Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
(Mark One)
 
 
x

 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
 
For the Quarterly Period Ended September 30, 2018
or

o

 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from                  to                  .
Commission file number 001-37427
HORIZON GLOBAL CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
47-3574483
(IRS Employer
Identification No.)
2600 W. Big Beaver Road, Suite 555
Troy, Michigan 48084
(Address of principal executive offices, including zip code)
(248) 593-8820
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x    No o.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x    No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
 
Non-accelerated filer o
 
Smaller reporting company o
 
Emerging growth company x
 
 
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes x No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No x
As of November 3, 2018, the number of outstanding shares of the Registrant’s common stock, par value $0.01 per share, was 25,112,239 shares.



HORIZON GLOBAL CORPORATION
Index
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1


Forward-Looking Statements
This report may contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements speak only as of the date they are made and give our current expectations or forecasts of future events. These forward-looking statements can be identified by the use of forward-looking words, such as “may,” “could,” “should,” “estimate,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “target,” “plan” or other comparable words, or by discussions of strategy that may involve risks and uncertainties.
These forward-looking statements are subject to numerous assumptions, risks and uncertainties which could materially affect our business, financial condition or future results including, but not limited to, risks and uncertainties with respect to: the Company’s integration of the Westfalia Group (“Westfalia Group” consists of Westfalia-Automotive Holding GmbH and TeIJs Holding B.V.); leverage; liabilities imposed by the Company’s debt instruments; market demand; competitive factors; supply constraints; material and energy costs; technology factors; litigation; government and regulatory actions including the impact of any tariffs, quotas or surcharges; the Company’s accounting policies; future trends; general economic and currency conditions; various conditions specific to the Company’s business and industry; and other risks that are discussed in Item 1A, “Risk Factors” and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The risks described in our Annual Report and elsewhere in this report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deemed to be immaterial also may materially adversely affect our business, financial position and results of operations or cash flows.
The cautionary statements set forth above should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may issue. We caution readers not to place undo reliance on the statements, which speak only as of the date of this report. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statement to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, except as otherwise required by law.
We disclose important factors that could cause our actual results to differ materially from our expectations implied by our forward-looking statements under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report. These cautionary statements qualify all forward-looking statements attributed to us or persons acting on our behalf. When we indicate that an event, condition or circumstance could or would have an adverse effect on us, we mean to include effects upon our business, financial and other conditions, results of operations, prospects and ability to service our debt.


2


PART I. FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

HORIZON GLOBAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


 
September 30,
2018

December 31,
2017
 
 
(unaudited)
 
 
Assets
 

 

Current assets:
 

 

Cash and cash equivalents
 
$
27,310


$
29,570

Receivables, net of reserves of approximately $4.5 million and $3.1 million at September 30, 2018 and December 31, 2017, respectively
 
122,250


91,770

Inventories
 
161,110


171,500

Prepaid expenses and other current assets
 
11,930


10,950

Total current assets
 
322,600

 
303,790

Property and equipment, net
 
105,370


113,020

Goodwill
 
10,410


138,190

Other intangibles, net
 
81,930


90,230

Deferred income taxes
 
6,900

 
4,290

Other assets
 
9,170


11,510

Total assets
 
$
536,380

 
$
661,030

Liabilities and Shareholders' Equity
 

 

Current liabilities:
 

 

Current maturities, long-term debt
 
$
12,530


$
16,710

Accounts payable
 
109,390


138,730

Accrued liabilities
 
57,430


53,070

Total current liabilities
 
179,350

 
208,510

Long-term debt
 
342,260


258,880

Deferred income taxes
 
13,600


14,870

Other long-term liabilities
 
19,000


38,370

Total liabilities
 
554,210

 
520,630

Commitments and contingent liabilities
 

 

Shareholders' equity:
 
 
 
 
Preferred stock, $0.01 par: Authorized 100,000,000 shares;
Issued and outstanding: None
 

 

Common stock, $0.01 par: Authorized 400,000,000 shares;
25,798,745 shares issued and 25,112,239 outstanding at September 30, 2018, respectively, and 25,625,571 shares issued and 24,939,065 outstanding at December 31, 2017, respectively
 
250

 
250

Paid-in capital
 
160,960

 
159,830

Treasury stock, at cost: 686,506 shares at September 30, 2018 and December 31, 2017
 
(10,000
)
 
(10,000
)
Accumulated deficit
 
(175,960
)
 
(18,760
)
Accumulated other comprehensive income
 
9,200

 
10,570

Total Horizon Global shareholders' equity
 
(15,550
)
 
141,890

Noncontrolling interest
 
(2,280
)
 
(1,490
)
Total shareholders' equity
 
(17,830
)
 
140,400

Total liabilities and shareholders' equity
 
$
536,380

 
$
661,030

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


HORIZON GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited—dollars in thousands, except for per share amounts)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net sales
 
$
227,840

 
$
240,120

 
$
677,990

 
$
696,990

Cost of sales
 
(184,220
)
 
(181,700
)
 
(548,350
)
 
(525,510
)
Gross profit
 
43,620

 
58,420

 
129,640

 
171,480

Selling, general and administrative expenses
 
(40,920
)
 
(45,130
)
 
(145,220
)
 
(134,610
)
Impairment
 
(26,640
)
 

 
(125,770
)
 

Operating profit (loss)
 
(23,940
)
 
13,290

 
(141,350
)
 
36,870

Other expense, net:
 
 
 
 
 
 
 
 
Interest expense
 
(7,650
)
 
(5,540
)
 
(19,790
)
 
(16,650
)
Loss on extinguishment of debt
 

 

 

 
(4,640
)
Other expense, net
 
(1,510
)
 
(1,310
)
 
(9,240
)
 
(2,560
)
Other expense, net
 
(9,160
)
 
(6,850
)
 
(29,030
)
 
(23,850
)
Income (loss) before income tax benefit
 
(33,100
)
 
6,440

 
(170,380
)
 
13,020

Income tax benefit
 
100

 
120

 
12,460

 
3,350

Net income (loss)
 
(33,000
)
 
6,560

 
(157,920
)
 
16,370

Less: Net loss attributable to noncontrolling interest
 
(240
)
 
(330
)
 
(720
)
 
(920
)
Net income (loss) attributable to Horizon Global
 
$
(32,760
)
 
$
6,890

 
$
(157,200
)
 
$
17,290

Net income (loss) per share attributable to Horizon Global:
 
 
 
 
 

 

Basic
 
$
(1.31
)
 
$
0.28

 
$
(6.28
)
 
$
0.70

Diluted
 
$
(1.31
)
 
$
0.27

 
$
(6.28
)
 
$
0.69

Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
25,101,847

 
24,948,410

 
25,028,072

 
24,728,643

Diluted
 
25,101,847

 
25,379,252

 
25,028,072

 
25,154,800



The accompanying notes are an integral part of these condensed consolidated financial statements.

4


HORIZON GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited—dollars in thousands)

 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income (loss)
 
$
(33,000
)
 
$
6,560

 
$
(157,920
)
 
$
16,370

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation
 
(680
)
 
2,020

 
(4,400
)
 
15,520

Derivative instruments (Note 9)
 
640

 
(1,080
)
 
2,960

 
170

Total other comprehensive income (loss)
 
(40
)
 
940

 
(1,440
)
 
15,690

Total comprehensive income (loss)
 
(33,040
)
 
7,500

 
(159,360
)
 
32,060

Less: Comprehensive loss attributable to noncontrolling interest
 
(240
)
 
(320
)
 
(790
)
 
(900
)
Comprehensive income (loss) attributable to Horizon Global
 
$
(32,800
)
 
$
7,820

 
$
(158,570
)
 
$
32,960



The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


HORIZON GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited—dollars in thousands)
 
 
Nine months ended
September 30,
 
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
 
Net income (loss)
 
$
(157,920
)
 
$
16,370

Adjustments to reconcile net income (loss) to net cash used for operating activities:
 
 
 
 
Net loss on dispositions of property and equipment
 
490

 
330

Depreciation
 
12,540

 
10,280

Amortization of intangible assets
 
6,170

 
7,660

Impairment of goodwill and intangible assets
 
125,770

 

Amortization of original issuance discount and debt issuance costs
 
6,050

 
5,090

Deferred income taxes
 
(3,370
)
 
840

Loss on extinguishment of debt
 

 
4,640

Non-cash compensation expense
 
1,430

 
2,760

Amortization of purchase accounting inventory step-up
 

 
420

Increase in receivables
 
(35,120
)
 
(28,360
)
(Increase) decrease in inventories
 
5,980

 
(7,920
)
Decrease in prepaid expenses and other assets
 
1,410

 
3,490

Increase (decrease) in accounts payable and accrued liabilities
 
(30,060
)
 
(17,440
)
Other, net
 
590

 
(480
)
Net cash used for operating activities
 
(66,040
)
 
(2,320
)
Cash Flows from Investing Activities:
 
 
 
 
Capital expenditures
 
(10,820
)
 
(20,270
)
Acquisition of businesses, net of cash acquired
 

 
(19,800
)
Net proceeds from disposition of property and equipment
 
160

 
1,080

Net cash used for investing activities
 
(10,660
)
 
(38,990
)
Cash Flows from Financing Activities:
 
 
 
 
Proceeds from borrowings on credit facilities
 
12,550

 
36,970

Repayments of borrowings on credit facilities
 
(14,390
)
 
(41,630
)
Proceeds from Term B Loan, net of issuance costs
 
45,430

 

Repayments of borrowings on Term B Loan, inclusive of transaction costs
 
(6,490
)
 
(187,820
)
Proceeds from ABL Revolving Debt
 
72,430

 
114,500

Repayments of borrowings on ABL Revolving Debt
 
(34,830
)
 
(94,500
)
Proceeds from issuance of common stock, net of offering costs
 

 
79,920

Repurchase of common stock
 

 
(10,000
)
Proceeds from issuance of Convertible Notes, net of issuance costs
 

 
121,130

Proceeds from issuance of Warrants, net of issuance costs
 

 
20,930

Payments on Convertible Note Hedges, inclusive of issuance costs
 

 
(29,680
)
Other, net
 
(300
)
 
(240
)
Net cash provided by financing activities
 
74,400

 
9,580

Effect of exchange rate changes on cash
 
40

 
1,960

Cash and Cash Equivalents:
 
 
 
 
Decrease for the period
 
(2,260
)
 
(29,770
)
At beginning of period
 
29,570

 
50,240

At end of period
 
$
27,310

 
$
20,470

Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid for interest
 
$
13,520

 
$
10,090

Cash paid for taxes
 
$
4,340

 
$
6,110

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


HORIZON GLOBAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Nine Months Ended September 30, 2018
(unaudited—dollars in thousands)

 
 
Common
Stock
 
Paid-in
Capital
 
Treasury Stock
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Horizon Global Shareholders’ Equity
 
Noncontrolling Interest
 
Total Shareholders’ Equity
Balance at December 31, 2017, as reported
 
$
250

 
$
159,490

 
$
(10,000
)
 
$
(17,860
)
 
$
10,010

 
$
141,890

 
$
(1,490
)
 
$
140,400

Impact of ASU 2018-02
 

 
340

 

 
(900
)
 
560

 

 

 

Balance at December 31, 2017, as restated
 
250

 
159,830

 
(10,000
)
 
(18,760
)
 
10,570

 
141,890

 
(1,490
)
 
140,400

Net loss
 

 

 

 
(57,510
)
 

 
(57,510
)
 
(250
)
 
(57,760
)
Other comprehensive income, net of tax
 

 

 

 

 
4,680

 
4,680

 
10

 
4,690

Shares surrendered upon vesting of employees' share based payment awards to cover tax obligations
 

 
(200
)
 

 

 

 
(200
)
 

 
(200
)
Non-cash compensation expense
 

 
720

 

 

 

 
720

 

 
720

Balance at March 31, 2018
 
250

 
160,350

 
(10,000
)
 
(76,270
)
 
15,250

 
89,580

 
(1,730
)
 
87,850

Net loss
 

 

 

 
(66,930
)
 

 
(66,930
)
 
(230
)
 
(67,160
)
Other comprehensive loss, net of tax
 

 

 

 

 
(6,010
)
 
(6,010
)
 
(80
)
 
(6,090
)
Shares surrendered upon vesting of employees' share based payment awards to cover tax obligations
 

 
(10
)
 

 

 

 
(10
)
 

 
(10
)
Non-cash compensation expense
 

 
490

 

 

 

 
490

 

 
490

Balance at June 30, 2018
 
250

 
160,830

 
(10,000
)
 
(143,200
)
 
9,240

 
17,120

 
(2,040
)
 
15,080

Net loss
 

 

 

 
(32,760
)
 

 
(32,760
)
 
(240
)
 
(33,000
)
Other comprehensive loss, net of tax
 

 

 

 

 
(40
)
 
(40
)
 

 
(40
)
Shares surrendered upon vesting of employees' share based payment awards to cover tax obligations
 

 
(90
)
 

 

 

 
(90
)
 

 
(90
)
Non-cash compensation expense
 

 
220

 

 

 

 
220

 

 
220

Balance at September 30, 2018
 
$
250

 
$
160,960

 
$
(10,000
)
 
$
(175,960
)
 
$
9,200

 
$
(15,550
)
 
$
(2,280
)
 
$
(17,830
)


The accompanying notes are an integral part of these condensed consolidated financial statements.


7


HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


1. Basis of Presentation
Horizon Global Corporation (“Horizon,” “Horizon Global,” or the “Company”) is a global designer, manufacturer and distributor of a wide variety of high quality, custom-engineered towing, trailering, cargo management and other related accessories. These products are designed to support original equipment manufacturers and original equipment suppliers (collectively, “OEs”), aftermarket and retail customers within the agricultural, automotive, construction, horse/livestock, industrial, marine, military, recreational, trailer and utility markets. The Company groups its operating segments into reportable segments by the region in which sales and manufacturing efforts are focused. The Company’s reportable segments are Horizon Americas, Horizon Europe-Africa, and Horizon Asia-Pacific. See Note 10, “Segment Information,” for further information on each of the Company’s reportable segments.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) for interim financial information and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. It is management’s opinion that these financial statements contain all adjustments, including adjustments of a normal and recurring nature, necessary for a fair presentation of financial position and results of operations. Results of operations for interim periods are not necessarily indicative of results for the full year.
2. New Accounting Pronouncements
In June 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU 2018-07”). ASU 2018-07 expands the scope of Accounting Standard Codification (“ASC”) 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 with early adoption permitted. The Company is in process of assessing the impact of the adoption of ASU 2018-07 on the condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (the “2017 Tax Act”). ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. It must be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate from the 2017 Tax Act is recognized. The Company adopted the standard in the third quarter of 2018 and the impact of the adoption of ASU 2018-02 is approximately a $0.9 million increase to accumulated deficit, a $0.3 million decrease to paid-in capital, and a $0.6 million decrease to accumulated other comprehensive income.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). ASU 2017-12 eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires, for qualifying hedges, the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also modifies the accounting for components excluded from the assessment of hedge effectiveness, eases documentation and assessment requirements and modifies certain disclosure requirements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted and should be applied on a modified retrospective basis. The Company is in the process of assessing the impact of the adoption of ASU 2017-12 on the condensed consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). ASU 2017-09 amends the scope of modification accounting for share-based payment arrangements and provides guidance on when an entity would be required to apply modification accounting. This guidance is effective for all entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted and should be applied on a prospective basis. The Company adopted ASU 2017-09 on January, 1, 2018, on a prospective basis, and there was no impact on the condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a

8



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Business” (“ASU 2017-01”). ASU 2017-01 provides clarification on the definition of a business and adds guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those annual periods, and should be applied on a prospective basis. As of January 1, 2018, ASU 2017-01 became effective for the Company for any new acquisitions (or disposals), and there was no impact on the condensed consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”). ASU 2016-16 provides an amendment to the accounting guidance related to the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory. Under the new guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Under the current guidance, the income tax effects are deferred until the asset has been sold to an outside party. The Company adopted ASU 2016-16 on January 1, 2018, on a modified retrospective basis, and there was no impact on the condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 was issued to reduce differences in practice with respect to how specific transactions are classified in the statement of cash flows. This guidance is effective for public entities for fiscal years beginning after December 15, 2017, including interim periods within those annual periods, with early adoption permitted and should be applied on a retrospective basis. The Company adopted ASU 2016-15 on January 1, 2018, and there was no impact on the condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which supersedes the leases requirements in “Leases (Topic 840).” The objective of this update is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. The FASB has subsequently issued an additional ASU that provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the revenue guidance (Topic 606) and certain criteria are met. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. The Company is in the process of assessing the impact of the adoption of ASU 2016-02 on the condensed consolidated financial statements. The Company expects the impact to the condensed consolidated balance sheet to be significant. The Company plans to elect the practical expedients upon transition that will retain the lease classification and initial direct costs for any leases that exist prior to adoption of the standard. Horizon will not reassess whether any contracts entered into prior to adoption are leases. The Company has formed a cross-functional implementation team and is in the process of cataloging its existing lease contracts and evaluating changes to its systems to implement the new guidance.
Accounting Standards Update 2014-09
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09” or “Topic 606”). ASU 2014-09 supersedes most of the existing guidance on revenue recognition in ASC Topic 605, “Revenue Recognition” (“Topic 605”), and establishes a broad principle that would require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not record a cumulative adjustment related to the adoption of ASU 2014-09, and the effects of adoption were not significant. See Note 3, “Revenues,” for further information.

9



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

3. Revenues
Revenue Recognition
The following tables present the Company’s net sales disaggregated by major sales channel for the three and nine months ended September 30, 2018:
 
 
Three Months Ended September 30, 2018
 
 
Horizon Americas
 
Horizon Europe-Africa
 
Horizon
Asia-Pacific
 
Total
 
 
(dollars in thousands)
Net Sales
 
 
 
 
 
 
 
 
Automotive OEM
 
$
20,320

 
$
40,650

 
$
5,740

 
$
66,710

Automotive OES
 
1,700

 
12,600

 
15,190

 
29,490

Aftermarket
 
38,470

 
19,980

 
6,170

 
64,620

Retail
 
29,600

 

 
2,860

 
32,460

Industrial
 
11,160

 

 
3,850

 
15,010

E-commerce
 
13,750

 
1,290

 

 
15,040

Other
 
510

 
4,000

 

 
4,510

Total
 
$
115,510

 
$
78,520

 
$
33,810

 
$
227,840

 
 
Nine Months Ended September 30, 2018
 
 
Horizon Americas
 
Horizon Europe-Africa
 
Horizon
Asia-Pacific
 
Total
 
 
(dollars in thousands)
Net Sales
 
 
 
 
 
 
 
 
Automotive OEM
 
$
60,320

 
$
134,930

 
$
18,250

 
$
213,500

Automotive OES
 
4,230

 
39,980

 
45,170

 
89,380

Aftermarket
 
96,700

 
65,180

 
19,210

 
181,090

Retail
 
96,330

 

 
8,050

 
104,380

Industrial
 
31,680

 

 
11,080

 
42,760

E-commerce
 
29,340

 
3,880

 

 
33,220

Other
 
1,210

 
12,450

 

 
13,660

Total
 
$
319,810

 
$
256,420

 
$
101,760

 
$
677,990

Revenue is recognized when obligations under the terms of a contract with the Company’s customers are satisfied; generally, this occurs with the transfer of control of its towing, trailering, cargo management and other related accessory products. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms vary by the type and location of its customers and the products offered. The term between invoicing and when payment is due is not significant.
For the majority of the Company’s sales arrangements, the Company deems control to transfer at a single point in time and recognizes revenue when it ships products from its manufacturing facilities to its customers. Once a product has shipped, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the asset. The Company considers control to transfer upon shipment because the Company has a present right to payment at that time, the customer has legal title to the asset, and the customer has significant risks and rewards of ownership of the asset.
For certain sales arrangements within the automotive OEM and automotive OES sales channels, the Company deems control to transfer over time, and recognizes revenue as products are manufactured, when the terms of the arrangement include both a right

10



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

to payment and contractual restrictions against the alternative use of its products. For revenue recognized over time, the Company estimates the amount of revenue earned at a given point during the production cycle based on certain costs factors such as raw materials and labor, incurred to date, plus a reasonable profit. The Company believes this method, which is the cost-to-cost input method, best estimates the revenue recognizable for these arrangement. At September 30, 2018, the aggregate amount of the transaction prices allocated to remaining performance obligations was not material, and the Company will recognize this revenue as the manufacturing of the products is completed, which is expected to occur over the next 12 months.
Provisions for customer volume rebates, product returns, discounts and allowances are variable consideration and are recorded as a reduction of revenue in the same period the related sales are recorded. Such provisions are calculated using historical averages adjusted for any expected changes due to current business conditions. Consideration given to customers for cooperative advertising is recognized as a reduction of revenue as there is no distinct good or service received in return for the advertising. The Company uses the most likely amount method to estimate variable consideration. Adjustments to estimates of variable consideration for previously recognized revenue were insignificant during the three and nine months ended September 30, 2018.
Contract Balances
The timing of revenue recognition, billings and cash collections and payments results in billed accounts receivable, unbilled receivables (contract assets), and deferred revenues (contract liabilities).
Revenue recognized over time gives rise to contract assets, which represent revenue recognized but unbilled. The Company’s sales arrangements satisfied over time create contract assets when revenue is recognized as the products are manufactured, as payment is not contractually required until the products have shipped. Contract assets in these arrangements are reclassified to accounts receivable upon shipment. At September 30, 2018, total opening and closing balances of contract assets were not material.
Contract liabilities are comprised of customer payments received or due in advance of the Company’s performance. At September 30, 2018, total opening and closing balances of deferred revenue were not material. The Company recognizes deferred revenue as net sales after the Company has transferred control of the products to the customer and all revenue recognition criteria is met. For the three and nine months ended September 30, 2018, the total amount of revenue recognized from revenue deferred in prior periods was not material.
Additionally, the Company monitors the aging of uncollected billings and adjusts its accounts receivable allowance on a quarterly basis, as necessary, based upon its evaluation of the probability of collection. The adjustments made by the Company due to the write-off of uncollectible amounts have been immaterial for all periods presented. At September 30, 2018 and December 31, 2017, the Company’s accounts receivable, net of reserves were $122.3 million and $91.8 million, respectively.
Practical Expedients
The Company elects the practical expedient to expense costs incurred to obtain a contract with a customer when the amortization period would have been one year or less. These costs include sales commissions as the Company has determined annual compensation is commensurate with annual sales activities.
The Company elects the practical expedient that does not require the Company to adjust consideration for the effects of a significant financing component when the period between shipment of its products and customer’s payment is one year or less.
4. Facility Closures
Solon, Ohio and Mosinee, Wisconsin

In the first quarter of 2018, the Company announced plans to close its facility in Solon, Ohio along with an engineering center in Mosinee, Wisconsin. The activities at these locations have been consolidated and moved to the headquarters of the Horizon Americas segment, located in Plymouth, Michigan. As of September 30, 2018, the Company vacated the Solon, Ohio and Mosinee, Wisconsin facilities. The Company is party to lease agreements for these facilities for which it has non-cancellable future rental obligations. The Company exited the facilities during the third quarter of 2018, and recorded a liability of approximately $1.5 million within accrued liabilities and other long-term liabilities in the Company’s condensed consolidated balance sheets as of September 30, 2018. The lease agreements expire in 2019 and 2022, respectively.

11



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

During the second quarter of 2018, the Company finalized workforce consolidation plans related to the facility closures. There were no severance and other employee-related costs incurred in the three months ended September 30, 2018 and approximately $3.4 million of severance and other employee-related costs in the nine months ended September 30, 2018.
5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2018 are summarized as follows:
 
 
Horizon Americas
 
Horizon Europe-Africa
 
Horizon
Asia-Pacific
 
Total
 
 
(dollars in thousands)
Balance at December 31, 2017
 
 
 
 
 
 
 
 
Goodwill
 
$
5,280

 
$
126,160

 
$
6,750

 
$
138,190

Accumulated impairment losses
 

 

 

 

Net beginning balance
 
5,280

 
126,160

 
6,750

 
138,190

Impairment
 

 
(124,660
)
 

 
(124,660
)
Foreign currency translation and other
 
(970
)
 
(1,500
)
 
(650
)
 
(3,120
)
Balance at September 30, 2018
 
$
4,310

 
$

 
$
6,100

 
$
10,410

During the first quarter of 2018, the Company continued to experience a decline in market capitalization. Additionally, the Europe-Africa reporting unit did not perform in-line with forecasted results driven by a shift in volume to lower margin programs as well as increased commodity costs, which negatively impacted margins. As a result, an indicator of impairment was identified during the first quarter of 2018. The Company performed an interim quantitative assessment as of March 31, 2018, utilizing a combination of the income and market approaches, which were weighted evenly. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded the fair value of the reporting unit by $43.4 million, and accordingly an impairment was recorded. Key assumptions used in the analysis were a discount rate of 13.5%, a terminal growth rate of 2.5% and EBITDA margin.
Due to the impairment indicators noted above, the Company also performed an interim impairment assessment of indefinite-lived intangible assets in the first quarter of 2018 in the Horizon Europe-Africa reportable segment. Based on the results of our analyses, there were certain trade names where the estimated fair values approximated the carrying values. Key assumptions used in the analysis were discount rates of 13.5% to 16.0% and royalty rates ranging from 0.5% to 1.0%.
During the second quarter of 2018, the Company continued to experience a decline in market capitalization. Additionally, the Europe-Africa reporting unit did not perform in-line with forecasted results driven by an unfavorable shift in volume to lower margin channels as well as increased commodity costs, which negatively impacted margins. Further, the expected benefits of shifting production to lower cost manufacturing sites have not been realized. As a result, an indicator of impairment was identified during the second quarter of 2018. The Company performed an interim quantitative assessment as of June 30, 2018, utilizing a combination of the income and market approaches. The income approach was weighted 75%, while the market approach was weighted 25%. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded the fair value of the reporting unit by $54.6 million and, accordingly, an impairment was recorded. Key assumptions used in the analysis were a discount rate of 14.0%, a terminal growth rate of 2.5% and EBITDA margin.
Due to the impairment indicators noted above, the Company performed an interim impairment assessment for indefinite-lived intangible assets within the Horizon Europe-Africa reportable segment, for which the gross carrying amounts totaled approximately $12.1 million as of June 30, 2018. Based on the results of the Company’s analyses, it was determined that the carrying values of the Westfalia and Terwa trade names exceeded their fair values by $1.1 million and, accordingly, an impairment was recorded. Key assumptions used in the analysis were discount rates of 15.0% and royalty rates ranging from 0.5% to 1.0%.
During the third quarter of 2018, the Europe-Africa reporting unit continued to underperform in relation to forecasted results driven by increased commodity costs and the failure to realize benefits from previously implemented synergy plans. The Company performed an interim quantitative assessment as of August 31, 2018, utilizing a combination of the income and market approaches. The income approach was weighted 75%, while the market approach was weighted 25%. The results of the quantitative analysis performed indicated the carrying value of the reporting unit exceeded fair value and, accordingly, an impairment of $26.6 million was recorded. Key assumptions used in the analysis were a discount rate of 13.5%, a terminal growth rate of 2.5% and EBITDA margin.

12



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Due to impairment indicators noted above, the Company performed an interim impairment assessment for indefinite-lived intangible assets within the Europe-Africa reportable segment as of August 31, 2018, for which the gross carrying amounts totaled approximately $10.9 million as of September 30, 2018. Based on the results of the Company’s analyses, the carrying value of the trademarks approximated fair value. Key assumptions used in the analysis were discount rates of 14.5%, and royalty rates ranging from 0.5% to 1.0%.
The gross carrying amounts and accumulated amortization of the Company’s other intangibles as of September 30, 2018 and December 31, 2017 are summarized below. The Company amortizes these assets over periods ranging from two to 20 years.
 
 
September 30, 2018
 
December 31, 2017
Intangible Category by Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
 
 
(dollars in thousands)
Finite-lived intangible assets:
 
 
 
 
 
 
 
 
   Customer relationships, 2 – 20 years
 
$
178,240

 
$
(126,170
)
 
$
180,850

 
$
(121,750
)
   Technology and other, 3 – 15 years
 
21,200

 
(15,930
)
 
19,950

 
(15,260
)
   Trademark/Trade names, 1 - 8 years
 
730

 
(230
)
 
730

 
(190
)
Total finite-lived intangible assets
 
200,170

 
(142,330
)
 
201,530

 
(137,200
)
 Trademark/Trade names, indefinite-lived
 
24,090

 

 
25,900

 

Total other intangible assets
 
$
224,260

 
$
(142,330
)
 
$
227,430

 
$
(137,200
)
Amortization expense related to intangible assets as included in the accompanying condensed consolidated statements of income (loss) is summarized as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands)
Technology and other, included in cost of sales
 
$
430

 
$
210

 
$
990

 
$
570

Customer relationships & Trademark/Trade names, included in selling, general and administrative expenses
 
1,600

 
2,490

 
5,180

 
7,090

Total amortization expense
 
$
2,030

 
$
2,700

 
$
6,170

 
$
7,660

6. Inventories
Inventories consist of the following components:
 
 
September 30,
2018
 
December 31,
2017
 
 
(dollars in thousands)
Finished goods
 
$
93,160

 
$
105,070

Work in process
 
18,770

 
16,590

Raw materials
 
49,180

 
49,840

Total inventories
 
$
161,110

 
$
171,500


13



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

7. Property and Equipment, Net
Property and equipment consists of the following components:
 
 
September 30,
2018
 
December 31,
2017
 
 
(dollars in thousands)
Land and land improvements
 
$
460

 
$
480

Buildings
 
23,730

 
23,370

Machinery and equipment
 
163,470

 
162,830

 
 
187,660

 
186,680

Less: Accumulated depreciation
 
82,290

 
73,660

Property and equipment, net
 
$
105,370

 
$
113,020

As discussed in See Note 5, “Goodwill and other intangible assets,” the Company identified indicators of impairment in its Horizon Europe-Africa reporting unit. As a result, the Company performed an impairment test for long-lived assets in accordance with Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment”, as of August 31, 2018. The test did not result in an impairment of long-lived assets. There were no indicators of impairment identified in the Horizon Americas or Horizon Asia-Pacific reporting units.
Depreciation expense included in the accompanying condensed consolidated statements of income (loss) is as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands)
Depreciation expense, included in cost of sales
 
$
3,960

 
$
3,440

 
$
11,560

 
$
9,330

Depreciation expense, included in selling, general and administrative expense
 
340

 
330

 
980

 
950

Total depreciation expense
 
$
4,300

 
$
3,770

 
$
12,540

 
$
10,280

8. Long-term Debt
The Company’s long-term debt consists of the following:
 
 
September 30,
2018
 
December 31,
2017
 
 
(dollars in thousands)
ABL Facility
 
$
47,600

 
$
10,000

Term B Loan
 
193,130

 
149,620

Convertible Notes
 
125,000

 
125,000

Bank facilities, capital leases and other long-term debt
 
22,790

 
25,780

 
 
388,520

 
310,400

Less:
 
 
 
 
Unamortized debt issuance costs and original issuance discount on Term B Loan
 
8,110

 
4,940

Unamortized debt issuance costs and discount on the Convertible Notes
 
25,620

 
29,870

Current maturities, long-term debt
 
12,530

 
16,710

Long-term debt
 
$
342,260

 
$
258,880


14



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Convertible Notes
On February 1, 2017, the Company completed a public offering of 2.75% Convertible Senior Notes (the “Convertible Notes”) in an aggregate principal amount of $125.0 million. Interest is payable on January 1 and July 1 of each year, beginning on July 1, 2017. The Convertible Notes are convertible into 5,005,000 shares of the Company’s common stock, based on an initial conversion price of $24.98 per share. The Convertible Notes will mature on July 1, 2022 unless earlier converted.
The Convertible Notes are convertible at the option of the holder (i) during any calendar quarter beginning after March 31, 2017, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (ii) during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of such period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (iii) upon the occurrence of specified corporate events; and (iv) on or after January 1, 2022 until the close of business on the second scheduled trading day immediately preceding the maturity date. During the third quarter of 2018, no conditions allowing holders of the Convertible Notes to convert have been met. Therefore, the Convertible Notes were not convertible during the third quarter of 2018 and are classified as long-term debt. Should conditions allowing holders of the Convertible Notes to convert be met in a future quarter, the Convertible Notes will be convertible at their holders’ option during the immediately following quarter. As of September 30, 2018, the if-converted value of the Convertible Notes did not exceed the principal value of those Convertible Notes.
Upon conversion by the holders, the Company may elect to settle such conversion in shares of its common stock, cash, or a combination thereof. Because the Company may elect to settle conversion in cash, the Company separated the Convertible Notes into their liability and equity components by allocating the issuance proceeds to each of those components in accordance with ASC 470-20, “Debt-Debt with Conversion and Other Options.” The Company first determined the fair value of the liability component by estimating the value of a similar liability that does not have an associated equity component. The Company then deducted that amount from the issuance proceeds to arrive at a residual amount, which represents the equity component. The Company accounted for the equity component as a debt discount (with an offset to paid-in capital in excess of par value). The debt discount created by the equity component is being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the Convertible Notes ending on July 1, 2022.
The Company allocated offering costs of $3.9 million to the debt and equity components in proportion to the allocation of proceeds to the components, treating them as debt issuance costs and equity issuance costs, respectively. The debt issuance costs of $2.9 million are being amortized as additional non-cash interest expense using the effective interest method over the contractual term of the Convertible Notes. The Company presents debt issuance costs as a direct deduction from the carrying value of the liability component. The carrying value of the liability component at September 30, 2018 and December 31, 2017 was $99.4 million and $95.1 million, respectively, including total unamortized debt discount and debt issuance costs of $25.6 million and $29.9 million, respectively. The $1.0 million portion of offering costs allocated to equity issuance costs was charged to paid-in capital. The carrying amount of the equity component was $20.0 million at September 30, 2018 and December 31, 2017, respectively, net of issuance costs and taxes.
Interest expense recognized relating to the contractual interest coupon, amortization of debt discount and amortization of debt issuance costs on the Convertible Notes included in the accompanying condensed consolidated statements of income (loss) are as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands)
Contractual interest coupon on convertible debt
 
$
880

 
$
880

 
$
2,610

 
$
2,310

Amortization of debt issuance costs
 
$
130

 
$
130

 
$
400

 
$
350

Amortization of "equity discount" related to debt
 
$
1,290

 
$
1,190

 
$
3,860

 
$
3,180

The estimated fair value of the Convertible Notes based on a market approach as of September 30, 2018 was approximately $94.1

15



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

million, which represents a Level 2 valuation. The estimated fair value was determined based on the estimated or actual bids and offers of the Convertible Notes in an over-the-counter market on the last business day of the period.
In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) in privately negotiated transactions with certain of the underwriters or their affiliates (in this capacity, the “option counterparties”). The Convertible Note Hedges provide the Company with the option to acquire, on a net settlement basis, 5,005,000 shares of its common stock, which is equal to the number of shares of common stock that notionally underlie the Convertible Notes, at a strike price of $24.98, which corresponds to the conversion price of the Convertible Notes. The Convertible Note Hedges have an expiration date that is the same as the maturity date of the Convertible Notes, subject to earlier exercise. The Convertible Note Hedges have customary anti-dilution provisions similar to the Convertible Notes. The Convertible Note Hedges have a default settlement method of net-share settlement but may be settled in cash or shares, depending on the Company’s method of settlement for conversion of the corresponding Convertible Notes. If the Company exercises the Convertible Note Hedges, the shares of common stock it will receive from the option counterparties to the Convertible Note Hedges will cover the shares of common stock that it would be required to deliver to the holders of the converted Convertible Notes in excess of the principal amount thereof. The aggregate cost of the Convertible Note Hedges was $29.0 million (or $7.5 million net of the total proceeds from the Warrants sold, as discussed below), before the allocation of issuance costs of approximately $0.7 million. The Convertible Note Hedges are accounted for as equity transactions in accordance with ASC 815-40, “Derivatives and Hedging-Contracts in Entity’s own Equity.”
In connection with the issuance of the Convertible Notes, the Company also sold net-share-settled warrants (the “Warrants”) in privately negotiated transactions with the option counterparties for the purchase of up to 5,005,000 shares of its common stock at a strike price of $29.60 per share, for total proceeds of $21.5 million, before the allocation of $0.6 million of issuance costs. The Company also recorded the Warrants within shareholders’ equity in accordance with ASC 815-40. The Warrants have customary anti-dilution provisions similar to the Convertible Notes. As a result of the issuance of the Warrants, the Company will experience dilution to its diluted earnings per share if its average closing stock price exceeds $29.60 for any fiscal quarter. The Warrants expire on various dates from October 2022 through February 2023 and must be net-settled in shares of the Company’s common stock. Therefore, upon exercise of the Warrants, the Company will issue shares of its common stock to the purchasers of the Warrants that represent the value by which the price of the common stock exceeds the strike price stipulated within the particular warrant agreement.
ABL Facility
On December 22, 2015, the Company entered into that certain Amended and Restated Loan Agreement among the Company, Horizon Global Americas Inc. (f/k/a Cequent Performance Products, Inc., successor by merger to Cequent Consumer Products, Inc.) (“HGA”), Cequent UK Limited, Cequent Towing Products of Canada Ltd., certain other subsidiaries of the Company party thereto as guarantors, the lenders party thereto and Bank of America, N.A., as agent for the lenders (the “ABL Loan Agreement”), under which the lenders party thereto agreed to provide the Company and certain of its subsidiaries with a committed asset-based revolving credit facility (the “ABL Facility”) providing for revolving loans up to an aggregate principal amount of $99.0 million.
The ABL Loan Agreement establishes (i) a U.S. sub-facility, in an aggregate principal amount of up to $94.0 million (subject to availability under a U.S.-specific borrowing base) (the “U.S. Facility”), (ii) a Canadian sub-facility, in an aggregate principal amount of up to $2.0 million (subject to availability under a Canadian-specific borrowing base) (the “Canadian Facility”), and (iii) a U.K. sub-facility in an aggregate principal amount of up to $3.0 million (subject to availability under a U.K.-specific borrowing base) (the “U.K. Facility”). The ABL Facility also includes a $20.0 million U.S. letter of credit sub-facility, which matures on June 30, 2020.
Borrowings under the ABL Facility bear interest, at the Company’s election, at either (i) with respect to the U.S. Facility and the U.K. Facility, (a) the Base Rate (as defined per the ABL Loan Agreement, the “Base Rate”) plus the Applicable Margin (as defined per the ABL Loan Agreement “Applicable Margin”), or (b) the London Interbank Offered Rate (“LIBOR”) plus the Applicable Margin, and (ii) with respect to the Canadian Facility, (a) the Base Rate plus the Applicable Margin, or (b) the Canadian Prime Rate (as defined per the ABL Loan Agreement).
The Company incurs fees with respect to the ABL Facility, including (i) an unused line fee of 0.25% times the amount by which the revolver commitments exceed the average daily revolver usage during any month, (ii) facility fees equal to the applicable margin in effect for (a) LIBOR Revolving Loans (as defined per the ABL Loan Agreement), with respect to the U.S. Facility and the U.K. Facility or (b) Canadian BA Rate Loans (as defined per the ABL Loan Agreement), with respect to the Canadian Facility,

16



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

times the average daily stated amount of letters of credit, (iii) a fronting fee equal to 0.125% per annum on the stated amount of each letter of credit, and (iv) customary administrative fees.
All of the indebtedness of the U.S. Facility is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. In connection with the ABL Loan Agreement, HGA and certain other subsidiaries of the Company party to the ABL Loan Agreement entered into a foreign facility guarantee and collateral agreement (the “Foreign Collateral Agreement”) in order to secure and guarantee the obligation under the Canadian Facility and the U.K. Facility. Under the Foreign Collateral Agreement, HGA and the other subsidiaries of the Company party thereto granted a lien on certain of their assets to Bank of America, N.A., as the agent for the lenders and other secured parties under the Canadian Facility and U.K. Facility.
The ABL Loan Agreement contains customary negative covenants, and does not include any financial maintenance covenants other than a springing minimum fixed charge coverage ratio of at least 1.00 to 1.00 on a trailing twelve-month basis, which will be tested only upon the occurrence of an event of default or certain other conditions as specified in the agreement. At September 30, 2018, the Company was in compliance with its financial covenants contained in the ABL Facility.
Debt issuance costs of approximately $2.5 million were incurred in connection with the entry into and amendment of the ABL Facility. These debt issuance costs will be amortized into interest expense over the contractual term of the loan. The Company recognized $0.1 million and $0.4 million of amortization of debt issuance costs for the three and nine months ended September 30, 2018, respectively, and $0.1 million and $0.4 million for the three and nine months ended September 30, 2017, respectively, which are included in the accompanying condensed consolidated statements of income (loss). There were $0.9 million and $1.3 million of unamortized debt issuance costs included in other assets in the accompanying condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively.
There were $47.6 million and $10.0 million outstanding under the ABL Facility as of September 30, 2018 and December 31, 2017, respectively, with a weighted average interest rate of 3.9% and 3.6%, respectively. Total letters of credit issued were approximately $3.4 million and $6.3 million at September 30, 2018 and December 31, 2017, respectively. The Company had $40.4 million and $58.5 million in availability under the ABL Facility as of September 30, 2018 and December 31, 2017, respectively.
Term Loan
On June 30, 2015, the Company entered into a Credit Agreement among the Company, the lenders party thereto and JPMorgan Chase Bank, N.A. (the “Term Loan Agreement”) under which the Company borrowed an aggregate of $200.0 million (“Original Term B Loan”), which matures on June 30, 2021. On September 19, 2016, the Company entered into the First Amendment to the Credit Agreement (“Term Loan Amendment”), which amended the Original Term B Loan to provide for incremental commitments in an aggregate principal amount of $152.0 million (“2016 Incremental Term Loans”) that were extended to the Company on October 3, 2016. The Original Term B Loan and 2016 Incremental Term Loans are collectively referred to as “Term B Loan”. On March 31, 2017, the Company entered into the 2017 Replacement Term Loan Agreement Amendment (Third Amendment to Credit Agreement) (the “2017 Replacement Term Loan Amendment”); the Term Loan Agreement, as amended by the Term Loan Amendment, the 2017 Replacement Term Loan Amendment and as otherwise amended prior to July 1, 2018, the “Amended Term Loan Agreement”), which replaced the Term B Loan to provide for a new term loan commitment (the “2017 Replacement Term Loan”). The proceeds from the 2017 Replacement Term Loan were used to repay in full the outstanding principal amount of the Term B Loan. As a result of the 2017 Replacement Term Loan Amendment, the interest rate was reduced by 1.5% per annum.
The Amended Term Loan Agreement permits the Company to request incremental term loan facilities, subject to certain conditions, in an aggregate principal amount, together with the aggregate principal amount of incremental equivalent debt incurred by the Company, of up to $75.0 million, plus an additional amount such that the Company’s pro forma first lien net leverage ratio (as defined in the term loan agreement) would not exceed 3.50 to 1.00 as a result of the incurrence thereof.
Borrowings under the 2017 Replacement Term Loan bore interest, at the Company’s election, at either (i) the Base Rate plus 3.5% per annum, or (ii) LIBOR, with a 1% floor, plus 4.5% per annum. Principal payments required under the Term B Loan were $1.9 million due each calendar quarter beginning June 2017.
During the first quarter of 2017, the Company used a portion of the net proceeds from the Convertible Notes offering as described above, along with proceeds from the Common Stock Offering as described in Note 12, “Earnings per Share”, to prepay a total of $177.0 million of the Term B Loan. In accordance with ASC 470, “Debt - Modifications and Extinguishments”, the prepayment was determined to be an extinguishment of the existing debt. As a result, the pro-rata share of the unamortized debt issuance costs

17



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

and original issuance discount related to the prepayment, aggregating to $4.6 million, was recorded as a loss on the extinguishment of debt in the condensed consolidated statements of income (loss). The remaining unamortized debt issuance costs and original issuance discount, including $2.4 million of additional transactions fees incurred in connection to the 2017 Replacement Term Loan Amendment, was approximately $6.1 million. Both the aggregate debt issuance costs and the original issue discount will be amortized into interest expense over the remaining life of the Term B Loan. The Company recognized approximately $0.6 million and $1.4 million of amortization of debt issuance cost and original issue discount for the three and nine months ended September 30, 2018, respectively, and $0.4 million and $1.2 million for the three and nine months ended September 30, 2017, respectively, which is included in the accompanying condensed consolidated statements of income (loss). The Company had an aggregate principal amount outstanding of $193.1 million and $149.6 million as of September 30, 2018 and December 31, 2017, respectively, under the Amended Term Loan Agreement bearing interest at 8.2% and 6.1%, respectively. The Company had $8.1 million and $4.9 million as of September 30, 2018 and December 31, 2017, respectively, of unamortized debt issuance costs and original issue discount, all of which are recorded as a reduction of the debt balance on the Company’s condensed consolidated balance sheets.
The Company’s Term B Loan traded at approximately 97.8% and 101.4% of par value as of September 30, 2018 and December 31, 2017, respectively. The valuation of the Term B Loan was determined based on Level 2 inputs under the fair value hierarchy.
On February 16, 2018, the Company entered into an amendment to the 2017 Replacement Term Loan (the “February 2018 Replacement Term Loan Amendment”), which would have replaced the 2017 Replacement Term Loan to provide for a new term loan commitment in an original aggregate principal amount of $385.0 million (the “2018 Replacement Term Loan”). The proceeds from the 2018 Replacement Term Loan were to be used to (i) repay in full the outstanding principal amount of the existing term loans, (ii) to consummate the acquisition of Brink International B.V. and its subsidiaries (collectively, the “Brink Group”) and pay a portion of the acquisition consideration thereof and the fees and expenses incurred in connection therewith, and (iii) for general corporate purposes. On June 14, 2018, the Company and H2 Equity Partners mutually agreed to terminate the Brink Group acquisition agreement. As part of the termination agreement, the Company agreed to pay a break fee of approximately $5.5 million to H2 Equity Partners and incurred $0.8 million and $5.7 million of transaction fees during the three and nine months ended September 30, 2018, respectively, which are all included in selling, general and administrative expenses in the condensed consolidated statements of income (loss). There were no financing fees incurred during the three months ended September 30, 2018. During the nine months ended September 30, 2018, the Company incurred $5.1 million of financing costs in connection with the pursuit of the Brink Group acquisition which are included in other expense, net in the condensed consolidated statements of income (loss). Due to the termination of the Brink Group acquisition, the February 2018 Replacement Term Loan Amendment was not effective.
On July 31, 2018, the Company entered into the Fourth Amendment to Credit Agreement (the “Fourth Amendment”; the Amended Term Loan Agreement, as amended by the Fourth Amendment, the “2018 Term Loan Agreement”). The Fourth Amendment provided for additional borrowings of $50.0 million (the “2018 Incremental Term Loan”; the 2017 Replacement Term Loan as increased by the 2018 Incremental Term Loan, the “2018 Term B Loan”) that were used to pay outstanding balances under the ABL Loan Agreement, pay fees and expenses in connection with the amendment and for general corporate purposes. Borrowings under the 2018 Term B Loan bear interest, at the Company’s election, at either (i) the Base Rate plus 5.0% per annum, or (ii) LIBOR, with a 1.0% floor, plus 6.0% per annum. Principal payments required under the 2018 Term B Loan are $2.6 million due each calendar quarter beginning September 2018. Under the 2018 Term Loan Agreement, commencing with the fiscal year ended December 31, 2017, and for each fiscal year thereafter, the Company is required to make prepayments of outstanding amounts under the Term B Loan in an amount up to 75.0% of the Company’s excess cash flow for such fiscal year, as defined in the 2018 Term B Loan, subject to adjustments based on the Company’s leverage ratio and optional prepayments of term loans and certain other indebtedness.
All of the indebtedness under the 2018 Term B Loan is and will be guaranteed by the Company’s existing and future material domestic subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors. The 2018 Term Loan Agreement contains customary negative covenants, and also contains a financial maintenance covenant which requires the Company to maintain a net leverage ratio, as defined in the agreement, not exceeding 7.00 to 1.00 on the last day of each fiscal quarter commencing with the fiscal quarter ending on June 30, 2018 and ending, and including, the fiscal quarter ending on December 31, 2018; 6.50 to 1.00 on the last day of the fiscal quarter ending March 31, 2019; 5.00 to 1.00 on the last day of the fiscal quarter ending June 30, 2019; 4.75 to 1.00 on the last day of the fiscal quarter ending September 30, 2019; and on the last day of each fiscal quarter thereafter, 4.50 to 1.00. At September 30, 2018, the Company was in compliance with its financial covenants under the Term B Loan.

18



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Covenant and Liquidity Matters

In 2018, the Company experienced a combination of increased distribution costs and constrained shipments from the Americas distribution network primarily resulting from the transfer of aftermarket shipping volume from Dallas, TX to Kansas City, KS.  Since amending our Term Loan on July 31, 2018, our Europe-Africa segment has continued to underperform.  Additionally, our new leadership team in Europe has performed an initial assessment of our business in that segment, resulting in reduced expectations through the remainder of 2018.  Primarily due to these factors as well as costs associated with remediating these factors, the Company has increased draws on our ABL and experienced a decline in Bank EBITDA.  Based on our results for the quarter-ended September 30, 2018 and our current forecast for the next twelve months, LTM Bank EBITDA will likely underperform management’s expectations at the time we entered into the Fourth Amendment.  In addition, total debt is expected to be higher than our projections at the time we entered into the Fourth Amendment.  As a result, we do not expect to comply with the 7.00 to 1.00 net leverage ratio covenant in our 2018 Term Loan Agreement for the quarter-ending December 31, 2018, which absent an amendment or waiver, would constitute a default when reported.  Such a default, if not cured, would allow the lenders to accelerate the maturity of the debt, making it due and payable at that time.  The Company is in active discussions with the administrative agent for the Term Loan lenders regarding the modification of covenant terms through the periods that will be impacted on an LTM basis by the factors described above and the Company believes it is probable that the Company will obtain an amendment modifying the covenant terms prior to triggering a default.
Bank facilities
On July 3, 2017, the Company’s Australian subsidiaries entered into an agreement (collectively, the “Australian Loans”) to provide for revolving borrowings with an aggregate principal amount of approximately $29.6 million. The Australian Loans include two sub-facilities: (i) Facility A, with a borrowing capacity of $18.7 million that matures on July 3, 2020 and (ii) Facility B, with a borrowing capacity of $10.8 million that matured on July 3, 2018. There were $5.9 million and $6.6 million outstanding under the Australian Loans as of September 30, 2018 and December 31, 2017, respectively.
Borrowings under Facility A bear interest at the Bank Bill Swap Bid Rate (“BBSY”) plus a margin determined based on the most recent net leverage ratio (as defined per the Australian credit agreement). The margin is to be determined on the first day of the period as follows: (i) 1.10% per annum if the net leverage ratio is less than 1.50 to 1.00; (ii) 1.20% per annum if the net leverage ratio is less than 2.00 to 1.00 and (iii) 1.30% if the net leverage ratio is less than 2.50 to 1.00. Borrowings under Facility B bear interest at the BBSY plus a margin of 0.9% per annum.
The Australian Loans contain financial covenants, which require the Company’s Australian subsidiaries to maintain: (i) a net leverage ratio not exceeding 2.50 to 1.00 during the period commencing on the date of the agreement and ending on the first anniversary of the date of the agreement; and 2.00 to 1.00 thereafter; (ii) a working capital coverage ratio (as defined per the Australian credit agreement) greater than 1.75 to 1.00 at all times; and (iii) a gearing ratio (defined as the ratio of senior debt to senior debt plus equity) not to exceed 50%. At September 30, 2018, the Company was in compliance with its financial covenants under the Australian Loans.
9. Derivative Instruments
Foreign Currency Exchange Rate Risk
As of September 30, 2018, the Company was party to forward contracts to hedge changes in foreign currency exchange rates with notional amounts of approximately $20.5 million. The Company uses foreign currency forward contracts to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to certain payments for contract manufacturing in its lower-cost manufacturing facilities. The foreign currency forward contracts hedge currency exposure between the Mexican peso and the U.S. dollar, and the U.S. dollar and the Australian dollar and mature at specified monthly settlement dates through June 2019. At inception, the Company designated the foreign currency forward contracts as cash flow hedges. Upon the performance of contract manufacturing or purchase of certain inventories, the Company de-designates the foreign currency forward contract.
On October 4, 2016, the Company entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. As of September 30, 2018, the notional amount of the cross currency swap was approximately $110.8 million. The Company uses the cross currency swap to mitigate the risk associated with fluctuations in currency rates impacting cash flows related to a non-U.S. denominated intercompany loan of €110.0 million. The cross currency swap hedges currency exposure between the Euro and the U.S. dollar and matures on January 3, 2019. The Company makes quarterly principal payments of €1.4 million, plus

19



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

interest at a fixed rate of 5.4% per annum, in exchange for $1.5 million, plus interest at a fixed rate of 7.2% per annum. At inception, the Company designated the cross currency swap as a cash flow hedge. Changes in the currency rate result in reclassification of amounts from accumulated other comprehensive income (loss) to earnings to offset the re-measurement gain or loss on the non-U.S. denominated intercompany loan.
On August 16, 2017, the Company’s Australian subsidiary entered into a cross currency swap arrangement to hedge changes in foreign currency exchange rates. As of September 30, 2018, the notional amount of the cross currency swap was approximately $3.9 million. The Australian subsidiary uses the cross currency swap to mitigate the risk associated with fluctuations in currency rates related to a non-functional currency intercompany loan of NZ$10.0 million. The floating-to-floating cross currency swap hedges currency exposure between the New Zealand dollar and the Australian dollar and matures on June 30, 2020. The Australian subsidiary makes quarterly principal payments of NZ$0.8 million, plus interest at the 3-month Bank Bill Benchmark Rate ("BKBM") in New Zealand plus a margin of 0.31% per annum, in exchange for A$0.8 million, plus interest at the three-month BBSY in Australia per annum. At inception, the cross currency swap was not designated as a hedging instrument.
Financial Statement Presentation
As of September 30, 2018 and December 31, 2017, the fair value carrying amount of the Company’s derivative instruments were recorded as follows:
 
 
 
 
Asset / (Liability) Derivatives
 
 
Balance Sheet Caption
 
September 30,
2018
 
December 31,
2017
 
 
 
 
(dollars in thousands)
Derivatives designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward contracts
 
Prepaid expenses and other current assets
 
$
1,350

 
$

Foreign currency forward contracts
 
Accrued liabilities
 

 
(670
)
Cross currency swap
 
Accrued liabilities
 
(2,330
)
 

Cross currency swap
 
Other long-term liabilities
 

 
(7,830
)
Total derivatives designated as hedging instruments
 
 
 
(980
)
 
(8,500
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
Foreign currency forward contracts
 
Prepaid expenses and other current assets
 
260

 
110

Foreign currency forward contracts
 
Accrued liabilities
 

 
(90
)
Cross currency swap
 
Other assets
 
40

 
90

Total derivatives de-designated as hedging instruments
 
 
 
300

 
110

Total derivatives
 
 
 
$
(680
)
 
$
(8,390
)

20



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

The following tables summarize the gain or loss recognized in accumulated other comprehensive income (loss) (“AOCI”) as of September 30, 2018 and December 31, 2017 and the amounts reclassified from AOCI into earnings and the amounts recognized directly into earnings for the three and nine months ended September 30, 2018 and 2017:
 
Amount of Gain (Loss) Recognized in
AOCI on Derivatives
(Effective Portion, net of tax)
 
 
 
Amount of Gain (Loss) Reclassified
from AOCI into Earnings
 
 
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
As of
September 30, 2018
 
As of December 31, 2017
 
Location of Gain (Loss) Reclassified from AOCI into Earnings
(Effective Portion)
 
2018
 
2017
 
2018
 
2017
 
(dollars in thousands)
 
 
 
(dollars in thousands)
Derivatives instruments
Foreign currency forward contracts
$
1,340

 
$
(660
)
 
Cost of sales
 
$
580

 
$
620

 
$
790

 
$
880

Cross currency swap
$
1,310

 
$
270

 
Other expense, net
 
$
780

 
$
(4,100
)
 
$
4,000

 
$
(13,840
)
Over the next 12 months, the Company expects to reclassify approximately $1.4 million of pre-tax deferred gains, related to the foreign currency forward contracts, from AOCI to cost of sales as contract manufacturing and inventory purchases are settled. Over the next 12 months, the Company expects to reclassify approximately $1.6 million of pre-tax deferred losses, related to the cross currency swap, from AOCI to other expense, net as an offset to the re-measurement gains or losses on the non-U.S. denominated intercompany loan.
Derivatives not designated as hedging instruments
The gain or loss resulting from the change in fair value on de-designated forward contracts is reported within cost of sales on the Company’s condensed consolidated statements of income (loss). There were $0.1 million of losses on de-designated derivatives for the three months ended September 30, 2018 and there were $0.1 million of losses on de-designated derivatives for the nine months ended September 30, 2018. There were no gains or losses on de-designated derivatives for the three months ended September 30, 2017 and $0.1 million of gains on de-designated derivatives for the nine months ended September 30, 2017. The gain or loss resulting from the change in fair value on the floating-to-floating cross currency swap is recorded within other expense, net on the Company’s condensed consolidated statements of income (loss). There were no gains or losses and $0.1 million of losses on this cross currency swap for the three and nine months ended September 30, 2018, respectively.
During May 2018, the Company entered into foreign currency option contracts known as zero-cost collars with an aggregate notional amount of €63.4 million to hedge changes in foreign currency related to the cash portion of the purchase price of the pending acquisition of the Brink Group; the acquisition was later terminated as described in Note 8 “Long-term Debt.” During June 2018, these zero-cost collar arrangements matured, resulting in a loss of $1.2 million which is included within other expense, net in the Company’s condensed consolidated statements of income (loss) for the nine months ended September 30, 2018. There was no gain or loss for the three months ended September 30, 2018.

21



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Fair Value Measurements
The fair value of the Company’s derivatives are estimated using an income approach based on valuation techniques to convert future amounts to a single, discounted amount. The Company’s derivatives are recorded at fair value in its condensed consolidated balance sheets and are valued using pricing models that are primarily based on market observable external inputs, including spot and forward currency exchange rates, benchmark interest rates, and discount rates consistent with the instrument’s tenor, and consider the impact of the Company’s own credit risk, if any. Changes in counterparty credit risk are also considered in the valuation of derivative financial instruments. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017 are shown below.
 
 
Frequency
 
Asset / (Liability)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
 
(dollars in thousands)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
Recurring
 
$
1,610

 
$

 
$
1,610

 
$

Cross currency swaps
 
Recurring
 
$
(2,290
)
 
$

 
$
(2,290
)
 
$

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
Recurring
 
$
(650
)
 
$

 
$
(650
)
 
$

Cross currency swaps
 
Recurring
 
$
(7,740
)
 
$

 
$
(7,740
)
 
$

10. Segment Information
The Company groups its operating segments into reportable segments by the region in which sales and manufacturing efforts are focused. Each operating segment has discrete financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance. The Company reports the results of its business in three reportable segments: Horizon Americas, Horizon Europe‑Africa, and Horizon Asia‑Pacific. Horizon Americas is comprised of the Company’s North American and South American operations. Horizon Europe‑Africa reportable segment is comprised of the European and South African operations, while Horizon Asia‑Pacific is comprised of the Australia, Thailand, and New Zealand operations. See below for further information regarding the types of products and services provided within each reportable segment.
Horizon Americas - A market leader in the design, manufacture and distribution of a wide variety of high-quality, custom engineered towing, trailering and cargo management products and related accessories. These products are designed to support OEMs, OESs, aftermarket and retail customers in the agricultural, automotive, construction, industrial, marine, military, recreational vehicle, trailer and utility end markets. Products include brake controllers, cargo management, heavy-duty towing products, jacks and couplers, protection/securing systems, trailer structural and electrical components, tow bars, vehicle roof racks, vehicle trailer hitches and additional accessories.
Horizon Europe‑Africa - With a product offering similar to Horizon Americas, Horizon Europe‑Africa focuses its sales and manufacturing efforts in Europe and Africa.
Horizon Asia‑Pacific - With a product offering similar to Horizon Americas, Horizon Asia‑Pacific focuses its sales and manufacturing efforts in the Asia-Pacific region of the world.

22



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Segment activity is as follows:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands)
Net Sales
 
 
 
 
 
 
 
 
Horizon Americas
 
$
115,510

 
$
115,460

 
$
319,810

 
$
351,400

Horizon Europe-Africa
 
78,520

 
87,950

 
256,420

 
253,070

Horizon Asia-Pacific
 
33,810

 
36,710

 
101,760

 
92,520

Total
 
$
227,840

 
$
240,120

 
$
677,990

 
$
696,990

Operating Profit (Loss)
 
 
 
 
 
 
 
 
Horizon Americas
 
$
7,270

 
$
10,930

 
$
4,730

 
$
38,840

Horizon Europe-Africa
 
(31,370
)
 
2,680

 
(132,150
)
 
5,950

Horizon Asia-Pacific
 
5,960

 
5,880

 
15,020

 
13,240

Corporate
 
(5,800
)
 
(6,200
)
 
(28,950
)
 
(21,160
)
Total
 
$
(23,940
)
 
$
13,290

 
$
(141,350
)
 
$
36,870

11. Equity Awards
Description of the Plan
Horizon employees and non-employee directors participate in the Horizon Global Corporation 2015 Equity and Incentive Compensation Plan (as amended and restated, the “Horizon 2015 Plan”). The Horizon 2015 Plan authorizes the Compensation Committee of the Horizon Board of Directors to grant stock options (including “incentive stock options” as defined in Section 422 of the U.S. Internal Revenue Code), restricted shares, restricted stock units, performance shares, performance stock units, cash incentive awards, and certain other awards based on or related to the Company’s common stock to Horizon employees and non-employee directors. No more than 4.4 million Horizon common shares may be delivered under the Horizon 2015 Plan.
Stock Options

The following table summarizes Horizon stock option activity from December 31, 2017 to September 30, 2018:

 
 
Number of
Stock Options
 
Weighted Average Exercise Price
 
Average  Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
Outstanding at December 31, 2017
 
338,349

 
$
10.38

 

 
 
  Granted
 

 

 

 
 
  Exercised
 

 

 
 
 
 
  Canceled, forfeited
 
(225,676
)
 
10.37

 
 
 
 
  Expired
 

 

 
 
 
 
Outstanding at September 30, 2018
 
112,673

 
$
10.39

 
6.6
 
$

As of September 30, 2018, the unrecognized compensation cost related to stock options is immaterial. For the three and nine months ended September 30, 2018, the stock-based compensation expense recognized by the Company related to stock options was immaterial. For the three and nine months ended September 30, 2017, the Company recognized approximately $0.1 million and $0.3 million of stock-based compensation expense related to stock options, respectively. There was no aggregate intrinsic value of the outstanding options at September 30, 2018. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income (loss).

23



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Restricted Shares
In the first nine months of 2018, the Company granted an aggregate of 466,763 restricted stock units and performance stock units to certain key employees and non-employee directors. The total grants consisted of: (i) 5,680 time-based restricted stock units that vested on July 1, 2018; (ii) 43,799 time-based restricted stock units that vest ratably on (1) March 1, 2019, (2) March 1, 2020 and (3) March 1, 2021; (iii) 101,204 time-based restricted stock units that vest ratably on (1) March 1, 2019, (2) March 1, 2020, (3) March 1, 2021 and (4) March 1, 2022; (iv) 145,003 market-based performance stock units that vest on March 1, 2021 (the “2018 PSUs”); (v) 43,416 time-based restricted stock units that vest on March 1, 2021; (vi) 17,575 time-based restricted stock units that vest on May 8, 2019; (vii) 84,210 time-based restricted stock units that vest on May 15, 2018; (viii) 11,404 time-based restricted stock units that vest on May 15, 2020; and (ix) 14,472 time-based restricted stock units that vest on August 1, 2020.
During 2017, the Company granted an aggregate of 185,423 restricted stock units and performance stock units to certain key employees and non-employee directors. The total grants consisted of: (i) 22,449 time-based restricted stock units that vest ratably on (1) March 1, 2018, (2) March 1, 2019 and (3) March 1, 2020; (ii) 50,416 time-based restricted stock units that vest ratably on (1) March 1, 2018, (2) March 1, 2019, (3) March 1, 2020 and (4) March 1, 2021; (iii) 72,865 market-based performance stock units that vest on March 1, 2020 (the “2017 PSUs”); (iv) 33,426 time-based restricted stock units that vest on July 1, 2018, and (v) 6,267 time-based restricted stock units that vest on July 1, 2019.
The performance criteria for the market-based performance stock units is based on the Company’s total shareholder return (“TSR”) relative to the TSR of the common stock of a pre-defined industry peer group. For the 2018 PSUs, TSR is measured over a period beginning January 1, 2018 and ending December 31, 2020. For the 2017 PSUs, TSR is measured over a period beginning January 1, 2017 and ending December 31, 2019. TSR is calculated as the Company’s average closing stock price for the 20-trading days at the end of the performance period plus Company dividends, divided by the Company’s average closing stock price for the 20-trading days prior to the start of the performance period. Depending on the performance achieved, the amount of shares earned can vary from 0% of the target award to a maximum of 200% of the target award. The Company estimated the grant-date fair value of the awards subject to a market condition using a Monte Carlo simulation model, using the following weighted-average assumptions: risk-free interest rate of 2.34% and 1.52% for the 2018 PSUs and 2017 PSUs, respectively, and annualized volatility of 37.4% and 38.5% for the 2018 PSUs and 2017 PSUs, respectively. Due to the lack of adequate stock price history of Horizon common stock, the expected volatility is based on the historical volatility of the common stock of the peer group. The grant date fair value of the performance stock units were $7.08 and $18.41 for the 2018 PSUs and 2017 PSUs, respectively.
The grant date fair value of restricted shares is expensed over the vesting period. Restricted share fair values are based on the closing trading price of the Company’s common stock on the date of grant. Changes in the number of restricted shares outstanding for the period ended September 30, 2018 were as follows:
 
 
Number of Restricted Shares
 
Weighted Average Grant Date Fair Value
Outstanding at December 31, 2017
 
582,611

 
$
13.51

  Granted
 
466,763

 
7.47

  Vested
 
(210,882
)
 
12.19

  Canceled, forfeited
 
(238,284
)
 
11.41

Outstanding at September 30, 2018
 
600,208

 
$
10.11

As of September 30, 2018, there was $2.4 million in unrecognized compensation costs related to unvested restricted shares that is expected to be recognized over a weighted-average period of 2.0 years.
The Company recognized approximately $0.1 million and $1.5 million of stock-based compensation expense related to restricted shares during the three and nine months ended September 30, 2018, respectively, and approximately $0.9 million and $2.5 million during the three and nine months ended September 30, 2017, respectively. Stock-based compensation expense is included in selling, general and administrative expenses in the accompanying condensed consolidated statements of income (loss).

24



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

12. Earnings per Share
On February 1, 2017, the Company completed an underwritten public offering of 4.6 million shares of common stock, which includes the exercise in full by the underwriters of their option to purchase 0.6 million shares of common stock, at a public offering price of $18.50 per share (the “Common Stock Offering”). Proceeds from the Common Stock Offering were approximately $79.9 million, net of underwriting discounts, commissions, and offering-related transaction costs.
Basic earnings (loss) per share is computed using net income (loss) attributable to Horizon Global and the number of weighted average shares outstanding. Diluted earnings (loss) per share is computed using net income (loss) attributable to Horizon Global and the number of weighted average shares outstanding, adjusted to give effect to the assumed exercise of outstanding stock options and warrants, vesting of restricted shares outstanding, and conversion of the Convertible Notes. Due to net losses for the three and nine months ended September 30, 2018, the effect of potentially dilutive securities had an anti-dilutive effect and therefore were excluded from the computation of diluted loss per share.
The following table sets forth the reconciliation of the numerator and the denominator of basic earnings per share attributable to Horizon Global and diluted earnings (loss) per share attributable to Horizon Global for the three and nine months ended September 30, 2018 and 2017:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(dollars in thousands, except for per share amounts)
Numerator:
 
 
 
 
 
 
 
 
Net income (loss) attributable to Horizon Global
 
$
(32,760
)
 
$
6,890

 
$
(157,200
)
 
$
17,290

Denominator:
 
 
 
 
 
 
 
 
Weighted average shares outstanding, basic
 
25,101,847

 
24,948,410

 
25,028,072

 
24,728,643

Dilutive effect of stock-based awards
 

 
430,842

 

 
426,157

Weighted average shares outstanding, diluted
 
25,101,847

 
25,379,252

 
25,028,072

 
25,154,800

 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share attributable to Horizon Global
 
$
(1.31
)
 
$
0.28

 
$
(6.28
)
 
$
0.70

Diluted earnings (loss) per share attributable to Horizon Global
 
$
(1.31
)
 
$
0.27

 
$
(6.28
)
 
$
0.69

The effect of certain common stock equivalents were excluded from the computation of weighted average diluted shares outstanding for the three and nine months ended September 30, 2018 and 2017, as inclusion would have resulted in anti-dilution. A summary of these anti-dilutive common stock equivalents is provided in the table below:
 
 
Three months ended
September 30,
 
Nine months ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Number of options
 
220,726

 

 
285,538

 

Exercise price of options
 
$9.20 - $11.29

 

 
$9.20 - $11.29

 

Restricted stock units
 
629,507

 

 
685,286

 
57,118

Convertible Notes
 
5,005,000

 
5,005,000

 
5,005,000

 
4,418,333

Warrants
 
5,005,000

 
5,005,000

 
5,005,000

 
4,418,333

For purposes of determining diluted earnings per share, the Company has elected a policy to assume that the principal portion of the Convertible Notes, as described in Note 8, “Long-term Debt,” is settled in cash and the conversion premium is settled in shares. Therefore, the Company has adopted a policy of calculating the diluted earnings per share effect of the Convertible Notes using the treasury stock method. As a result, the dilutive effect of the Convertible Notes is limited to the conversion premium, which is

25



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

reflected in the calculation of diluted earnings per share as if it were a freestanding written call option on the Company’s shares. Using the treasury stock method, the Warrants issued in connection with the issuance of the Convertible Notes are considered to be dilutive when they are in the money relative to the Company’s average common stock price during the period. The Convertible Note Hedges purchased in connection with the issuance of the Convertible Notes are always considered to be anti-dilutive and therefore do not impact the Company’s calculation of diluted earnings (loss) per share.
13. Shareholders’ Equity
Preferred Stock
The Company is authorized to issue 100,000,000 shares of preferred stock, par value of $0.01 per share. There were no preferred shares outstanding at September 30, 2018 or December 31, 2017.
Common Stock
The Company is authorized to issue 400,000,000 shares of common stock, par value of $0.01 per share. At September 30, 2018, there were 25,798,745 shares of common stock issued and 25,112,239 shares of common stock outstanding. At December 31, 2017, there were 25,625,571 shares of common stock issued and 24,939,065 shares of common stock outstanding.
Share Repurchase Program
In April 2017, the Board of Directors authorized a share repurchase program of up to 1.5 million shares of the Company’s issued and outstanding common stock during the period beginning on May 5, 2017 and ending May 5, 2020 (the “Share Repurchase Program”). The Share Repurchase Program provides for share purchases in the open market or otherwise, depending on share price, market conditions and other factors, as determined by the Company. In addition, the Company’s ABL Loan Agreement and Term B Loan place certain limitations on the Company’s ability to repurchase its common stock. As of September 30, 2018, cumulative shares purchased totaled 686,506 at an average purchase price per share of $14.55, excluding commissions. The repurchased shares are presented as treasury stock, at cost, on the condensed consolidated balance sheets.
Accumulated Other Comprehensive Income
Changes in AOCI by component, net of tax, for the nine months ended September 30, 2018 are summarized as follows:
 
 
 Derivative Instruments
 
Foreign Currency Translation
 
Total
 
 
(dollars in thousands)
Balance at December 31, 2017
 
$
(310
)
 
$
10,880

 
$
10,570

Net unrealized gains (losses) arising during the period (a)
 
6,850

 
(4,330
)
 
2,520

Less: Net realized losses reclassified to net loss (b)
 
3,890

 

 
3,890

Net current-period change
 
2,960

 
(4,330
)
 
(1,370
)
Balance at September 30, 2018
 
$
2,650

 
$
6,550

 
$
9,200

__________________________
(a) Derivative instruments, net of income tax expense of $(1.3) million. See Note 9, “Derivative Instruments,” for further details.
(b) Derivative instruments, net of income tax benefit of $0.9 million. See Note 9, “Derivative Instruments,” for further details.

26



HORIZON GLOBAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)

Changes in AOCI by component, net of tax, for the nine months ended September 30, 2017 are summarized as follows:
 
 
 Derivative Instruments
 
Foreign Currency Translation
 
Total
 
 
(dollars in thousands)
Balance at December 31, 2016
 
$
(930
)
 
$
(7,410
)
 
$
(8,340
)
Net unrealized gains (losses) arising during the period (a)
 
(7,950
)
 
15,500

 
7,550

Less: Net realized losses reclassified to net loss (b)
 
(8,120
)
 

 
(8,120
)
Net current-period change
 
170

 
15,500

 
15,670

Balance at September 30, 2017
 
$
(760
)
 
$
8,090

 
$
7,330

__________________________
(a) Derivative instruments, net of income tax benefit of $5.2 million. See Note 9, “Derivative Instruments,” for further details.
(b) Derivative instruments, net of income ta