Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition contains forward-looking statements regarding industry outlook and our expectations regarding the performance of our business. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under the heading “Forward-Looking Statements,” at the beginning of this Annual Report on Form 10-K. Our actual results may differ materially from those contained in or implied by any forward-looking statements.
You should read the following discussion together with Item 8, “Financial Statements and Supplementary Data” within this Annual Report on Form 10-K.
Overview
Headquartered in Plymouth, Michigan, Horizon Global Corporation and its consolidated subsidiaries (“Horizon,” “Horizon Global,” “we,” “our,” or the “Company”) are a leading designer, manufacturer and distributor of a wide variety of high-quality, custom-engineered towing, trailering, cargo management and other related accessory products in the North American, European and African markets, primarily servicing the aftermarket, automotive original equipment manufacturers (“automotive OEMs”) and automotive original equipment servicers (“automotive OESs”) (collectively, “OEs”), retail, e-commerce and industrial channels, supporting our customers generally through a regional service and delivery model.
Critical factors affecting our ability to succeed include:
• Our ability to realize the expected future economic benefits resulting from the changes made to our manufacturing operations, distribution footprint and management team in recent years, including the implementation of operational improvement initiatives, which are continuously ongoing to support margin expansion;
• Our ability to continue to manage our liquidity, including continuing to service our debt obligations and comply with the applicable financial covenants thereto, especially given our recent debt refinancing and capital structure alignment to support business growth and the Company’s long-term strategic plan;
• Our ability to quickly and cost-effectively introduce new products to our customers and end-user market with a resulting streamlined customer service model and improved operating margins;
• Our ability to continue to successfully launch new products and customer programs to expand or realign our geographic coverage or distribution channels and realize desired operating efficiencies and product line or customer content penetration;
• Our ability to efficiently manage our cost structure via global supply base management, internal sourcing and/or purchasing of materials, freight and logistics management, selective outsourcing of support functions, working capital management and a global approach to leverage our administrative functions; and
• Our ability to manage liquidity and other economic and business uncertainties, including those related to the global microchip shortage, ongoing global shipping container and other transportation and logistics constraints, as well as the COVID-19 pandemic that may result in future business disruption, including any mandated operating restrictions such as temporary facility closures.
If we are unable to do any of the foregoing successfully, our financial condition and results of operations could be materially and adversely impacted.
Horizon Global reports its business in two operating segments: Horizon Americas and Horizon Europe‑Africa. See Note 15, Segment Information , included in Item 8, “ Financial Statements and Supplementary Data,” within this Annual Report on Form 10-K for further description of the Company’s operating segments.
Shipping and handling costs associated with outbound freight are accounted for as a fulfillment cost and are included in cost of sales in our consolidated statements of operations. Other shipping and handling expenses, which primarily relate to Horizon Americas’ distribution network, are included in selling, general and administrative expenses in our consolidated statements of operations.
Supplemental Analysis and Segment Information
Non-GAAP Financial Measures
The Company’s management utilizes Adjusted EBITDA as the key measure of company and segment performance and for planning and forecasting purposes, as management believes this measure is most reflective of the operational profitability or loss of the Company and its operating segments and provides management and investors with information to evaluate the operating performance of its business and is representative of its performance used to measure certain of its financial covenants, further discussed in the Liquidity and Capital Resources section below. Adjusted EBITDA should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income attributable to Horizon Global, which is the most directly comparable financial measure to Adjusted EBITDA that is prepared in accordance with U.S. GAAP. Adjusted EBITDA, as determined and measured by Horizon Global, should also not be compared to similarly titled measures reported by other companies. The Company also uses operating profit (loss) to measure stand-alone segment performance.
Adjusted EBITDA is defined as net income (loss) attributable to Horizon Global before interest expense, income taxes, depreciation and amortization, and before certain items, as applicable, such as severance, restructuring, relocation and related business disruption costs, gains (losses) on extinguishment of debt, impairment of goodwill and other intangibles, non-cash stock compensation, certain product liability and litigation claims, acquisition and integration costs, gains (losses) on business divestitures and other assets, debt issuance costs, board transition support and non-cash unrealized foreign currency remeasurement costs.
Adjusted EBITDA for our operating segments for the twelve months ended December 31, 2021 is as follows:
Twelve Months Ended
December 31, 2021
Horizon Americas
Horizon Europe-Africa
Corporate
Consolidated
(dollars in thousands)
Net loss attributable to Horizon Global
Net loss attributable to noncontrolling interest
Net loss
Interest expense
Income tax benefit
Depreciation and amortization
EBITDA
Net loss attributable to noncontrolling interest
Severance
Restructuring, relocation and related business disruption costs
Loss on extinguishment of debt
Non-cash stock compensation
Loss on business divestitures and other assets
Debt issuance costs
Gain on extinguishment of debt
Unrealized foreign currency remeasurement costs
Adjusted EBITDA
Adjusted EBITDA for our operating segments for the twelve months ended December 31, 2020 is as follows:
Twelve Months Ended
December 31, 2020
Horizon Americas
Horizon Europe-Africa
Corporate
Consolidated
(dollars in thousands)
Net loss attributable to Horizon Global
Net loss attributable to noncontrolling interest
Net loss
Interest expense
Income tax benefit
Depreciation and amortization
EBITDA
Net loss attributable to noncontrolling interest
Loss from discontinued operations, net of tax
Severance
Restructuring, relocation and related business disruption costs
Non-cash stock compensation
Loss (gain) on business divestitures and other assets
Board transition support
Product liability and litigation claims
Debt issuance costs
Unrealized foreign currency remeasurement costs
Adjusted EBITDA
Segment Information
A summary of segment financial information for our operating segments for the twelve months ended December 31, 2021 and 2020 is as follows:
Twelve Months Ended December 31,
Change
Constant Currency Change
As a Percentage of Net Sales
As a Percentage of Net Sales
(dollars in thousands)
Net Sales
Horizon Americas
Horizon Europe‑Africa
Total
Gross Profit
Horizon Americas
Horizon Europe‑Africa
Total
Selling, General and Administrative Expense
Horizon Americas
Horizon Europe‑Africa
Corporate
Total
Operating Profit (Loss)
Horizon Americas
Horizon Europe‑Africa
Corporate
Total
Capital Expenditures
Horizon Americas
Horizon Europe‑Africa
Corporate
Total
Depreciation of Property and Equipment and Amortization of Intangibles
Horizon Americas
Horizon Europe‑Africa
Corporate
Total
Adjusted EBITDA
Horizon Americas
Horizon Europe-Africa
Corporate
Total
Results of Operations
Twelve Months Ended December 31, 2021 Compared with Twelve Months Ended December 31, 2020
Consolidated net sales increased $120.9 million, or 18.3%, to $782.1 million during the twelve months ended December 31, 2021, as compared to $661.2 million during the twelve months ended December 31, 2020. The increase was driven by higher net sales in Horizon Americas and Horizon Europe‑Africa primarily attributable to the impacts of economic uncertainty and business disruptions of the COVID-19 pandemic that impacted the Company in 2020, most significantly in the first and second quarters. Net sales for Horizon Americas increased $74.0 million, driven by increases in sales volumes as well as pricing recovery initiatives driven by commodity and input cost increases. Net sales for Horizon Europe‑Africa increased $46.9 million, driven by increases in sales volumes and pricing recovery initiatives as well as favorable currency translation.
Gross profit margin (gross profit as a percentage of net sales) was 18.2% during the twelve months ended December 31, 2021 and 2020. Gross profit margin in 2021 as compared to 2020 was impacted by higher net sales in Horizon Americas and Horizon Europe‑Africa as detailed above, coupled with favorable net sales channel mix and was partially offset by unfavorable cost performance, primarily attributable to unfavorable material, supply chain and other manufacturing input costs associated with global macroeconomic factors experienced during 2021.
Selling, general and administrative (“SG&A”) expenses increased $7.9 million, primarily attributable to $3.3 million of higher personnel and other variable compensation costs across the Company, driven primarily by temporary salary reductions in the U.S. and the Company’s participation in certain payroll reimbursement programs during 2020 in response to the impacts of the COVID-19 pandemic. The increase was also due to $3.8 million of higher outside professional fees and other administrative costs across the Company. Unfavorable currency translation in Horizon Europe‑Africa of $1.8 million also contributed to the increase.
Operating margin (operating profit (loss) as a percentage of net sales) was 0.9% and (1.0)% during the twelve months ended December 31, 2021 and 2020, respectively. Operating profit improved $14.1 million, or 204.5%, to an operating profit of $7.2 million during 2021, as compared to an operating loss of $(6.9) million during 2020. Improved operating profit and operating margin were primarily due to the operational results detailed above.
Other expense, net increased $7.9 million to $8.4 million during the twelve months ended December 31, 2021, as compared to $0.5 million during the twelve months ended December 31, 2020, primarily attributable to $(4.1) million of foreign currency loss during 2021 as compared to $0.9 million of foreign currency gain during 2020. The increase was also due to the $2.2 million loss on the sale of the Company’s Brazil business completed during the second quarter of 2021. Refer to Note 5, Goodwill and Other Intangible Assets, in Item 8, “ Financial Statements and Supplementary Data,” within this Annual Report on Form 10-K for additional information of the sale of the Company’s Brazil business.
Interest expense decreased $3.7 million to $28.0 million during the twelve months ended December 31, 2021, as compared to $31.7 million during the twelve months ended December 31, 2020, primarily as a result of the Company’s February 2021 refinancing, which resulted in a new term loan agreement that replaced the Company’s existing term loan agreement. The new term loan included a lower interest rate and removed paid-in-kind interest, resulting in lower interest expense for the twelve months ended December 31, 2021. Additionally, during 2021, the Company also incurred an $11.7 million loss on debt extinguishment related to the termination of the existing term loan agreement resulting from the February 2021 refinancing and a $7.5 million gain on debt extinguishment related to forgiveness of the Company’s PPP Loan, as defined below. Refer to Note 9, Long-term Debt , in Item 8, “ Financial Statements and Supplementary Data,” within this Annual Report on Form 10-K for additional information.
The effective income tax rate for the twelve months ended December 31, 2021 and 2020 was 0.5% and 4.0%, respectively. The lower effective income tax rate for both periods is attributable to the Company’s valuation allowance recorded in the U.S. and several foreign jurisdictions, which resulted in no income tax benefit recognized for jurisdictional pretax losses, coupled with jurisdictional income mix.
Net loss from continuing operations improved $4.4 million to a net loss of $(33.1) million for the twelve months ended December 31, 2021, compared to a net loss from continuing operations of $(37.5) million for the twelve months ended December 31, 2020. The improvement was attributable to the operational results detailed above.
Loss from discontinued operations, net of tax is attributable to the sale of the Company’s former APAC operating segment, which was sold in September 2019. During the twelve months ended December 31, 2020, the remaining post-closing conditions of the sale were completed, including a true up to net cash proceeds, which resulted in a loss on sale of discontinued operations of $0.5 million in accordance with Accounting Standards Codification 205-20, “ Discontinued Operations” .
See below for a discussion of operating results by segment.
Horizon Americas
Net sales by sales channel, in thousands, for Horizon Americas are as follows:
Twelve Months Ended December 31,
Change
Net Sales
Aftermarket
Automotive OEM
Automotive OES
Retail
E-commerce
Industrial
Other
Total
Net sales increased $74.0 million, or 19.4%, to $456.4 million during the twelve months ended December 31, 2021, as compared to $382.4 million during the twelve months ended December 31, 2020, primarily attributable to higher sales volumes. The increased volumes are primarily attributable to the impacts of economic uncertainty and business disruptions of the COVID-19 pandemic that impacted the Company in 2020, most significantly in the first and second quarters. Net sales also increased by $38.8 million due to pricing recovery initiatives implemented, primarily in the aftermarket, OE, retail and e-commerce sales channels, to partially recover increased material and input costs. The increase was partially offset by a $1.7 million increase in sales returns and allowances.
Horizon Americas’ gross profit increased $16.2 million, or 17.0%, to $112.1 million, or 24.6% of net sales, during the twelve months ended December 31, 2021, as compared to $95.9 million, or 25.1% of net sales, during the twelve months ended December 31, 2020. The increase in gross profit is primarily attributable to the increase in net sales detailed above, partially offset by unfavorable material, supply chain and other manufacturing input costs, net of customer pricing recoveries, attributable to significant commodity and logistics cost increases in the Company’s supply chain due to global macroeconomic factors. The decrease in gross profit margin was primarily driven by a significant rise in inputs costs that impacted business performance, especially in the third and fourth quarters of 2021, that were not able to be fully passed through to our customers during 2021, given there is generally a delay in such recoveries due to market pressures and restrictions within certain customer contracts that require agreement.
SG&A expenses increased $1.6 million to $69.5 million, or 15.2% of net sales, during the twelve months ended December 31, 2021, as compared to $67.9 million, or 17.8% of net sales, during the twelve months ended December 31, 2020. The increase in SG&A is primarily attributable to the following:
– $3.5 million of higher outside professional fees and other administrative costs;
– $1.2 million of higher personnel and other variable compensation costs, primarily as a result of temporary salary reductions in the U.S. and other compensation and benefit cost reductions in the second quarter of 2020 in response to the impacts of the COVID-19 pandemic; partially offset by:
– $1.5 million of lower depreciation and amortization.
Horizon Americas’ operating profit increased $14.6 million to $42.6 million, or 9.3% of net sales, during the twelve months ended December 31, 2021, as compared to $28.0 million, or 7.3% of net sales, during the twelve months ended December 31, 2020. Improved operating profit and operating margin were primarily due to the operational results detailed above.
Horizon Americas’ Adjusted EBITDA increased $10.8 million to $49.2 million during the twelve months ended December 31, 2021, as compared to Adjusted EBITDA of $38.4 million during the twelve months ended December 31, 2020. Adjusted EBITDA improved primarily due to operational results detailed above.
Horizon Europe-Africa
Net sales by sales channel, in thousands, for Horizon Europe‑Africa are as follows:
Twelve Months Ended December 31,
Change
Net Sales
Aftermarket
Automotive OEM
Automotive OES
E-commerce
Industrial
Other
Total
Net sales increased $46.8 million, or 16.8%, to $325.7 million during the twelve months ended December 31, 2021, as compared to $278.9 million during the twelve months ended December 31, 2020, primarily attributable to higher sales volumes. The increased volumes are primarily attributable to the impacts of economic uncertainty and business disruptions of the COVID-19 pandemic that impacted the Company in 2020, most significantly in the first and second quarters. Net sales also increased by $8.6 million due to pricing recovery initiatives implemented, primarily in the OE sales channels, to recover increased material and input costs. The increase was also due to $15.3 million of favorable currency translation.
Horizon Europe-Africa’s gross profit increased $5.8 million, or 23.3%, to $30.5 million, or 9.4% of net sales, during the twelve months ended December 31, 2021, from $24.7 million, or 8.9% of net sales, during the twelve months ended December 31, 2020. The increase in gross profit and gross profit margin is primarily attributable to the increase in net sales detailed above, which included a sales mix shift to higher margin products. The gross profit and gross profit margin increase was partially offset by unfavorable material, supply chain and other manufacturing input cost, net of customer pricing increases, coupled with the inability to flex costs efficiently based on OEM customer production schedule changes that negatively impacted business performance, especially in the third and fourth quarters of 2021. The input costs increases were not able to be fully passed through to our customers during 2021, given there is generally a delay in such recoveries due to market pressures and restrictions within certain customer contracts that require agreement.
SG&A expenses increased $7.9 million to $41.0 million, or 12.6% of net sales, during the twelve months ended December 31, 2021, as compared to $33.1 million, or 11.9% of net sales, during the twelve months ended December 31, 2020. The increase in SG&A was primarily attributable to the cost saving initiatives implemented by the Company and corresponding savings realized during 2020 in response to the impacts of the COVID-19 pandemic. As a result, the increase in SG&A is attributable to the following:
– $2.2 million of higher personnel and other variable compensation cost, partially as a result of payroll costs reimbursed in the prior year under terms of certain government payroll reimbursement programs;
– $1.5 million of higher outside professional fees and other administrative costs; and
– $1.8 million of unfavorable currency translation.
Horizon Europe-Africa’s operating loss increased $2.1 million to an operating loss of $(10.5) million, or (3.2)% of net sales, during the twelve months ended December 31, 2021, as compared to an operating loss of $(8.4) million, or (3.0)% of net sales, during the twelve months ended December 31, 2020. The changes in operating loss and operating margin were primarily due to the operational results detailed above.
Horizon Europe-Africa’s Adjusted EBITDA decreased $1.8 million to $6.9 million during the twelve months ended December 31, 2021, as compared to Adjusted EBITDA of $8.7 million during the twelve months ended December 31, 2020. Adjusted EBITDA declined primarily due to the operational results detailed above.
Corporate Expenses
Corporate expenses included in operating loss decreased $1.7 million to $24.8 million during the twelve months ended December 31, 2021, as compared to $26.5 million during the twelve months ended December 31, 2020. The decrease was primarily attributable to the following:
– $1.2 million of lower costs incurred related to professional service fees and other costs associated with new debt issuance, amendments, and modifications and related structure changes.
Corporate Adjusted EBITDA was $(20.5) million during the twelve months ended December 31, 2021, as compared to Adjusted EBITDA of $(20.7) million during the twelve months ended December 31, 2020. Adjusted EBITDA improved primarily due to higher discretionary and administrative support costs, partially offset by lower personnel and compensation costs.
Liquidity and Capital Resources
Our capital and working capital requirements are funded through a combination of cash on hand, cash flows from operations and various borrowings and factoring arrangements described below, including our asset-based Revolving Credit Facility (as defined below). As of December 31, 2021 and 2020, we had $8.2 million and $18.2 million, respectively, of cash and cash equivalents held at foreign subsidiaries. There may be country specific regulations which may restrict or result in increased costs in the repatriation of these funds.
In March 2020, the Company, as guarantor, entered into a Loan and Security Agreement (the “Loan Agreement”) with Encina Business Credit, LLC (“Encina”), as agent for the lenders party thereto, and Horizon Global Americas Inc. and Cequent Towing Products of Canada Ltd., as borrowers (the “ABL Borrowers”). The Loan Agreement provides for an asset-based revolving credit facility (the “Revolving Credit Facility”) in the maximum aggregate principal amount of $75.0 million subject to customary borrowing base limitations contained therein, and may be increased at the ABL Borrowers’ request in increments of $5.0 million, up to a maximum of five times over the life of the Revolving Credit Facility, for a total increase of up to $25.0 million. As of December 31, 2021, the Company had availability of $27.4 million under the Revolving Credit Facility and $3.6 million of cash and cash equivalents in the United States.
As of December 31, 2021 and 2020, total cash and availability was $39.2 million and $83.4 million, respectively. The Company defines cash and availability as cash and cash equivalents and amounts of cash accessible but undrawn from credit facilities.
During 2020, in response to the initial uncertain economic environment caused in part from the COVID-19 pandemic, the Company pursued funding from available government programs and other sources of liquidity designed to strengthen its balance sheet and enhance financial flexibility. These sources included short-term loans, some of which offered forgiveness if certain conditions are met as well as entering into or modifying other arrangements. A summary of these actions is described below.
In April 2020, Horizon Global Company LLC (the “U.S. Borrower”), a direct U.S.-based subsidiary of the Company, received a loan from PNC Bank, National Association (“PNC”) for $8.7 million, pursuant to the Paycheck Protection Program (the “PPP Loan”) under Division A, Title I of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The PPP Loan was amended in July 2021 to make any unforgiven portion payable over five years on a monthly basis. Funds from the PPP Loan may be used for payroll, costs used to continue group health care benefits, rent and utilities. Under the terms of the PPP Loan, certain amounts may be forgiven if they are used for qualifying expenses as described in the CARES Act.
During the fourth quarter of 2021, the Company’s application of loan forgiveness with PNC and the Small Business Administration was approved for forgiveness of $7.4 million of principal and $0.1 million of interest. The $1.3 million unforgiven portion of the loan has an interest rate of 1.0% per annum and will be repaid on a monthly basis through April 2025.
In March 2020, Westfalia-Automotive GmbH (“Westfalia”), an indirect subsidiary of the Company, was approved for a government payroll reimbursement program in Germany under the Kurzarbeitergeld (the “KUG”). The KUG is designed to reimburse employers for payroll costs incurred and paid to employees affected by the business disruption and government mandated operating restrictions in place due to the COVID-19 pandemic for the period March 1, 2020 through August 31, 2020. Westfalia was approved to receive reimbursement of certain costs for the period March 19, 2020 through August 31, 2020. The Company was reimbursed $3.3 million for qualifying payroll costs under terms of the KUG for the twelve months ended December 31, 2020.
We believe the combination of these sources, as well as the changes to our capital structure following our recent refinancing activities, as fully summarized below, will enable us to meet our working capital, capital expenditures and other funding requirements for at least the next twelve months and for the foreseeable future thereafter. Our ability to fund our working capital needs, debt payments and other obligations, and to comply with financial covenants, including borrowing base limitations under our Revolving Credit Facility, depends on our future operating performance and cash flow and many factors outside of our control, including the costs of raw materials, the state of the automotive accessories market, financial and economic conditions and the extent and duration of the impact of the COVID-19 pandemic.
Cash Flows - Operating Activities
Net cash used for and provided by operating activities during the twelve months ended December 31, 2021 and 2020 was $(42.7) million and $39.1 million, respectively.
During the twelve months ended December 31, 2021, the Company generated $13.3 million i n cash flows, based on the reported net loss of $(33.1) million and after considering the effects of non-cash items related to depreciation, amortization of intangible assets, gain and loss on debt extinguishment, amortization of original issuance discount and debt issuance costs, deferred income taxes, non-cash compensation expense, paid-in-kind interest, and other, net. During the twelve months ended December 31, 2020, the Company generated $7.4 million based on the reported net loss of $(37.5) million and after considering the effects of similar non-cash items.
Changes in operating assets and liabilities used $(56.0) million and sourced $31.7 million of cash during the twelve months ended December 31, 2021 and 2020, respectively.
Changes in accounts receivable resulted in a net source of cash of $2.1 million during the twelve months ended December 31, 2021. The decrease in accounts receivable during 2021 was driven primarily by lower net sales in the fourth quarter of 2021 as compared to the fourth quarter of 2020 . During the twelve months ended December 31, 2020, the increase in accounts receivables resulted in a net use of cash of $(12.2) million. The increase in accounts receivable during 2020 was driven primarily by higher net sales in the fourth quarter of 2020 as compared to the prior year , partially offset by pull ahead collection efforts in the fourth quarter of 2020.
Changes in inventory resulted in a net use of cash of $(52.3) million and source of $24.2 million during the twelve months ended December 31, 2021 and 2020, respectively. The increase in inventory during 2021 was driven primarily by global macroeconomic factors experienced during the period, including increased costs of raw materials, such as steel; constraints on shipping container availability and port congestion resulting in higher inventory costs. The decrease in inventory during the twelve months ended December 31, 2020 was due to improved inventory management coupled with an extended selling season in the last half of the year.
Changes in prepaid expenses and other assets resulted in a net use of cash of $(0.7) million and $(4.9) million during the twelve months ended December 31, 2021 and 2020, respectively. The increase in prepaid expenses and other assets during 2021 and 2020 was primarily due to the mix of invoicing from vendors and subsequent payment.
Changes in accounts payable and accrued liabilities resulted in a use of cash of $(5.2) million a nd a source of cash $24.6 million during the twelve months ended December 31, 2021 and 2020, respectively. The use of cash during 2021 , as compared to the source of cash during 2020, was primarily due to the timing of payments made to suppliers, mix of vendors and related terms coupled with improved working capital management during 2020 as compared to the prior year.
Cash Flows - Investing Activities
Net cash used for investing activities during the twelve months ended December 31, 2021 was $(20.4) million , as compared to net cash used for investing activities of $(13.2) million during the twelve months ended December 31, 2020.
During the twelve months ended December 31, 2021, capital expenditures were $(20.5) million as compared to $(13.3) million during the twelve months ended December 31, 2020, which related to growth, capacity and productivity-related projects within Horizon Americas and Horizon Europe‑Africa. The increase in capital expenditures was primarily due to the Company’s curtailment or retiming of certain projects during 2020, in response to the impacts and business disruptions of the COVID-19 pandemic.
We expect our capital spending in the twelve months ended December 31, 2022 to be $27.0 million, primarily related to support for product development, growth and maintenance for the business.
Cash Flows - Financing Activities
Net cash provided by financing activities wa s $30.3 million and $12.7 million during the twelve months ended December 31, 2021 and 2020, respectively.
During the twelve months ended December 31, 2021 and 2020, net proceeds from the Revolving Credit Facility, net of issuance costs, were $33.8 million and $21.9 million, respectively. During the twelve months ended December 31, 2020, net repayments on the Company’s former asset based lending facility totaled $(19.9) million.
During the twelve months ended December 31, 2021, proceeds from the Company’s new term loan, net of issuance costs and related issuance of common stock warrants, were $75.3 million and $16.3 million , respectively. During the twelve months ended December 31, 2021, repayments of borrowings on the Company’s former term loan, including transaction fees, were $(94.9) million .
During the twelve months ended December 31, 2020, proceeds from the Company’s PPP Loan were $8.7 million.
Factoring Arrangements
The Company has factoring arrangements with financial institutions to sell certain accounts receivable. During the twelve months ended December 31, 2021 and 2020, total receivables sold under certain non-recourse factoring arrangements were $279.9 million and $237.1 million, respectively. We utilize factoring arrangements as part of our working capital needs. The costs of participating in these arrangements are immaterial to our results. Refer to Note 3, Summary of Significant Accounting Policies, in Item 8, “ Financial Statements and Supplementary Data ,” included within this Annual Report on Form 10-K for additional information.
Our Debt and Other Commitments
We and certain of our subsidiaries are party to the asset-based Revolving Credit Facility governed by the Loan Agreement, each as defined and described above. The Revolving Credit Facility provides for $75.0 million of funding, which has been subsequently increased as described below, on a revolving basis, subject to borrowing base availability, and matures on March 13, 2024. As of December 31, 2021, there was $58.1 million outstanding on the Revolving Credit Facility with interest payable in cash at an interest rate of London Interbank Offered Rate (“LIBOR”) plus 4.00% per annum, subject to a 1.00% LIBOR floor.
In April 2021, the Company entered into an amendment to the Loan Agreement, that among other modifications, increased the maximum amount of credit available under the Revolving Credit Facility to $85.0 million. The amendment also increased sub-limits relating to the Company’s ability to borrow against in-transit inventory as well as inventory located in the Company’s Mexico facilities.
In September 2021, the Company entered into an amendment to the Loan Agreement, that among other modifications, increased the maximum amount of credit available under the Revolving Credit Facility to $95.0 million. The amendment also increased the Company’s ability to borrow against receivables and sub-limits relating to in-transit inventory and inventory located in the Company’s Mexico facilities. The increased borrowing capacity against receivables and inventory was effective through December 31, 2021.
On December 30, 2021, the Company entered into an amendment to the Loan Agreement, that among other modifications, permanently increased the Company’s inventory sub-limit and temporarily increased the Company’s ability to borrow against
receivables, in-transit inventory as well as inventory located in the Company’s Mexico facilities, which is effective through March 31, 2022. The amendment also amended the interest rate of the Revolving Credit Facility effective March 31, 2022, to be 3.50% to 4.00% per annum, subject to certain conditions defined in the Loan Agreement. The amendment also extended the term of the Revolving Credit Facility by one year, and all borrowings under the Loan Agreement mature on March 13, 2024.
In addition, the Company and certain of its subsidiaries, have been or are parties to other long-term credit agreements, including the Senior Term Loan Credit Agreement, as defined and described below. As of December 31, 2021, there was $100.0 million outstanding on the Senior Term Loan Credit Agreement bearing cash interest at the interest rate of LIBOR plus 7.50%, subject to a 1.00% LIBOR floor.
In February 2017, the Company completed a public offering of 2.75% Convertible Senior Notes due 2022 (the “Convertible Notes”) in an aggregate principal amount of $125.0 million. Interest is payable on January 1 and July 1 of each year. As a result of the Company’s Senior Term Loan Credit Agreement, which includes the delayed draw term loan facility, and the Series B Preferred Stock commitment letter executed in February 2022, the Company has the ability and intent to repay the Convertible Notes when they mature on July 1, 2022. The Senior Term Loan Credit Agreement, delayed draw term loan facility and Series B Preferred Stock commitment letter are each defined and described below.
First Lien Term Loan Agreement and Second Lien Term Loan Agreement
In March 2019, the Company amended and restated the existing term loan agreement (the “First Lien Term Loan Agreement”) to permit the Company to, among other things, enter into the Second Lien Term Loan Agreement, as defined and described below.
In March 2019, the Company entered into a credit agreement (the “Second Lien Term Loan Agreement”) with Cortland Capital Markets Services LLC, as administrative agent and collateral agent, and Corre Partners Management L.L.C., as representative of the lenders, and the lenders party thereto.
As a result of the Replacement Term Loan Amendment, as defined and described below, the outstanding balance and any accrued interest under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement was replaced by the Replacement Term Loan, as defined and described below.
Replacement Term Loan
In July 2020, the Company entered into a limited consent to the Loan Agreement governing its Revolving Credit Facility and an amendment to the Company’s First Lien Term Loan Agreement and Second Lien Term Loan Agreement (the “Replacement Term Loan Amendment”). The Replacement Term Loan Amendment provided a replacement term loan (the “Replacement Term Loan”) that refinanced and replaced the outstanding balances under the First Lien Term Loan Agreement and Second Lien Term Loan Agreement, plus any accrued interest thereon.
In February 2021, the Company entered into the Senior Term Loan Credit Agreement, as defined and described below. The proceeds received from the initial borrowings under the Senior Term Loan Credit Agreement were used to repay in full all outstanding debt and accrued interest on the Replacement Term Loan. As a result of the repayment, the credit agreement governing the Company’s Replacement Term Loan was terminated and is no longer in effect.
Senior Term Loan Credit Agreement
In February 2021, the Company entered into a credit agreement (the “Senior Term Loan Credit Agreement”) with Atlantic Park Strategic Capital Fund, L.P. (“Atlantic Park”), as administrative agent and collateral agent, and the lenders party thereto. The Senior Term Loan Credit Agreement provides for an initial term loan facility (the “Senior Term Loan”) in the aggregate principal amount of $100.0 million, all of which has been borrowed by the Company and used to repay the Replacement Term Loan, and a delayed draw term loan facility in the aggregate principal amount of up to $125.0 million, which may be drawn by the Company in up to three separate borrowings through June 30, 2022. A ticking fee of 25 basis points per annum will accrue on the undrawn portion of the delayed draw term loan facility.
Interest on the Senior Term Loan Credit Agreement is payable in cash on a quarterly basis at the interest rate of LIBOR plus 7.50% per annum, subject to a 1.00% LIBOR floor. The Senior Term Loan Credit Agreement includes customary affirmative and negative covenants, including a maximum total net leverage ratio requirement tested quarterly, commencing with the fiscal quarter ending March 31, 2023, not to exceed: 6.50 to 1.00. The Senior Term Loan Credit Agreement also contains a financial covenant that stipulates the Company will not make capital expenditures exceeding $27.5 million during any fiscal year. To the
extent that the amount of capital expenditures is less than $27.5 million in any fiscal year, up to 50% of the difference may be carried forward and used for capital expenditures in the immediately succeeding fiscal year.
Following a one-year no-call period, the Senior Term Loan Credit Agreement provides for a 2.5% call premium for years two through five and no premium thereafter. All outstanding borrowings under the Senior Term Loan Credit Agreement mature on February 2, 2027.
All of the indebtedness under the Senior Term Loan Credit Agreement is and will be guaranteed by the Company’s existing and future United States, Canadian and Mexican subsidiaries and certain other foreign subsidiaries and is and will be secured by substantially all of the assets of the Company and such guarantors.
Pursuant to the Senior Term Loan Credit Agreement, the Company issued warrants (the “Senior Term Loan Warrants”) to Atlantic Park to purchase in the aggregate up to 3,905,486 shares of the Company’s common stock, with an exercise price of $9.00 per share, subject to adjustment as provided in the Senior Term Loan Warrants. The Senior Term Loan Warrants are exercisable at any time prior to February 2, 2026.
Senior Term Loan Credit Agreement Amendment
On February 10, 2022, the Company entered into an amendment to its Senior Term Loan Credit Agreement (the “Senior Term Loan Credit Agreement Amendment”) with Atlantic Park. The Senior Term Loan Credit Agreement Amendment provides for a $35.0 million draw on the Company’s existing delayed draw term loan facility under the Senior Term Loan Credit Agreement and allows the net proceeds to be used for working capital purposes and to fund low-cost country expansion in the Company’s Horizon Europe-Africa operating segment. All amounts drawn under the delayed draw facility are governed by the existing terms of the Company’s Senior Term Loan Credit Agreement.
Pursuant to the Senior Term Loan Credit Agreement Amendment, the Company issued warrants to Atlantic Park to purchase up to 975,000 shares of the Company’s common stock, with an exercise price of $9.00 per share. The warrants are exercisable at any time prior to February 10, 2027, provided that the warrants may not be exercised and shares of common stock may not be issued pursuant to the warrants unless and until the Company obtains shareholder approval permitting the issuance of such shares of common stock in accordance with the rules of the New York Stock Exchange.
On February 10, 2022, the Company executed a commitment letter with Corre Partners Management L.L.C. (“Corre”) to issue, solely at the Company’s option, up to $40.0 million of Series B Preferred Stock. To the extent issued, the net proceeds of the Series B Preferred Stock may be used to repay up to $35.0 million of the Company’s outstanding Convertible Notes at maturity and, following such repayment, for general corporate purposes. If issued, the Series B Preferred Stock would accrue dividends in kind at a rate of 11.0% per annum. The Series B Preferred Stock would be perpetual, but subject to voluntary redemption by the Company at its option and subject to mandatory redemption upon a change in control or the one-year anniversary of the maturity of the Senior Term Loan. Additionally, if issued, if the Series B Preferred Stock is not redeemed after the occurrence of certain events, it would be convertible into shares of the Company’s common stock, at the option of Corre and subject to shareholder approval. The commitment letter expires on July 1, 2022.
The Company estimates it incurred $1.4 million of debt issuance costs and fees associated with the above transactions. The transactions will be accounted for in the first quarter of 2022.
Covenant and Liquidity Matters
The Loan Agreement governing our Revolving Credit Facility contains various negative and affirmative covenants and other requirements affecting us and our subsidiaries, including restrictions on incurrence of debt, liens, mergers, investments, loans, advances, guarantee obligations, acquisitions, asset dispositions, sale-leaseback transactions, hedging agreements, dividends and other restricted payments, transactions with affiliates, restrictive agreements and amendments to charters, bylaws, and other material documents. The Revolving Credit Facility does not include any financial maintenance covenants other than a financial covenant that stipulates the Company will not make capital expenditures exceeding $30.0 million during any fiscal year.
We are subject to variable interest rates on our Senior Term Loan Credit Agreement and Revolving Credit Facility. At December 31, 2021, 1-Month LIBOR and 3-Month LIBOR approximated 0.10% and 0.21% , respectively.
The Company is in compliance with all of its financial covenants as of December 31, 2021.
In addition to our long-term debt, we have other cash commitments related to leases. We account for these lease transactions as operating leases and rent expense related thereto for the twelve months ended December 31, 2021 and 2020 was $14.5 million
and $15.0 million, respectively. As of December 31, 2021, we had obligations for future lease payments of $57.7 million. We expect to continue to utilize leasing as a financing strategy in the future to meet capital expenditure needs and to reduce debt levels.
Refer to Note 9, Long-term Debt , and Note 10, Leases , in Item 8, “ Financial Statements and Supplementary Data ,” included within this Annual Report on Form 10-K for additional information.
Consolidated EBITDA
Consolidated EBITDA (defined as “Consolidated EBITDA” in our Senior Term Loan Agreement) is a comparable measure to how the Company assesses performance. As discussed further in the Supplemental Analysis and Segment Information section above, we use certain non-GAAP financial measures to assess performance and measure our covenant compliance in accordance with the Senior Term Loan Agreement, which includes Adjusted EBITDA at the operating segment level. For the measurement of our Senior Term Loan Agreement financial covenants, the definition of Consolidated EBITDA limits the amount of non-recurring expenses or costs including restructuring, moving and severance that can be excluded to $10 million in any cumulative four fiscal quarter period. Similarly, the definition limits the amount of fees, costs and expenses incurred in connection with any proposed asset sale, offering of equity interests or any indebtedness, lender agent fees, and fees in connection with the maintenance and/or forgiveness of the PPP Loan, in aggregate, that can be excluded to $8 million in any cumulative four fiscal quarter period.
The reconciliations of net income (loss) attributable to Horizon Global to EBITDA, EBITDA to Adjusted EBITDA and Adjusted EBITDA to Consolidated EBITDA are as follows:
Twelve Months Ended December 31,
Change
(dollars in thousands)
Net loss attributable to Horizon Global
Net loss attributable to noncontrolling interest
Net loss
Interest expense
Income tax benefit
Depreciation and amortization
EBITDA
Net loss attributable to noncontrolling interest
Loss from discontinued operations, net of income tax
EBITDA from continuing operations
Adjustments pursuant to Senior Term Loan Agreement:
Losses on sale of receivables
Debt extinguishment losses
Non-cash equity grant expenses
Other non-cash expenses or losses (gains)
Lender agent related professional fees, costs, and expenses (a)
Non-recurring expenses or costs (b)
Non-cash losses on asset sales
Debt extinguishment gains
Other
Adjusted EBITDA
Non-recurring expense limitation (a) (b)
Other
Consolidated EBITDA
(a) Fees, costs and expenses incurred in connection with any proposed asset sale, offering of equity interests or any indebtedness, lender agent fees, and fees in connection with the maintenance and/or forgiveness of the PPP Loan are not to, in aggregate, exceed $8 million in adjustments in determining Consolidated EBITDA in any four fiscal quarter period.
(b) Non-recurring expenses or costs including restructuring, moving and severance are not to, in aggregate, exceed $10 million in adjustments in determining Consolidated EBITDA in any four fiscal quarter period.
Credit Rating
The Company’s credit agreements do not require that we maintain a credit rating.
Outlook
Our business remains susceptible to macroeconomic conditions that could adversely affect our results, including the global microchip shortage and ongoing global shipping container and other transportation and logistics constraints. These recent macroeconomic factors have resulted in a delay of receiving raw materials by the Company or some of our OE customers, which has resulted in retiming some customer orders to future periods. We have also experienced increased costs for certain raw materials, including steel, and while the Company endeavors to recover incremental input costs through pricing recovery initiatives, the recoveries generally occur over time and are not guaranteed. However, the trend of customer orders in the economies that most significantly affect our demand has been strong, including the United States and Europe. We also continue to monitor the ongoing COVID-19 pandemic and potential impacts to our operations, employees, customers and other stakeholders, as well as prioritizing the health and safety of our employees. We continue to monitor these macroeconomic factors and remain committed to fulfilling and delivering our customers’ orders driven by the strong product demand we have experienced.
We also remain focused on maintaining liquidity to fund our operations, while considering future maturities in our capital structure, which have been addressed and will continue to be addressed as the Company continues to execute our business plan and operational improvement initiatives in 2022. These initiatives were put in place to streamline and simplify the Company’s operations and provide a roadmap to achieve our strategic priorities of margin expansion, liquidity management and organic business growth.
We believe the unique strategic footprint we enjoy in our market space will benefit us as our OE customers continue to demonstrate a preference for stronger relationships with few suppliers. We believe our strong brand positions, portfolio of product offerings, and existing customer relationships present a long-term opportunity for us and provide leverage to see balanced growth in OE, aftermarket and retail businesses. That position and brand recognition allows us flexibility to bring our products to market in various channels that we believe provide us the ability to leverage our current operational footprint to meet or exceed our customer demands.
Impact of New Accounting Standards
See Note 2, New Accounting Pronouncements , included in Item 8, “ Financial Statements and Supplementary Data ,” within this Annual Report on Form 10-K.
Critical Accounting Estimates
The following discussion of accounting estimates is intended to supplement the accounting policies presented in Note 3, Summary of Significant Accounting Policies included in Item 8, “ Financial Statements and Supplementary Data ,” within this Annual Report on Form 10-K. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, our evaluation of business and macroeconomic trends, and information from other outside sources, as appropriate.
Revenue Recognition. Revenue is measured based on a consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Sales Related Accruals. Net sales are comprised of gross revenues less estimates of expected returns, trade discounts and customer allowances, which include incentives for items such as cooperative advertising agreements, volume discounts and other supply agreements in connection with various customer programs. On at least a quarterly basis, we perform detailed reviews of our sales related accruals by evaluating specific customer contractual commitments, assessing current incentive programs and other relevant information in order to assess the adequacy of the reserve. Reductions to revenue and estimated accruals are recorded in the period in which revenue is recognized.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts to reflect management’s best estimate of probable credit losses inherent in our accounts receivable balances. Determination of the allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the allowances for
doubtful accounts and, therefore, net income. The level of the allowance is based on quantitative and qualitative factors including historical loss experience, delinquency trends, economic conditions and customer credit risk. We perform detailed reviews of our accounts receivable portfolio on at least a quarterly basis to assess the adequacy of the allowance. Over the past two years, the allowance for doubtful accounts was 3.4% to 3.0% of gross accounts receivable. We do not believe that significant credit risk exists due to our diverse customer base.
Impairment of Long-Lived Assets and Definite-Lived Intangible Assets. We review the Company’s financial performance for indicators of impairment on at least a quarterly basis. In reviewing for impairment indicators, we also consider events or changes in circumstances such as business prospects, customer retention, market trends, potential product obsolescence, competitive activities and other economic factors. An impairment loss is recognized when the carrying value of an asset group exceeds the future net undiscounted cash flows expected to be generated by that asset group. The impairment loss recognized is the amount by which the carrying value of the asset group exceeds its fair value.
Goodwill and Indefinite-Lived Intangibles. On June 8, 2021, the Company divested its Brazil business via a share sale (the “Brazil Sale”). Under the terms of the Brazil Sale, the Company disposed all assets and liabilities of its Brazil business, including $3.3 million of goodwill within the Horizon Americas operating segment, for nominal consideration. As a result, as of December 31, 2021, the Company had no recorded goodwill and no annual goodwill impairment test was required in 2021.
The Company performed an annual goodwill impairment test as of October 1, 2020, for the Horizon Americas reporting unit. The assessment indicated that it was more likely than not that the fair value of the reporting unit exceeded its carrying value.
We review indefinite-lived intangible assets for impairment annually or more frequently if events or changes in circumstances indicate the assets might be impaired. The Company first performs a qualitative assessment of whether it is more likely than not that an indefinite-lived intangible asset is impaired. If necessary, the Company then performs a quantitative impairment test by comparing the estimated fair value of the asset, based upon its forecasted cash flows using the relief from royalty method, to its carrying value. The Company performed an annual indefinite-lived asset impairment test as of October 1, 2020. The assessment indicated that it was more likely than not that the fair value of the indefinite-lived intangible assets exceeded their carrying value.
See Note 5, Goodwill and Other Intangible Assets included in Item 8, “ Financial Statements and Supplementary Data, ” within this Annual Report on Form 10-K for further information.
Income Taxes. We compute income taxes using the asset and liability method, whereby deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of assets and liabilities and for operating loss and tax credit carryforwards. Under this method, changes in tax rates and laws are recognized in income in the period such changes are enacted. We determine valuation allowances based on an assessment of positive and negative evidence on a jurisdiction-by-jurisdiction basis and are utilized to reduce deferred tax assets to the amount more likely than not to be realized. To make this assessment, we evaluate historical operating results, the existence of cumulative losses in the most recent fiscal years, expectations for future pretax operating income, the time period over which our temporary differences will reverse and the implementation of feasible and prudent tax planning strategies. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Changes in existing tax laws could also affect actual tax results and the valuation of deferred tax assets over time. We record interest and penalties related to uncertain tax positions in income tax expense.
We are also currently subject to tax controversies in various jurisdictions, and these jurisdictions may assess additional income tax liabilities against us. Developments in audits could have a material effect on our operating results or cash flows in the period for which that development occurs, as well as for subsequent periods. We regularly assess the likelihood of an adverse outcome resulting from these proceedings to determine the adequacy of our tax accruals. Although we believe our estimates are reasonable, the final outcome of audits could be materially different from our historical income tax provisions and accruals.
Refer to Note 16, Income Taxes, to the consolidated financial statements included in Item 8, “ Financial Statements and Supplementary Data, ” of this Annual Report on Form 10-K for additional information.
