Higher Spending Sends Horizon Global's Bottom Line Into the Red

By Brian Feroldi Markets Fool.com

Horizon Global(NYSE: HZN), an international provider of towing and trailering equipment,reported its fourth-quarter 2016 earnings before the markets opened for trading on Thursday, March 9. Investors were given asneak peekat Horizon's results a few weeks ago when the company announced that it was raising capital through a secondary common stock and bond offering. Despite the heads-up, Horizon's shares still took a bigtumble when the company's actual results hit the wire. Let's take a closer look at what happened at Horizon this quarter to see what caused the markets to turn bearish.

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Image source: Getty Images.

Horizon Global Q4: The raw results

Metric Q4 2016 Q4 2015 Year-Over-Year Change
Revenue $183.6 million $121.2 million 51.4%
Adjusted net income ($7.7 million) $1.1 million N/A
Adjusted earnings per share ($0.37) $0.06 N/A

Data source: Horizon Global.

What happened this quarter?

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The huge jump in sales this quarter was primarily driven by the recently completed acquisition of Westfalia. However, the company did see top-line growth in all three of its major reporting segments:

  • North American net sales grew by 6.6% thanks to volume gains in retail ande-commerce sales channels. However, the division's operating profit decreased by nearly half due to impairment charges on intangible assets in the company's Brazilian business.
  • Asia-Pacific sales grew by7% due to growth in industrialand retail sales. However, operating profit fell 14% because of increased costs associated with new customer gains.
  • Sales in Europe and Africa jumped by 569%, thanks mostly to the inclusion of Westfalia. Unfortunately, the company failed to translate the huge sales bump into profits. This segment generated an operating loss of $13.8 million, which management said was caused by the impacts of purchase accounting, increased professional fees, and severance costs.

Zooming out, here are a few highlights from the full-year 2016:

  • Total revenue grew 12.8% to $649 million. Excluding Westfalia, net sales increased 3.3%. That's right in the middle of what management told investors to expect when it pre-announced results.
  • Operating profit margin fell 240 basis points to 1%. However, adjusted segment profit margin -- which excludes costs related to Westfalia -- increase 160 basis points to 10%. That's at the high end of management's guidance range.
  • Operating cash flow increased 32% to $35.4 million.
  • Adjusted net income dropped 44% to $12.4 million.
  • Adjusted EPS fell 48% to $0.64.

What management had to say

Horizon CEO Mark Zeffiro said that he was happy with the company's performance in 2016, but he reiterated that improving margins are his toppriority, stating, "Our goal of 10.0 percent adjusted segment operating margin, excluding Westfalia, is now behind us, and we are driving towards our next goal of achieving a 10.0 percent adjusted operating profit margin for our entire enterprise, including Westfalia."

Zeffiro also said that the company successfully raised $210 million ingross proceeds through its common stock and notes offering in February. He said the move strengthens the company's balance sheet, reduces its interest expense, and gives the company financial flexibility to either pay down debt or make acquisitions.

Looking forward

Turning to 2017, Zeffiro said that the company is focused on "expanding our market share, leveraging our strengths in both the OE [original equipment] and e-commerce channels and driving continuous improvement across our global operations."

As a result, the company expects each of its business segments to put up strong performances and gain market share.

Here's a look at the guidance that the company is offering up for 2017:

Metric 2016 Results 2017 Guidance Year-Over-Year Change
Revenue $649 million $844 million to $876 million 30% to 35%
Adjusted operating profit $37 million $53 million to $59 million 43% to 59%
Adjusted earnings per share $0.64 $0.90 to $1.00 41% to 56%

Data source: Horizon Global.

Wall Street was only expecting the company to produce $843 million in revenue for 2017. However, market watchers wanted to see $1.38 in adjusted EPS for the full year. The big difference between those two numbers is likely the reason behind Thursday's sell-off.

While traders appear to be less than thrilled with the company's guidance, Horizon's recent market share gains andopportunities for margin improvement should continue to provide long-term shareholders with plenty of reasons to remain optimistic.

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Brian Feroldi has no position in any stocks mentioned. The Motley Fool recommends Horizon Global. The Motley Fool has a disclosure policy.