Horizon Global Corporation (HZN) reported its third-quarter results on Nov. 1. Shares of the manufacturer of branded towing and trailering equipment have been on fire this year, having more than doubled in value year to date. Investors have been bidding up the company's stock as the management team has consistently delivered on its plans to increase margins, grow revenue, and reduce leverage.
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Horizon's shares jumped by 8% in the trading session that immediately followed the earnings release. Let's put the company's third-quarter results under the microscope to see why traders are feeling so bullish.
Horizon Global Q3: The raw results
| Metric | Q3 2016 | Q3 2015 | Change |
|---|---|---|---|
| Revenue | $151.7 million | $153.3 million | (1%) |
| Adjusted net income | $5.68 million | $9.00 million | (37%) |
| Adjusted earnings per share | $0.30 | $0.50 | (40%) |
Data source: Horizon Global.
What happened this quarter?
- North American net sales decreased by 5.1% as the company noted weakness in its retail, aftermarket, and industrial channels. However, adjusted operating profits fell by only 2.1%, to $14 million, thanks to continued margin expansion.
- Horizon's international sales were strong, showing growth of 10.9%. Adjusted operating profits soared by 200%, to $3.6 million, thanks to the increased sales volume.
- Taken together, adjusted operating profit margin grew to 7.8%, up from 7.6% in the year-ago period.
- Management announced its intentions to acquire the Westfalia Group, a leading provider of towing equipment in Europe. Horizon Global stated that it would fund the acquisition through a combination of cash, stock issuance, and debt assumption for a total purchase price of roughly 167 million euros. The deal is slated to close in the fourth quarter and management expects it to be accretive to earnings in 2017.
- Horizon continued to reduce its debt load during the quarter. Its leverage ratio was 2.7 at quarter-end, which is down sharply from 3.6 in the year-ago period. However, those figures do not take into account the $152 million term loan that was taken on to fund the Westfalia Group acquisition.
What management had to say
Horizon's CEO, Mark Zeffiro, was quite happy with his company's performance, saying:
We are pleased with our third quarter 2016 results, which were more in line with our historical segment operating profit distribution than the third quarter of 2015. Our automotive OE [original equipment] and e-commerce channels experienced significant sales gains in the quarter, offset by the softness we are seeing in the retail channel. Segment operating profit improved on lower sales volume as compared to third quarter 2015. On a full-year basis, we are in sight of our goal of 10% adjusted segment operating profit.
Zeffiro also said that the company is already working on integrating the Westfalia Group acquisition, and that it is on target to achieve $10 million in synergies next year.
Looking forward
Management is feeling even more confident about its plans to deliver strong results for the full year, which caused it to bump up its guidance. While it is still projecting constant currency net sales growth of only 3% to 5%, it now believes that adjusted segment operating profit margins will improve by 130 to 150 basis points. That compares favorably to the prior outlook of a "more than 100 basis point" improvement. Better still, net cash conversion is expected to be more than 200% higher than net income generation, which is up sharply from management's prior outlook. Importantly, these results do not include the impact from the Westfalia Group acquisition, either.
CEO Zeffiro commented on the company's upbeat guidance and his team's marching orders for the rest of the year, stating:
Our 2016 outlook has been updated to reflect our year-to-date improvement in adjusted segment operating profit as we realize the benefits of our improved cost structure. Our net cash conversion has also improved through efficient management of working capital and profitability. We will continue to pay close attention to the retail environment and the global markets as we close out the year. We are executing our strategic plan, focusing on our three key financial priorities of increasing operating margins, improving our capital structure and growing our revenues. Our results in the third quarter demonstrate our ability to realize the benefits of near-term restructuring activities while remaining focused on long-term value creation.
