
Horizon Americas’ gross profit increased approximately $3.5decreased by $7.1 million to $105.8$37.8 million or 30.1% of net sales, in the nine months ended September 30, 2017,2Q20 YTD, as compared to $102.3$44.8 million or 29.2% of net sales, in the nine months ended September 30, 2016, Positively impacting2Q19 YTD. The decrease in gross profit margin reflects the changes in sales detailed above. Additionally, gross profit was approximately $4.0impacted by the following:
–$5.1 million lower scrap costs and inventory reserves;
–$2.8 million of lower costs associated with the consolidation of Horizon Americas’favorable manufacturing facilities during 2016 that did not reoccur in 2017. 2017 also benefited from $2.6costs; and
–$2.7 million in cost savings
due to the consolidation of Horizon Americas’ manufacturing facilities in 2016. Negatively impacting gross profit margin was approximately $4.4 million of unfavorable commodity prices andlower outbound freight costs.
Selling, general and administrativeSG&A expenses increased approximately $2.6decreased by $5.3 million to $66.8$31.6 million, or 19.0% of net sales in the nine months ended September 30, 2017,2Q20 YTD, as compared to $64.2$36.9 million, or 18.3%18.0% of net sales, in 2Q19 YTD. The decrease in SG&A expenses was attributable to the nine months ended September 30, 2016. The increase is primarily due to higherfollowing:
–$3.0 million of lower distribution costscenter lease, operating and support costs;
–$1.4 million of approximately $2.1lower litigation and other administrative costs; and
–$1.2 million along with higher legal costs associated with protecting our intellectual property.of lower personnel and compensation costs.
Horizon Americas’ operating profit increased approximately $3.2margin decreased by $1.8 million to $38.8an operating profit of $6.2 million, or 11.1%3.7% of net sales, in the nine months ended September 30, 2017,2Q20 YTD, as compared to $35.6an operating profit of $8.0 million, or 10.2%3.9% of net sales, in the nine months ended September 30, 2016.2Q19 YTD. Operating profit margin increaseddeclined primarily due to the favorableoperational results detailed above.
Horizon Americas’ Adjusted EBITDA decreased by $1.4 million to $12.0 million in 2Q20 YTD, as compared to Adjusted EBITDA of $13.5 million in 2Q19 YTD. Adjusted EBITDA decreased primarily due to operational results detailed above.
Horizon Europe-Africa
Net sales by sales channel, in thousands, for Horizon Europe-Africa during 2Q20 YTD and 2Q19 YTD are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | Change | | |
| | 2020 | | 2019 | | $ | | % |
Net Sales | | | | | | | | |
Automotive OEM | | $ | 62,020 | | | $ | 94,700 | | | $ | (32,680) | | | (34.5) | % |
Automotive OES | | 20,180 | | | 29,330 | | | (9,150) | | | (31.2) | % |
Aftermarket | | 32,390 | | | 36,360 | | | (3,970) | | | (10.9) | % |
| | | | | | | | |
Industrial | | 660 | | | 1,560 | | | (900) | | | N/A |
E-commerce | | 660 | | | 1,090 | | | (430) | | | (39.4) | % |
Other | | 1,340 | | | 2,830 | | | (1,490) | | | (52.7) | % |
Total | | $ | 117,250 | | | $ | 165,870 | | | $ | (48,620) | | | (29.3) | % |
Horizon Europe-Africa began 2Q20 YTD with strong performance and our initial operating results for the first quarter 2020 reflected strong demand for our products. However, the COVID-19 pandemic began to negatively impact results in March 2020 as the Company temporarily idled certain manufacturing facilities in line with customer demand and in accordance with applicable government mandated operational restrictions. As a result, net sales decreased by $48.6 million to $117.3 million in 2Q20 YTD, as compared to $165.9 million in 2Q19 YTD, primarily attributable to lower volumes in the automotive OEM and automotive OES sales channels, due to the effects of approximately $4.9the COVID-19 pandemic throughout 2Q20 YTD. Net sales of Horizon Europe-Africa were also negatively impacted by $2.1 million related to the sale of its non-automotive business in the first quarter 2019 and $2.8 million of unfavorable currency translation.
Horizon Europe-Africa’s gross profit decreased by $8.5 million to $6.5 million in 2Q20 YTD, as compared to $15.1 million in 2Q19 YTD. The decrease in gross profit margin reflects the changes in sales detailed above. Additionally, gross profit was impacted by the following:
–$4.3 million of charges in 2Q19 YTD related to potential claims from product sold by Horizon Europe-Africa arising from potentially faulty components provided by a supplier that did not recur in 2Q20 YTD, see Note 13, Contingencies, included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements;”
–$3.5 million of payroll reimbursement costs received in 2Q20 YTD under terms of government payroll reimbursement programs, which includes the KUG (as defined in the Liquidity section below); partially offset by:
–$1.7 million of charges in 2Q20 YTD for royalty costs and settlement of certain intellectual property infringement claims, see Note 13, Contingencies, included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements”.
SG&A expenses decreased by $3.1 million to $15.0 million, or 12.8% of net sales in 2Q20 YTD, as compared to $18.1 million, or 10.9% of net sales, in 2Q19 YTD. The decrease in SG&A expenses was primarily attributable to the following:
–$2.3 million of lower personnel and compensation costs, associated with the consolidation of our manufacturing footprint and approximately $2.2which includes $0.5 million of lower expense relatedpayroll reimbursement costs received in 2Q20 YTD under terms of governmental payroll reimbursement programs, which includes the KUG.
Horizon Europe-Africa’s operating margin decreased by $6.9 million to the impairmentan operating loss of intangible assets during 2016. Partially offsetting these increases were unfavorable commodity prices and higher freight costs.
Horizon Europe-Africa. Net sales increased approximately $213.5$8.5 million, or 539.1%, to $253.1 million(7.2)% of net sales in the nine months ended September 30, 2017,2Q20 YTD, as compared to $39.6an operating loss of $1.6 million, or (1.0)% of net sales, in the nine months ended September 30, 2016, which is2Q19 YTD. Operating margin declined primarily due to the Westfalia Group acquisition. Net sales were negatively impacted by approximately $0.7 million of unfavorable currency exchange as the British pound weakened in relation to the U.S. dollar.operational results described above.
Horizon Europe-Africa’s gross profit increased approximately $35.5Adjusted EBITDA decreased by $7.8 million to $42.1$0.2 million or 16.6% of net sales, in the nine months ended September 30, 2017, from approximately $6.6 million, or 16.5% of net sales, in the nine months ended September 30, 2016, driven by the Westfalia Group acquisition.
Selling, general and administrative expenses increased approximately $30.4 million to $36.1 million, or 14.3% of net sales, in the nine months ended September 30, 2017,2Q20 YTD, as compared to $5.7Adjusted EBITDA of $8.0 million or 14.4% of net sales, in the nine months ended September 30, 2016.2Q19 YTD. Adjusted EBITDA decreased primarily due to operational results detailed above.
Corporate Expenses Corporate expenses included in operating loss decreased by $4.8 million to $12.3 million in 2Q20 YTD, as compared to $17.1 million in 2Q19 YTD. The increase isdecrease was primarily attributable to the aforementioned acquisition, which includes $5.0$4.5 million of depreciationhigher professional service fees and amortizationother costs incurred in 2Q19 YTD related to purchase accounting. Additionally, we incurred approximately $4.0a new debt issuance, amendments, and modifications and related structure changes.
Corporate Adjusted EBITDA was $(9.2) million during 2Q20 YTD, which was an improvement of severance and integration related costs in connection with the Westfalia Group acquisition during the 2017 period.
Horizon Europe-Africa’s operating profit increased approximately $5.4$1.0 million, to approximately $6.0 million, or 2.4% of net sales, in the nine months ended September 30, 2017, as compared to $0.6 million, or 1.5%Adjusted EBITDA of net sales, in the nine months ended September 30, 2016, primarily attributable to the acquisition mentioned above.
Horizon Asia-Pacific. Net sales increased approximately $16.7 million, or 22.0%, to $92.5$(10.2) million in the nine months ended September 30, 2017, compared to $75.8 million in the nine months ended September 30, 2016. A regional bolt-on acquisition contributed an increase of $6.0 million in net sales. Net sales in our automotive OE channel, exclusive of this acquisition, increased $1.8 million due to increased volumes on existing programs. An increase of $6.8 million in net sales in our industrial channel is primarily due programs with a new customer. The remainder of the increase is2Q19. Adjusted EBITDA improved primarily due to favorable currency exchange as the Australian dollar, Thai baht, and New Zealand dollar strengthened in relation to the U.S. dollar.
Horizon Asia-Pacific’s gross profit increased approximately $6.6 million to $23.6 million, or 25.5% of net sales, in the nine months ended September 30, 2017, from approximately $17.0 million, or 22.4% of net sales, in the nine months ended September 30, 2016. $3.7 million of the increase in gross profit is driven by the increased sales volumes mentioned above. Gross profit margin was further positively impacted by the results of productivity initiatives in our Australian business and and efficiencies realized in Thailand due to restructuring of operations completed in the second quarter of 2017.
Selling, generallower discretionary and administrative expenses increased approximately $2.2 million to $10.3 million, or 11.1% of net sales, in the nine months ended September 30, 2017, as compared to $8.1 million, or 10.7% of net sales, in the nine months ended September 30, 2016. The increase in selling, general and administrative expenses is primarily due to the timing of marketing and promotional spend, increased peoplesupport costs in support of growth initiatives, and operational restructuring costs. Additionally, selling, general and administrative expenses was increased by acquisition-related costs of $0.5 million. Further negatively impacting selling, general and administrative expenses was $0.3 million in unfavorable currency exchange.
Horizon Asia-Pacific’s operating profit increased approximately $4.4 million to $13.2 million, or 14.3% of net sales, in the nine months ended September 30, 2017, as compared to $8.8 million, or 11.6% of net sales, in the nine months ended September 30, 2016, primarily due to increased volumes and operational improvements across the region.
Corporate Expenses. Corporate expenses increased approximately $1.7 million to $21.2 million for the nine months ended September 30, 2017, from $19.5 million for the nine months ended September 30, 2016. The increase between years is primarily attributed to an increase in professional fees for various human resource, information technology, and compliance initiatives, and increased people costs as we have continued to build out our corporate structure. These increases were2Q20 YTD, partially offset by approximately $2.0 million of lower costs associated with the acquisition of the Westfalia Group.higher personnel and compensation costs.
Liquidity and Capital Resources
Our capital and working capital requirements are funded through a combination of cash flows from operations, cash on hand and various borrowings and factoring arrangements described below, including our ABL Facility. We utilize intercompany loans and equity contributions to fund our worldwide operations. See Note 7, “Long-term Debt” included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” within this quarterly report on Form 10-Q.asset-based revolving credit facility (as defined below). As of SeptemberJune 30, 20172020, and December 31, 2016,2019, there was $14.2$12.3 million and $20.2$8.7 million, respectively, of cash held at foreign subsidiaries. There may be country specific regulations that may restrict or result in increased costs in the repatriation of these funds.
Based onWe believe our current and anticipated levels of operations and the condition in our markets and industry, we believe thatavailable our cash on hand, cash flow from operations and availability under our Revolving Credit Facility are our most significant sources of liquidity. In response to the current uncertain economic environment resulting from the COVID-19 pandemic, the Company has pursued funding from available government programs and other sources of liquidity designed to strengthen its balance sheet and enhance financial flexibility. These sources include short-term loans, some of which are forgivable if certain conditions are met, as well as entering into or modifying other arrangements, including expanded use of receivables factoring. A summary of these actions is described below.
In April 2020, S.I.A.R.R. SAS (the “French Borrower”), an indirect subsidiary of the Company, received a loan from BNP Paribas (the “French Loan”) for $5.5 million. The French Loan, issued pursuant to an agreement dated April 9, 2020, between the French Borrower and BNP Paribas, matures on April 9, 2021. The French Loan bears interest at a rate of 0.5% per annum. The French Borrower, at its election, may repay the French Loan in full on April 9, 2021 or in monthly installments for a period of five years from the date of election.
In April 2020, Horizon Global Company LLC (the “US Borrower”), a direct US-based subsidiary of the Company, received a loan from PNC Bank, National Association for $8.7 million, pursuant to the Paycheck Protection Program (the “PPP Loan”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP Loan, which is in the form of a Note dated April 18, 2020 issued by the US Borrower, matures on April 18, 2022. The PPP Loan bears interest at 1.0% per annum and is payable monthly commencing on November 15, 2020. Funds from the PPP Loan may be used for payroll, costs used to continue group health care benefits, rent and utilities. Under the terms of the PPP Loan, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act.
The Company submitted its PPP Loan application in good faith in accordance with the CARES Act and the guidance issued by the Small Business Administration (the “SBA”), including the SBA’s Paycheck Protection Program Loans Frequently Asked Questions. During the second quarter of 2020, the Company, in accordance with the final guidance issued by the United States Department of the Treasury, met the need and sized based criteria of the program. The Company plans to file its application of forgiveness in the near term and continues to use the PPP Loan proceeds on qualifying expenses; however, there is no guarantee that any portion of the PPP Loan proceeds will be forgiven.
In March 2020, Westfalia-Automotive Gmbh (“Westfalia”), an indirect subsidiary of Horizon Global Corporation, was approved for a government payroll reimbursement program in Germany under the Kurzarbeitergeld (the “KUG”). The KUG is designed to reimburse employers for payroll costs incurred and paid to employees affected by the business disruption and government mandated operating restrictions in place due to COVID-19 for the period March 1, 2020 through August 31, 2020. Westfalia was approved to receive reimbursement of certain costs for the period March 19, 2020 through August 31, 2020. For the three and six months ended June 30, 2020, the Company recognized $2.5 million and $3.3 million, respectively, for qualifying payroll costs incurred for which the Company expects to be reimbursed under terms of the KUG. The Company estimates it will recognize future reimbursements up to $2.0 million under the terms of the KUG, provided the aforementioned local operating restrictions remain in place.
The Company is also taking the following measures to reduce costs and ensure appropriate liquidity:
–pursuing additional governmental grant or loan programs in the jurisdictions in which it operates;
–participating in payroll or payroll tax deferral programs such as those enacted by the CARES Act;
–undertaking negotiations with landlords to defer short-term rent payments;
–assessing its supplier base and related payment terms to determine if supplier payment timing may be amended, extended and/or retimed;
–reducing or retiming investments, including capital expenditures, that will not materially impact future business opportunities or our organic growth; and
–reducing reliance on temporary employees in both administrative and operations functions.
Additionally, in the United States, the Company has not furloughed or otherwise voluntarily reduced its workforce during the crisis. To protect the continued employment of its US-based employees, the Company, in addition to the other cost savings measures described above, implemented a temporary 20% wage reduction for all employees in the United States. In some cases, employees outside of the United States have been furloughed in response to government mandated operational restrictions and
fluctuations in customer demand. To the extent available, the Company availed itself of local government programs to support furloughed employees, such as those described above.
In March 2020, the Company, as guarantor, entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as agent for the lenders party thereto, and Horizon Global Americas Inc. and Cequent Towing Products of Canada Ltd., as borrowers (the “ABL Borrowers”). The Loan Agreement provides for an asset-based revolving credit facility (the “Revolving Credit Facility”) in the maximum aggregate principal amount of $75.0 million subject to customary borrowing base limitations contained therein, and may be increased at the ABL Borrowers’ request in increments of $5.0 million, up to a maximum of five times over the life of the Revolving Credit Facility, for a total increase of up to $25.0 million. In March 2020, the Company drew down $19.0 million from its Revolving Credit Facility to strengthen liquidity and supplement the Company’s cash position in United States. As of June 30, 2020, the Company had availability of $11.3 million under the Revolving Credit Facility and $27.7 million of cash in the United States.
Refer to Note 9, Long-term Debt, included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this Quarterly Report on Form 10-Q for additional information.
We believe the combination of these sources will enable us to meet our working capital, capital expenditures debt service and other funding requirements for at least the next twelve months. However, ourrequirements. Our ability to fund our working capital needs, debt payments and other obligations, and to comply with financial covenants, including borrowing base limitations under our ABLRevolving Credit Facility, depends on our future operating performance and cash flow and many factors outside of our control, including the costs of raw materials, the state of the automotive accessories market and financial and economic conditions and other factors. Any future acquisitions, joint ventures or other similar transactions will likely require additional capitalthe extent and there can be no assurance that any such capital will be available to us on acceptable terms, if at all.
duration of the impact of the COVID-19 pandemic. Cash Flows - Operating Activities
Net cash provided by and used for operating activities during 2Q20 YTD and 2Q19 YTD was approximately $2.3$4.9 million during nine months ended September 30, 2017 compared to a source of approximately $27.5and $(63.0) million, during the nine months ended September 30, 2016.respectively. During the nine months ended September 30, 2017,2Q20 YTD, the Company generated $47.9used $8.2 million in cash flows, based on the reported net incomeloss of $16.4$33.3 million and after considering the effects of non-cash items related to gains and losses on dispositions of property and equipment, depreciation, amortization stock compensation, amortization of inventory step-up recorded as part of purchase accounting, changes in deferred income taxes, loss on extinguishment of debt,intangible assets, amortization of original issueissuance discount and debt issuance costs, deferred income taxes, stock compensation, paid-in-kind interest, and other, net. During the nine months ended September 30, 2016,2Q19 YTD, the Company generated $27.6used $29.9 million in cash flows, based on the reported net incomeloss of $9.9$40.5 million and after considering the effects of similar non-cash items.
Changes in operating assets and liabilities used approximately $50.2sourced $13.1 million and $0.1used $(33.1) million of cash during the nine months ended September 30, 20172Q20 YTD and 2016,2Q19 YTD, respectively. Increases in accounts receivable resulted in a net use of cash of $28.4$16.8 million and $8.3$28.5 million during the nine months ended September 30, 20172Q20 YTD and 2016,2Q19 YTD, respectively. The increase in accounts receivable for both periods is lower in 2Q20 YTD as compared with 2Q19 YTD as a result of thelower sales activity in 2Q20 due to impacts of COVID-19 while 2Q19 experienced higher sales activity, duringwhen compared with the third quarter compared to therespective fourth quarter due to the seasonality of the business. The higher increase in accounts receivable for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 is due to increased sales levels in 2017, which is partially attributable to the Westfalia acquisition.periods.
Changes in inventory resulted in a source of cash of $19.3 million during 2Q20 YTD and use of cash of approximately $7.9$(7.8) million during the nine months ended September 30, 2017 and a source of cash of approximately $19.9 million2Q19 YTD. The decrease in inventory during the nine months ended September 30, 2016.2Q20 YTD was due to improved inventory management. The increase in inventory during the nine months ended September 30, 2017 is2Q19 YTD was due to efforts to maintain higher stock levelssoftening of our highest volume products on hand, as well as additional inventory built as safety stock in anticipation of projects being completed indemand at the fourth quarter in our Horizon Americas reportable segment. We also maintained lower levels of inventory in December 2016 in Horizon Americas in anticipationstart of the new ERP system going live. The inventory decline in 2016 is a result of the seasonality of our business.typically strong selling season.
ChangesIncreases in accounts payable and accrued liabilities resulted in a usesource of cash of approximately $17.4 million and $10.0$13.5 million during the nine months ended September 30, 20172Q20 YTD and 2016, respectively.$4.3 million during 2Q19 YTD. The decrease in accounts payable and accrued liabilities during the nine months ended September 30, 2017 is primarily related to the release of liabilities related to certain unrecognized tax positions and decreases to certain compensation accruals primarily related to bonus payments, as well as a decrease in liabilities associated with the acquisition of Westfalia from December 31, 2016. These decreases were partially offset by higher accounts payable related to maintaining higher inventory levels as described above. The usesource of cash for nine months ended September 30, 20162Q20 YTD as compared to 2Q19 YTD is primarily relateddue to the timingmix of payments made to suppliers mix ofand vendors and the related terms, as well as decreases in certain compensation accruals primarily related to bonus and severance payments.
terms.
Cash Flows - Investing Activities
Net cash used for investing activities during the nine months ended September 30, 2017 and 20162Q20 YTD was approximately $39.0$(5.4) million and $9.9net cash provided by investing activities was $0.8 million respectively. During the third quarter of 2017, we acquired the assets of Best Barsduring 2Q19 YTD. Capital expenditures for total cash consideration of $19.8 million. In addition, during the nine months ended September 30, 2017, we invested approximately $20.32Q20 YTD and 2Q19 YTD were $5.5 million in capital expenditures, as we have continued our investment inand $5.7 million, respectively, with both periods related to growth, capacity and productivity-related capital projects, including several projects in the newly acquired Westfalia Group. Cash received from the disposition of property and equipment was approximately $1.1 million primarily due to the sale of assets in Romania.within Horizon Europe-Africa. During the nine months ended September 30, 2016, we incurred approximately $10.1 million in capital expenditures and received cash from the disposition of property and equipment of approximately $0.2 million resulting2Q19 YTD, net proceeds from the sale of assets in Brazil and South Africa.the non-automotive business were $5.0 million.
Cash Flows - Financing Activities
Net cash provided by financing activities was approximately $9.6$29.3 million and $0.2$37.7 million during the nine months ended September 30, 20172Q20 YTD and 2016,2Q19 YTD, respectively. During the nine months ended September 30, 2017, we received2Q20 YTD, net proceeds of $121.1 million from the issuance of our Convertible Notes,Revolving Credit Facility, net of issuance costs; $79.9 millioncosts, were $35.5 million. During 2Q20 YTD, proceeds from the issuance of common stock,PPP Loan were $8.7 million. During 2Q20 YTD and 2Q19 YTD, net of offering costs; $20.9 million fromrepayments on the issuance of Warrants; and our net borrowings from our ABL Facility totaled $20.0 million. We used$19.9 million and $11.7 million, respectively. During 2Q19 YTD, net proceeds from borrowings on our Second Lien Term Loan were $35.5 million, and cash of approximately $187.8$10.1 million was used for repayments on our First Lien Term B Loan, $29.7 million for payments on Convertible Note Hedges, net of issuance costs, and approximately $10.0 million to repurchase shares as part of our Share Repurchase Program. During the nine months ended September 30, 2016, our net borrowings from our ABL Facility totaled $6.8 million. We also used net cash amount of approximately $7.5 million for repayments on our Term B Loan.
Factoring Arrangements
We have factoring arrangements with financial institutions to sell certain accounts receivable under non-recourse agreements. Total receivables sold during the year under the factoring arrangements was approximately $23.9were $94.6 million and $133.2 million as of SeptemberJune 30, 2017. The Company had no factoring arrangements for the nine months ended September 30, 2016.2020 and 2019, respectively. We utilize factoring arrangements as part of our financing forbusiness funding to meet the Company’s working capital.capital needs. The costs of participating in these arrangements are immaterial to our results.
Our Debt and Other Commitments
We and certain of our subsidiaries are party toIn March 2019, the ABL Facility, an asset-based revolving credit facility,Company entered into the Second Lien Term Loan Agreement that provides for $99.0 million of funding on a revolving basis, as well as a Term B Loan under which we borrowed an aggregate of $352.0 million. The ABL Facility matures in June 2020 and bears interest on outstanding balances at variable rates as outlinedterm loan facility in the agreement, while the Term B Loan matures in June 2021 and bears interest at variable rates in accordance with the credit agreement.
During the first quarter of 2017, we completed an underwritten public offering of $125.0 million aggregate principal amount of Convertible Notes.$51.0 million and matures on September 30, 2021. The Convertible Notesinterest on the Second Lien Term Loan 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 subject to various affirmative and negative covenants including a secured net leverage ratio tested quarterly further detailed below.
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.
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.
In March 2020, the Company amended the existing First Lien Term Loan Agreement (the “Ninth Term Amendment”) to remove the minimum liquidity covenant of $15.0 million, amend the net leverage ratio requirements to remove the December 31, 2020 leverage ratio test, and amend the fixed charge coverage ratio covenant to not be below 1.0 to 1.0 beginning with the fiscal quarter ending March 31, 2021, and replace the prior first lien leverage covenant with a secured net leverage ratio starting with the fiscal quarter ending March 31, 2021 as follows:
•March 31, 2021: 6.00 to 1.00
•June 30, 2021 and each fiscal quarter ending thereafter: 5.00 to 1.00
In March 2020, the Company amended the existing Second Lien Term Loan Agreement (the “Second Lien Second Amendment”) to amend certain financial covenants as outlined above.
In March 2020, the Company entered into the Loan Agreement, as defined above. The interest on the loans under the Loan Agreement are payable in cash at the interest rate of LIBOR plus 4.00% per annum, subject to a 1.00% LIBOR floor. All interest, fees, and other monetary obligations due may, in Encina’s discretion but upon prior notice to the Company, be charged to the loan account and thereafter be deemed to be part of the Revolving Credit Facility subject to the same interest rate. Borrowings under the Loan Agreement mature on July 1, 2022the 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 converted in accordance withterminated. Based on the terms prior to such date, and bears interest at a rate of 2.75% per annum. We used net proceeds from the Convertible Notes offering, along with proceeds from the issuance of common stock, also completed in the first quarter of 2017, to prepay $177.0 millionmaturity dates of the Company’s First Lien Term B Loan. Additionally,Loan and Second Lien Term Loan, the loans under the Loan Agreement would be due on March 31, 2017, we entered into2021. As a result of the Third Amendment to the Term B Loan. This amendment allowed us to repay the existing Original Term B Loan and Incremental Term Loans and provided for the2020 Replacement Term Loan Amendment, as defined below, the maturity of all borrowings under the Revolving Credit Facility were effectively extended to fiscal year 2022 and are presented in gross long-term debt in the accompanying condensed consolidated balance sheet as of June 30, 2020. With the proceeds of the Revolving Credit Facility, the Company paid in full all outstanding debt incurred under the ABL Facility, which reduced the required principal payments by $2.7 million per quarter and reduced the interest rate by 1.5% per annum. Refer to Note 7, “Long-term Debt,” in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this quarterly report on Form 10-QCompany accounted for additional information.as a debt extinguishment.
As of SeptemberJune 30, 2017, approximately $20.02020, $37.8 million was outstanding on the ABLRevolving Credit Facility bearing interest at a weighted average rate of 3.2%5.0% and $151.6$25.5 million was outstanding on the First Lien Term B Loan bearing interest at 5.7%7.0%. The Company had $65.0$11.3 million inof availability under the ABLRevolving Credit Facility as of SeptemberJune 30, 2017.2020.
The agreements governing the ABL Facility and Term B Loan containAgreement contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including restrictions on incurrence of debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, asset dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The ABLRevolving Credit Facility does not include any financial maintenance covenants other than a springing minimumfinancial covenant that stipulates the Company will not make Capital Expenditures (as defined in the Loan Agreement) exceeding $30.0 million during any fiscal year.
In May 2020, the Company entered into amendments, limited waivers and consents in connection with its Loan Agreement and the First Lien Term Loan Agreement (the “Tenth Term Amendment”) and the Second Lien Term Loan Agreement (“the Second Lien Third Amendment”), with an effective date of April 1, 2020, that, among other things, consented to the Company’s applying for, obtaining and incurring the PPP Loan and French Loan, each as defined and described above. The Tenth Term Amendment and Second Lien Third Amendment amended the fixed charge coverage ratio of at least 1.00covenant to 1.00 on a trailing twelve-month basis, which will be tested only uponeliminate the occurrence of an event of default or certain other conditions as specified inMarch 31, 2021 testing period, amended the agreement. The Term B Loan contains customary negative covenants, and also contains a financial maintenance covenant which requires us to maintain asecured net leverage ratio not exceeding 5.25covenant to eliminate the March 31, 2021 testing period, and amended the secured net leverage ratio levels as follows:
•June 30, 2021: 6.00 to 1.00 through the
•September 30, 2021 and each fiscal quarter ending September 30, 2017,thereafter: 5.00 to 1.00 through the fiscal quarter ending March 31, 2018, 4.75 to 1.00 through the fiscal quarter ending September 30, 2018; and thereafter, 4.50 to 1.00. As of September 30, 2017, we were in compliance with our financial covenants contained in the ABL Facility and the Term B Loan, respectively.
On July 3, 2017, our Australia subsidiary entered into a new agreement to provide for revolving borrowings up to an aggregate amount of $32.0 million. The agreement includes two sub-facilities: (i) Facility A has a borrowing capacity of $20.3 million, matures on July 3, 2020, and is subject to interest at Bank Bill Swap rate plus a margin determined based on the most recent net leverage ratio; (ii) Facility B has a borrowing capacity of $11.7 million, matures on July 3, 2018 and is subject to interest at Bank Bill Swap rate plus 0.9% per annum. Borrowings under this arrangement are subject to financial and reporting covenants. Financial covenants include maintaining a net leverage ratio not exceeding 2.50 to 1.00 during the period commencing on the date of the agreement and ending on the first anniversary of the date of the agreement; and 2.00 to 1.00 thereafter; working capital coverage ratio (working capital over total debt) greater than 1.75 to 1.00 and a gearing ratio (senior debt to senior debt plus equity) not exceeding 50%. As of September 30, 2017 we were in compliance with all covenants.
We are subject to variable interest rates on our First Lien Term B Loan and ABLRevolving Credit Facility. At SeptemberJune 30, 2017, 1-Month2020, one-month LIBOR and 3-Monththree-month LIBOR approximated 1.23%0.17% and 1.33%0.30%, respectively.
Principal payments requiredOn July 3, 2020, the Company entered into a limited consent to the Loan Agreement with Encina, that consented to the Company’s entering into the 2020 Replacement Term Loan Amendment, as defined and described below.
On July 6, 2020, the Company entered into the 2020 Replacement Term Loan Amendment (the “Eleventh Term Amendment”) to amend the Term Loan Agreement. The Eleventh Term Amendment provided replacement term loans (the “Replacement Term Loans”) that refinanced and replaced the outstanding balances under the First Lien Term B Loan are $1.9 million due each calendar quarter, withAgreement and Second Lien Term Loan Agreement, plus any accrued interest thereon. The interest on the remaining principal dueReplacement Term Loans will be payable at LIBOR plus 10.75% per annum, subject to a 1.00% LIBOR floor, of which 4.00% shall be payable in cash and LIBOR plus 6.75% shall be payable-in-kind (PIK) interest (provided that the Company may elect on maturity,not more than one occasion to pay all interest as PIK interest). Borrowings under the Eleventh Term Amendment mature on the earlier of: (i) June 30, 2021. Commencing2022 and (ii) April 1, 2022 if the Convertible Notes, as defined in Note 9, Long-term Debt, in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this Quarterly Report on Form 10-Q, are not repaid or otherwise discharged prior to such date. Additionally, the Eleventh Term Amendment provided for a 1.00% PIK closing fee, which was added to the principal amount of the Replacement Term Loans on the closing date;provided for a prepayment penalty on the entire principal amount of the Replacement Term Loans in an amount equal to 3.0% of the aggregate principal amount prepaid prior to December 31, 2021; and amended the fixed charge coverage ratio covenant beginning with the fiscal yearquarter ending June 30, 2021, as follows:
•June 30, 2021: 1.10 to 1.00
•September 30, 2021: 1.25 to 1.00
•December 31, 2017,31. 2021 and for each fiscal year thereafter,quarter ending thereafter: 1.40 to 1.00
As a result of the amendment entered into on July 6, 2020, for the Company’s First Lien Term Loan and Second Lien Term Loan, and our current forecast through June 30, 2021, the Company will also be requiredbelieves it has sufficient liquidity to make prepaymentsoperate its business for the foreseeable future.
The Company is in compliance with all of outstanding term loans under the Term B Loanits financial covenants in an amount upits debt agreements as of June 30, 2020. Refer to 50.0% of our excess cash flowNote 9, Long-term Debt, in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this Quarterly Report on Form 10-Q for such fiscal year, as defined, subject to adjustments based on our leverage ratio and optional prepayments of term loans and certain other indebtedness.additional information.
In addition to our long-term debt, we have other cash commitments related to leases. We account for these lease transactions as operating leases and annual rent expense related thereto approximated $16.8 million for the year ended December 31, 2016.2Q20 YTD was $7.2 million. We expect to continue to utilize leasing as a financing strategy in the future to meet capital expenditure needs and to reduce debt levels.
The following is a reconciliation of net income (loss), as reported, which is a U.S. GAAP measure of our operating results, to Consolidated Bank EBITDA, as defined in our credit agreement, for the twelve months ended September 30, 2017. We present Consolidated Bank EBITDA to show our performance under our financial covenants.
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| | | | | | | | | | | | | | | | |
| | | | Less: | | Add: | | |
| | Year Ended December 31, 2016 | | Nine Months Ended September 30, 2016 | | Nine Months Ended September 30, 2017 | | Twelve Months Ended September 30, 2017 |
| | (dollars in thousands) |
Net income (loss) attributable to Horizon Global | | $ | (12,360 | ) | | $ | 9,890 |
| | $ | 17,290 |
| | $ | (4,960 | ) |
Bank stipulated adjustments: | | | | | | | | |
Interest expense, net (as defined) | | 20,080 |
| | 12,600 |
| | 16,650 |
| | 24,130 |
|
Income tax (benefit) expense | | (3,730 | ) | | 900 |
| | (3,350 | ) | | (7,980 | ) |
Depreciation and amortization | | 18,220 |
| | 12,970 |
| | 17,940 |
| | 23,190 |
|
Extraordinary charges | | 6,830 |
| | 4,120 |
| | — |
| | 2,710 |
|
Non-cash compensation expense(a) | | 3,860 |
| | 2,840 |
| | 2,760 |
| | 3,780 |
|
Other non-cash expenses or losses | | 16,460 |
| | 3,410 |
| | 1,050 |
| | 14,100 |
|
Pro forma EBITDA of permitted acquisition | | 13,910 |
| | 13,910 |
| | 1,090 |
| | 1,090 |
|
Interest-equivalent costs associated with any Specified Vendor Receivables Financing | | 1,200 |
| | 940 |
| | 960 |
| | 1,220 |
|
Debt extinguishment costs | | — |
| | — |
| | 4,640 |
| | 4,640 |
|
Items limited to 25% of consolidated EBITDA: | | | | | | | |
|
|
Non-recurring expenses (b) | | 4,190 |
| | 4,860 |
| | 1,310 |
| | 640 |
|
Acquisition integration costs (c) | | 4,290 |
| | — |
| | 8,230 |
| | 12,520 |
|
Synergies related to permitted acquisition (d) | | 12,500 |
| | — |
| | (8,330 | ) | | 4,170 |
|
EBITDA limitation for non-recurring expenses (e) | | (4,860 | ) | | — |
| | 2,620 |
| | (2,240 | ) |
Consolidated Bank EBITDA, as defined | | $ | 80,590 |
| | $ | 66,440 |
| | $ | 62,860 |
| | $ | 77,010 |
|
|
| | | | |
| | September 30, 2017 |
| | (dollars in thousands) |
Total Consolidated Indebtedness, as defined | | $ | 278,330 |
|
Consolidated Bank EBITDA, as defined | | 77,010 |
|
Actual leverage ratio | | 3.61 | x |
Covenant requirement | | 5.25 | x |
______________________
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(a) | Non-cash compensation expenses resulting from the grant of restricted units of common stock and common stock options. |
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(b) | Under our credit agreement, cost and expenses related to cost savings projects, including restructuring and severance expenses, are not to exceed $5 million in any fiscal year and $20 million in aggregate, commencing on or after January 1, 2015. |
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(c) | Under our credit agreement, costs and expenses related to the integration of the Westfalia Group acquisition are not to exceed $10 million in any fiscal year and $30 million in aggregate. |
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(d) | Under our credit agreement, the add back for the amount of reasonably identifiable and factually supportable “run rate” cost savings, operating expense reductions, and other synergies cannot exceed $12.5 million for the Westfalia Group acquisition. |
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(e) | The amounts added to Consolidated Net Income pursuant to items in notes (b)-(d) shall not exceed 25% of Consolidated EBITDA, excluding these items, for such period. |
Refer to Note 7, “Long-term Debt,”12, Leases, in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this quarterly reportQuarterly Report on Form 10-Q for additional information.
Consolidated EBITDA
Consolidated EBITDA (defined as “Consolidated EBITDA” in our First Lien Term Loan Agreement and Second Lien Term Loan Agreement, collectively “Term Loan Agreements”) is a comparable measure to how the Company assesses performance. As discussed further in the Segment Information and Supplemental Analysis section of above, we use certain non-GAAP financial measures to assess performance and measure our covenants compliance in accordance with the Term Loan Agreements, which includes Adjusted EBITDA at the operating segment level. For the measurement of our Term Loan Agreements financial covenants, the definition of Consolidated EBITDA limits the amount of non-recurring expenses or costs including restructuring, moving and severance that can be excluded to $10 million in any cumulative four fiscal quarter period. Similarly, the definition limits the amount of fees, costs and expenses incurred in connection with any proposed asset sale that can be excluded to $5 million in any cumulative four fiscal quarter period.
The leverage ratios asreconciliations of March 31, 2017net income (loss) attributable to Horizon Global to EBITDA, EBITDA to Adjusted EBITDA and Adjusted EBITDA to Consolidated EBITDA for the three months ended June 30, 2017 were calculated based upon2020 and 2019; the U.S. GAAP definition of debt for our previously disclosed Convertible Note issuance during the first quarter of 2017. Based on discussions with the administrative agent under our credit agreement, the leverage ratio will be presented based on a U.S. GAAP exception outlined in the credit agreement, which provides our investors and lenders a clearer view of our total leverage position. Based upon this U.S. GAAP exception, our leverage ratio would have been 4.37x and 3.86x as of March 31, 2017 andsix months ended June 30, 2017, respectively. The restated ratios2020 and 2019; and the last twelve months ended June 30, 2020 and 2019 are stillas follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | | | Last Twelve Months Ended June 30, | | | | |
| | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
| | (dollars in thousands) | | | | | | (dollars in thousands) | | | | | | (dollars in thousands) | | | | |
Net (loss) income attributable to Horizon Global | | $ | (16,340) | | | $ | (8,080) | | | $ | (8,260) | | | $ | (33,080) | | | $ | (33,180) | | | $ | 100 | | | $ | 80,720 | | | $ | (112,700) | | | $ | 193,420 | |
Net loss attributable to noncontrolling interest | | (380) | | | (60) | | | (320) | | | (670) | | | (580) | | | (90) | | | (1,320) | | | (1,040) | | | (280) | |
Net (loss) income | | $ | (16,720) | | | $ | (8,140) | | | $ | (8,580) | | | $ | (33,750) | | | $ | (33,760) | | | $ | 10 | | | $ | 79,400 | | | $ | (113,740) | | | $ | 193,140 | |
Interest expense | | 8,220 | | | 15,320 | | | (7,100) | | | 16,410 | | | 26,150 | | | (9,740) | | | 48,530 | | | 41,610 | | | 6,920 | |
Income tax expense (benefit) | | 80 | | | (1,040) | | | 1,120 | | | 70 | | | (1,310) | | | 1,380 | | | (9,320) | | | 1,520 | | | (10,840) | |
Depreciation and amortization | | 5,470 | | | 5,310 | | | 160 | | | 10,530 | | | 10,520 | | | 10 | | | 21,680 | | | 21,120 | | | 560 | |
EBITDA | | $ | (2,950) | | | $ | 11,450 | | | $ | (14,400) | | | $ | (6,740) | | | $ | 1,600 | | | $ | (8,340) | | | $ | 140,290 | | | $ | (49,490) | | | $ | 189,780 | |
Net loss attributable to noncontrolling interest | | 380 | | | 60 | | | 320 | | | 670 | | | 580 | | | 90 | | | 1,320 | | | 1,040 | | | 280 | |
(Income) loss from discontinued operations, net of tax | | — | | | (2,990) | | | 2,990 | | | 500 | | | (6,770) | | | 7,270 | | | (182,240) | | | (14,000) | | | (168,240) | |
EBITDA from continuing operations | | $ | (2,570) | | | $ | 8,520 | | | $ | (11,090) | | | $ | (5,570) | | | $ | (4,590) | | | $ | (980) | | | $ | (40,630) | | | $ | (62,450) | | | $ | 21,820 | |
Adjustments pursuant to Term Loan Agreements: | | | | | | | | | | | | | | | | | | |
Losses on sale of receivables | | 250 | | | 430 | | | (180) | | | 540 | | | 960 | | | (420) | | | 1,170 | | | 1,840 | | | (670) | |
| | | | | | | | | | | | | | | | | | |
Non-cash equity grant expenses | | 900 | | | 600 | | | 300 | | | 1,320 | | | 970 | | | 350 | | | 2,500 | | | 1,310 | | | 1,190 | |
Other non-cash expenses or losses | | 220 | | | 600 | | | (380) | | | 1,750 | | | 5,570 | | | (3,820) | | | 1,210 | | | 36,790 | | | (35,580) | |
Term Loans related fees, costs and expenses | | — | | | 1,300 | | | (1,300) | | | — | | | 3,040 | | | (3,040) | | | (120) | | | 3,040 | | | (3,160) | |
| | | | | | | | | | | | | | | | | | |
Lender agent related professional fees, costs, and expenses | | 270 | | | 910 | | | (640) | | | 380 | | | 910 | | | (530) | | | 320 | | | 910 | | | (590) | |
Non-recurring expenses or costs(a) | | 970 | | | 180 | | | 790 | | | 4,480 | | | 6,030 | | | (1,550) | | | 17,080 | | | 25,630 | | | (8,550) | |
| | | | | | | | | | | | | | | | | | |
Non-cash losses on asset sales | | 20 | | | (20) | | | 40 | | | 90 | | | (1,460) | | | 1,550 | | | 1,240 | | | 340 | | | 900 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Other | | (20) | | | (240) | | | 220 | | | (20) | | | (210) | | | 190 | | | 660 | | | (1,720) | | | 2,380 | |
Adjusted EBITDA | | $ | 40 | | | $ | 12,280 | | | $ | (12,240) | | | $ | 2,970 | | | $ | 11,220 | | | $ | (8,250) | | | $ | (16,570) | | | $ | 5,690 | | | $ | (22,260) | |
Non-recurring expense limitation(a)(b) | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A | | (7,080) | | | (15,630) | | | 8,550 | |
Other | | 20 | | | 240 | | | (220) | | | 20 | | | 210 | | | (190) | | | (660) | | | 1,720 | | | (2,380) | |
Consolidated EBITDA | | $ | 60 | | | $ | 12,520 | | | $ | (12,460) | | | $ | 2,990 | | | $ | 11,430 | | | $ | (8,440) | | | $ | (24,310) | | | $ | (8,220) | | | $ | (16,090) | |
(a) Non-recurring expenses or costs including severance, restructuring and relocation are not to, in complianceaggregate, exceed $10 million in adjustments in determining Consolidated EBITDA in any four fiscal quarter period.
(b) Fees, costs and expenses incurred in connection with our covenant level of 5.25x for each quarter.any proposed asset sale are not to, in aggregate, exceed $5 million in adjustments in determining Consolidated EBITDA in any four fiscal quarter period.
Credit Rating
WeThe Company’s debt agreements do not require that we maintain a credit rating.
Outlook
The Company began 2020 with a strong performance and certain of our outstanding debt obligations are rated by Standard & Poor’s and Moody’s. On January 30, 2017, Moody’s upgraded our prior rating of B2 to B1operating results demonstrated strong demand for our $146 million ($352 million atproducts. However, the COVID-19 pandemic has caused significant business and economic disruption globally and resulted in economic uncertainty and challenges, both in the short term and long term. At this time, the Company’s main priority is the health of rating,its employees and others in the communities where it does business and we are taking actions in response to the current environment. The Company has implemented risk mitigation plans across the enterprise to reduce the risk of spreading COVID-19 while continuing to operate to the extent possible. In accordance with mandates and other guidance from local governments and health authorities, as well as the World Health Organization and the Centers for Disease Control, the Company has taken the following measures:
–requiring administrative employees to work remotely;
–temporarily eliminating domestic and international travel;
–gating measures defined and implemented for essential workers to enter facilities;
–providing and requiring the use of personal protective equipment by all employees during working hours;
–requiring essential on-site employees to practice social distancing, including refraining from handshaking, hugging or other forms of physical greeting and maintaining 6 feet of distance from coworkers where possible;
–professionally sanitizing each facility on a regular basis;
–sanitizing equipment between uses;
–requiring frequent hand washing, including before and after the $152 million add-on) Term B Loan, as presented in Note 7, “Long-term Debt” included in Part I, Item I, “Notes to Condensed Consolidated Financial Statements” within this quarterly reportuse of shared equipment;
–conducting temperature checks on Form 10-Q. Moody’s also maintained a B2 to our corporate family rating and our outlook as stable. On January 26, 2017, Standard & Poor’s raised its corporate credit rating from B to B+ for our $146 million ($352 millionemployees at the timestart of the rating, including the $152 million add-on) senior secured term loan. Standard & Poor’s also maintained our B corporate credit ratingeach shift;
–ensuring availability of hand sanitizer at each facility and outlook as stable, while assigning a B- ratingencouraging frequent application; and
–requiring employees to our then proposed (at time of rating) Convertible Notes. If our credit ratings were to decline, ourstay home if they are experiencing cold or flu-like symptoms.
The Company has the ability to access certain financial markets may become limited, our costmanufacture and distribute its products across its various sales channels, and continues to operate and fill customer orders. The Company adhered to government mandated operational restrictions and flexed its operations in line with current and anticipated customer demand, and will continue to do so while prioritizing the health and safety of borrowings may increase, the perception of usits employees and others in the viewcommunities where it operates. The customers in our original equipment manufacturers and original equipment servicers sales channels were those most affected by government mandated operational restrictions. However, substantially all of our customers suppliersresumed operational status, resulting in increasing demand with each successive month during the second quarter 2020.
The Company continues to operate its distribution facilities in the United States, including its facility in Edgerton, Kansas and security holders may worsenhas reopened its primary manufacturing facilities in North America and Europe, with substantially all of those facilities operating at or above 90%. We currently expect the operations of our remaining facilities to continue to improve in the near term as a result,government mandated operating restrictions continue to be eased.
The extent and duration of the COVID-19 pandemic remains uncertain, as does the impact on our business. The level of economic recovery we may be adversely affected.
Market Risk
We conduct business in various locations throughoutexperience as we look forward is also unclear and we will continue to assess the worldoperational and are subject to market risk due to changes infinancial impacts of the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between such local currencies and the U.S. dollar.
We use derivative financial instruments to manage currency risks associated with our procurement activities denominated in currencies other than the functional currency of our subsidiaries and the impact of currency rate volatilitypandemic on our earnings. Asbusiness.
Impact of September 30, 2017, we were party to forward contracts and cross currency swaps, to hedge changes in foreign currency exchange rates, with notional amounts of approximately $17.2 million and $123.6 million, respectively. New Accounting Standards
See Note 8, “Derivative Instruments2, New Accounting Pronouncements,” included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” within this quarterly reportQuarterly Report on Form 10-Q.
We are also subject to interest risk as it relates to our long-term debt. We may in the future use interest rate swap agreements to fix the variable portion of our debt to manage this risk.
Outlook
Our global business remains susceptible to economic conditions that could adversely impact our business. While the U.S. and Asia-Pacific economies impacting our demand remain strong, and the European economy shows indications of improvement, global economic sentiment remains cautious given continued geopolitical uncertainty and foreign currency volatility. Additionally, we continue to evaluate the trade and tax policy discussions taking place in Washington, D.C. and the impact the ultimate legislation could have on our current operations. We believe the unique global footprint we enjoy in our market space will continue to benefit us as our OE customers continue to demonstrate a preference for stronger relationships with few suppliers. Additionally, while we believe that the continued consolidation in aftermarket distribution presents long-term opportunities for us given our strong brand positions, portfolio of product offerings, and existing customer relationships, our results of operations may be impacted by the closure and consolidation of customer warehouses in the short term.
We attempt to mitigate challenging external factors by executing productivity projects across our businesses which we believe will drive future margin expansion, including leveraging recent investments made to expand our European manufacturing footprint, global customer relationships and global manufacturing and distribution capabilities. We believe these initiatives will carry through 2017 and beyond and enhance our margins and business portfolio over time.
Our strategic priorities are to improve margins, reduce our leverage, and drive top line growth.
Impact of New Accounting Standards
See Note 2, “New Accounting Pronouncements,” included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” within this quarterly report on Form 10-Q.
Critical Accounting Policies
Our financial statements are prepared in accordance with U.S. GAAP.accounting principles generally accepted within the United States of Americas (“US GAAP”). Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates that affect both the amounts and timing of the recording of assets, liabilities, net sales and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources, as appropriate.
During the quarter ended September 30, 2017, thereThere were no material changes to the items that we disclosed as our critical accounting policies in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Emerging Growth Company
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, establishes a class of company called an “emerging growth company,” which generally is a company whose initial public offering was completed after December 8, 2011 and had total annual gross revenues of less than $1$1.07 billion during its most recently completed fiscal year. We currently qualify as an emerging growth company.
As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are not available to public reporting companies that do not qualify for this classification, including without limitation the following:
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▪ | An emerging growth company is exempt from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and financial statements, commonly known as an “auditor discussion and analysis.” |
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▪ | An emerging growth company is not required to hold a nonbinding advisory stockholder vote on executive compensation or any golden parachute payments not previously approved by stockholders. |
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▪ | An emerging growth company is not required to comply with the requirement of auditor attestation of management’s assessment of internal control over financial reporting, which is required for other public reporting companies by Section 404 of the Sarbanes-Oxley Act.▪An emerging growth company is exempt from any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and financial statements, commonly known as an “auditor discussion and analysis.” ▪An emerging growth company is not required to hold a nonbinding advisory stockholder vote on executive compensation or any golden parachute payments not previously approved by stockholders. ▪An emerging growth company is not required to comply with the requirement of auditor attestation of management’s assessment of internal control over financial reporting, which is required for other public reporting companies by Section 404 of the Sarbanes-Oxley Act. ▪An emerging growth company is eligible for reduced disclosure obligations regarding executive compensation in its periodic and annual reports, including without limitation exemption from the requirement to provide a compensation discussion and analysis describing compensation practices and procedures. ▪A company that is an emerging growth company is eligible for reduced financial statement disclosure in registration statements, which must include two years of audited financial statements rather than the three years of audited financial statements that are required for other public reporting companies. |
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▪ | An emerging growth company is eligible for reduced disclosure obligations regarding executive compensation in its periodic and annual reports, including without limitation exemption from the requirement to provide a compensation discussion and analysis describing compensation practices and procedures. |
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▪ | A company that is an emerging growth company is eligible for reduced financial statement disclosure in registration statements, which must include two years of audited financial statements rather than the three years of audited financial statements that are required for other public reporting companies. |
For as long as we continue to be an emerging growth company, we expect that we will take advantage of the reduced disclosure obligations available to us as a result of this classification. We will remain an emerging growth company until the earlier of (i) December 31, 2020, the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities Act; (ii) the last day of the fiscal year in which we have total annual gross revenues of $1$1.07 billion (subject to further adjustment for inflation) or more; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under applicable SEC rules. WeBased on the foregoing, we expect that we will remain an emerging growth company for the foreseeable future, but cannot retain our emerging growth company status indefinitely and will no longer qualify as an emerging growth company on or beforeas of December 31, 2020.
Emerging growth companies may elect to take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, we are exposed to market risk associated with fluctuations in interest rates, commodity prices, insurable risks due to property damage, employee and liability claims, and other uncertainties in the financial and credit markets, which may impact demand for our products.Not applicable.
We conduct business in various locations throughout the world and are subject to market risk due to changes in the value of foreign currencies. The functional currencies of our foreign subsidiaries are primarily the local currency in the country of domicile. We manage these operating activities at the local level and revenues and costs are generally denominated in local currencies; however, results of operations and assets and liabilities reported in U.S. dollars will fluctuate with changes in exchange rates between the local currencies and the U.S. dollar. A 10% change in average exchange rates versus the U.S. dollar would have resulted in an approximate $35.3 million change to our revenues for the nine months ended September 30, 2017.
We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding debt. Outstanding balances under our Term B Loan, at the Company’s election, bear interest at variable rates based on a margin over defined LIBOR. Based on the amount outstanding on the Term B Loan as of September 30, 2017, a 100 basis point change in LIBOR would result in an approximate $1.5 million change to our annual interest expense.
We use derivative financial instruments to manage our currency risks. We are also subject to interest risk as it relates to long-term debt. See Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for details about our primary market risks, and the objectives and strategies used to manage these risks. Also see Note 7, “Long-term Debt,” and Note 8, “Derivative Instruments,” in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” included within this quarterly report on Form 10-Q for additional information.
Item 4. Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Evaluation of disclosure controls and procedures
As of SeptemberJune 30, 2017,2020, an evaluation was carried out by management, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act) pursuant to Rule 13a-15 of the Exchange Act. The Company’s disclosure controls and procedures are designed only to provide reasonable assurance that they will meet their objectives. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of SeptemberJune 30, 2017,2020, the Company’s disclosure controls and procedures are effective to provide reasonable assurance that they would meet their objectives.
Changes in internal control over financial reportingInternal Control Over Financial Reporting
During the Company’s most recent fiscal quarter, there have beenThere were no changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2020, that have materially affected, or areis reasonably likely to materially affect, the Company’sits internal control over financial reporting. As a result of the COVID-19 pandemic, certain employees of the Company began working remotely in March 2020. Management has taken measures to ensure that our internal control over financial reporting remained effective and were not materially affected during the period. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to claims and litigation in the ordinary course of business, but we do not believe that any such claim or litigation is likely to have a material adverse effect on our financial position, and results of operations, or cash flows. For additional information regarding legal proceedings, refer to Note 13,Contingencies, included in Part I, Item 1, “Notes to Condensed Consolidated Financial Statements,” within this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
AFor a discussion of our risks and uncertainties, see the risk factors can bebelow and the information found in the section entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2016. 2019.
The information below includes additional risks relatingnovel coronavirus (“COVID-19”) pandemic has disrupted, and may continue to our issuance of Convertible Notes and our transactions in Convertible Note Hedges and Warrants. The risks described below could materially affectdisrupt, our business, financial condition or future results.
The conditional conversion features of our 2.75% Convertible Senior Notes due 2022, if triggered, may adversely affect our financial condition.
In the event the conditional conversion features of the Convertible Notes are triggered, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock, we would be required to make cash payments to satisfy all or a portion of our conversion obligation based on the conversion rate, which could adversely affect our liquidity. In addition, even if holders do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which could result in a material reductionadverse impact to our business, results of operations, cash flow, liquidity and financial condition.
In December 2019, the COVID-19 outbreak occurred in China and has since spread to other parts of the world. On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic and recommended containment and mitigation measures. On March 13, 2020, the United States declared a national emergency concerning the outbreak. Along with these declarations, extraordinary and wide-ranging actions were taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions across the United States and the world, including quarantines, social distancing and “stay-at-home” orders, travel restrictions, mandatory business closures and other mandates that substantially restricted individuals’ daily activities and curtailed or ceased many businesses’ normal operations.
New and changing government actions to address the COVID-19 pandemic continue to occur regularly. Certain jurisdictions in which we operate have had to re-establish restrictions due to a resurgence in COVID-19 cases. Additionally, although many of our net working capital.customers have begun to reopen, restart operations or increase operating levels, they may be forced to close or limit operations as any new COVID-19 outbreaks occur.
In response to the pandemic and these actions, we began implementing changes in our business in March 2020 to protect our employees and customers and support appropriate social distancing and other health and safety protocols. We have flexed the workforce in our distribution centers and manufacturing operations based on business needs, including the implementation of remote, alternate and flexible work arrangements where possible and remote work options for non-essential on-site functions and have adhered to geographical government mandates and operating restrictions for other facilities. Additionally, we have enhanced cleaning and sanitary procedures; eliminated domestic and international travel; restricted access to our facilities to only employees and implemented return to work screening protocols for when our facilities are reopened. While all of these measures have been necessary and appropriate, they have resulted in additional costs and may adversely impact our business and financial performance. As our response to the pandemic evolves, we expect to incur additional costs and will potentially experience adverse impacts to our business, each of which may be significant. In addition, an extended period of remote work arrangements could impair our ability to effectively manage our business, and introduce additional operational risks, including, but not limited to, cybersecurity risks and increased vulnerability to security breaches, cyber attacks, computer viruses, ransomware, or other similar events and intrusions.
To date, the COVID-19 pandemic has surfaced in nearly all regions around the world and has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. As a result, we have experienced, and may continue to experience, decreases in demand and customer orders for our products in all sales channels, as well as temporary disruptions and closures of some of our facilities due to decreased demand and government mandates. The convertible note hedge and warrant transactions that we entered into in connection with the offeringCOVID-19 pandemic has also impacted various aspects of the Convertible Senior Notessupply chain as our suppliers experience similar business disruptions due 2022to operating restrictions from government mandates. We continue to monitor procurement of raw materials and components used in the manufacturing, distribution and sale of our products, but continued disruptions in the supply chain due to the COVID-19 pandemic may affectcause difficulty in sourcing materials or unexpected shortages or delays in delivery of raw materials and components, and may result in increased costs in our supply chain. We have implemented plans to reduce spending in certain areas of our business, including flexing variable labor, involuntary leave programs, reductions or delays in variable costs and investments, including capital expenditures, and may need to take additional actions to reduce spending in the future.
We are closely monitoring and assessing the impact of the pandemic on our business, the extent of the impact on our liquidity to meet our short-term obligations and fund our business needs and growth, and our ability to meet financial covenants within our credit agreements. While we are closely monitoring the impact of the pandemic on all aspects of our business, the extent of
the impact on our results of operations, cash flow, liquidity, and financial performance, as well as our ability to execute near- and long-term business strategies and initiatives, will depend on numerous evolving factors and future developments, which are highly uncertain and cannot be reasonably predicted, including: (a) the duration, severity and scope of the pandemic; (b) rapidly-changing governmental and public health mandates and guidance to contain and combat the outbreak; (c) the extent and duration of the pandemic’s adverse effect on economic and social activity, consumer confidence, discretionary spending and preferences, labor and healthcare costs, and unemployment rates, any of which may reduce demand for some of our products and impair the ability of those with whom we do business to satisfy their obligations to us; (d) our ability to sell and provide our services and products, including as a result of continued travel restrictions, mandatory business closures, and stay-at home or similar orders; (e) any temporary reduction in our workforce, closures of our offices and facilities and our ability to adequately staff and maintain our operations; (f) the ability of our customers and suppliers to continue their operations, which could result in terminations of contracts, losses of revenue, and further adverse effects to our supply chain; (g) any impairment in value of our tangible or intangible assets, which could be recorded as a result of weaker economic conditions; and (h) the Convertible Notespotential effects on our internal controls, including as a result of changes in working environments and observing stay-at-home and similar orders that are applicable to our common stock.employees and business partners, among others. In addition, if the pandemic continues to create disruptions or turmoil in the credit or financial markets, or impacts our credit ratings, it could adversely affect our ability to access capital on favorable terms and continue to meet our liquidity needs.
In connection withGiven the offeringinherent uncertainty surrounding the COVID-19 pandemic, we expect the pandemic may continue to have an adverse impact on our business in the near term. Should these conditions persist for a prolonged period, the COVID-19 pandemic, including any of the Convertible Notes, we entered into convertible note hedge transactions with certain option counterparties. The Convertible Note Hedgesabove factors and others that are expected generally to reduce the potential dilution upon conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Convertible Notes, as the casecurrently unknown, may be. We also entered into warrant transactions with each option counterparty. The Warrants could separately have a dilutivematerial adverse effect on our common stockbusiness, results of operations, cash flow, liquidity, and financial condition. Even as restrictions are lifted and economies gradually reopen, the shape of the economic recovery is uncertain and may continue to negatively impact our cash flow, liquidity, and financial condition.
We are currently out of compliance with the extent thatNYSE's minimum market capitalization requirement and are at risk of the market price per share ofNYSE delisting our common stock, exceedswhich would have an adverse impact on the strike price of the Warrants. In connection with establishing its initial hedge of the Convertible Note Hedgestrading volume, liquidity and Warrants, each option counterparty or an affiliate thereof may have entered into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Convertible Notes. This activity could increase (or reduce the size of any decrease in) the market price of our common stock orstock.
On April 30, 2020, we were notified (the “Notice”) by the Convertible Notes atNew York Stock Exchange (the “NYSE”) that time. In addition, each option counterparty or an affiliate thereof may modify its hedge position by entering into or unwinding various derivativeswe were not in compliance with respectthe continued listing standard set forth in Section 802.01B of the NYSE Listed Company Manual because our average market capitalization was less than $50 million over a consecutive 30 trading-day period and our stockholders’ equity was less than $50 million. We are taking actions to meet the continued listing standards of the NYSE to cure the market capitalization condition which we expect will ultimately lead to a recovery of our common stock and/or purchasing or sellingprice and market capitalization. Our common stock could also be delisted if our average market capitalization over a consecutive 30 day-trading period is less than $15 million, in which case we would not have an opportunity to cure the deficiency, our common stock would be suspended from trading on the NYSE immediately, and the NYSE would begin the process to delist our common stock, subject to our right to appeal under NYSE rules. We cannot assure you that any appeal we undertake in these or other securities of ours in secondary market transactions priorcircumstances will be successful. While we are working to the maturitycure this deficiency and regain compliance with this continued listing standard, there can be no assurance that we will be able to cure this deficiency or if we will cease to comply with another continued listing standard of the Convertible Notes (and isNYSE.
A delisting of our common stock from the NYSE could negatively impact us as it would likely to do so during any observation period related to a conversion ofreduce the Convertible Notes). This activity could also cause or avoid an increase or a decrease in theliquidity and market price of our common stock; reduce the number of investors willing to hold or acquire our common stock; and negatively impact our ability to access equity markets and obtain financing.
If we fail to meet the necessary requirements for our common stock to remain listed on the NYSE or other similar markets, then we will be obligated to offer to repurchase all of our outstanding Convertible Notes. Our failure to make such an offer or repurchase any tendered Convertible Notes will result in an event of default under the indentures governing the Convertible Notes. In addition, ifAny such default will trigger a cross-default on our other debt obligations, including the First Lien Term Loan, Second Lien Term and Revolving Credit Facility. Our inability to cure any such Convertible Note Hedges and Warrants fail to become effective, each option counterparty may unwind its hedge position with respect to our common stock, which could adversely affectdefaults, including the valuepayment of our common stockdebt obligations, would have a material adverse effect on our financial position and the valueresults of the Convertible Notes.operations.
We are subject to counterparty risk with respect to the convertible note hedge transactions.
Each option counterparty to the Convertible Note Hedges is a financial institution, and we will be subject to the risk that it might default under the Convertible Note Hedges. Our exposure to the credit risk of an option counterparty will not be secured by any collateral. Global economic conditions have from time to time resulted in the actual or perceived failure or financial difficulties of many financial institutions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with the option counterparty. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of any option counterparty.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In April 2017, the Board of Directors authorized the Share Repurchase Program, which provides for the purchase of up to 1.5 million shares of the Company’s issued and outstanding common stock. The Share Repurchase Program provides for share purchases in the open market or otherwise, including pursuant to Rule 10b5-1 plans, depending on share price, market conditions and other
factors, as determined by the Company. Total shares purchased as of September 30, 2017 through the Share Repurchase Program were 686,506 at a total cost of $10.0 million for an average purchase price per share of $14.55, excluding commissions.
The Company’s purchases of its shares of common stock during the third quarter of 2017three months ended June 30, 2020 were as follows:
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (a) |
July 1 - 31, 2017 | | 116,141 |
| | $ | 14.09 |
| | 116,141 |
| | 813,494 |
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August 1 - 31, 2017 | | — |
| | | | — |
| | 813,494 |
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September 1 - 30, 2017 | | — |
| | | | — |
| | 813,494 |
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Total | | 116,141 |
| | $ | 14.09 |
| | 116,141 |
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Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs (a) |
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April 1 - 30, 2020 | | — | | | | | — | | | 813,494 | |
May 1 - 31, 2020 | | — | | | | | — | | | — | |
June 1 - 30, 2020 | | — | | | | | — | | | — | |
Total | | — | | | | | — | | | — | |
__________________________
(a) On The Company has a share repurchase program that was announced in May 3, 2017 the Company announced that its Board of Directors had approved the Share Repurchase Program. The Share Repurchase Program allows the Company to repurchasepurchase up to 1.5 million shares of itsthe Company’s common stock. As of June 30, 2020, there were no shares of common stock remaining to be purchased under this program. The Share Repurchase Program expiresshare repurchase program expired on May 5, 2020.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.None.
Item 6. Exhibits.
Exhibits Index:
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3.1(b) | |
3.2(a) | |
31.110.1* | |
10.2 | |
10.3 | |
10.4 | |
10.5 | |
31.1 | |
31.2 | |
32.1 | |
32.2 | |
101.INS | Inline XBRL Instance Document. (not part of filing) |
101.SCH | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document). |
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(a) | | Incorporated by reference to the ExhibitsExhibit filed with our Registration StatementCurrent Report on Form S-1/A8-K filed on June 11, 2015 (Reg.February 20, 2019 (File No. 333-203138)001-37427). |
(b) | | Incorporated by reference to the ExhibitsExhibit filed with our Quarterly Report on Form 10-Q filed on August 11, 20158, 2019 (File No. 001-37427). |
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* Certain exhibits and schedules are omitted pursuant to Item 601(a)(5) of Regulation S-K, and the Company agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted exhibits and schedules upon request.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | HORIZON GLOBAL CORPORATION (Registrant) | | |
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| | HORIZON GLOBAL CORPORATION (Registrant) | | /s/ DENNIS E. RICHARDVILLE |
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Date: | August 7, 2020 | By: | | /s/ DAVID G. RICE |
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Date: | October 31, 2017 | By: | | David G. RiceDennis E. Richardville
Chief Financial Officer |
Exhibits Index:
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101.INS | XBRL Instance Document. |
101.SCH | XBRL Taxonomy Extension Schema Document. |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. |
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(a) | | Incorporated by reference to the Exhibits filed with our Registration Statement on Form S-1/A filed on June 11, 2015 (Reg. No. 333-203138). |
(b) | | Incorporated by reference to the Exhibits filed with our Quarterly Report on Form 10-Q filed on August 11, 2015 (File No. 001-37427). |