Horizon Global Corporation, a leading designer, manufacturer, and distributor of a wide range of high-quality, custom-engineered towing, trailering, cargo management, and related accessory products, has faced a challenging operating environment in recent years. The company's annual net income stood at -$33.12 million, while its annual revenue reached $782.12 million. Additionally, the company reported an annual operating cash flow of -$42.7 million and an annual free cash flow of -$63.16 million.
Business Overview
Headquartered in Plymouth, Michigan, Horizon Global operates in two primary segments: Horizon Americas and Horizon Europe-Africa. The Horizon Americas segment is a market leader in the design, manufacture, and distribution of a diverse range of towing, trailering, and cargo management products, serving aftermarket, automotive OEM, automotive OES, industrial, and retail customers. The Horizon Europe-Africa segment focuses on similar product offerings, catering to the European and African markets.
Horizon Global's products are designed to support a wide range of end markets, including agricultural, automotive, construction, horse/livestock, industrial, marine, military, recreational, trailer, and utility. The company's strategic footprint and brand recognition have allowed it to leverage its operational capabilities to meet customer demand across various sales channels, including aftermarket, automotive OEM, automotive OES, retail, e-commerce, and industrial.
Operational Challenges and Strategic Initiatives
The company has faced several operational challenges in recent years, including the impact of the COVID-19 pandemic, global supply chain disruptions, inflationary pressures, and the ongoing conflict between Russia and Ukraine. These factors have contributed to a decline in the company's financial performance, as evidenced by the reported annual net income, revenue, operating cash flow, and free cash flow.
In response to these challenges, Horizon Global has undertaken a comprehensive review of strategic alternatives for the business, which could involve the sale of a portion or the entirety of the company. Additionally, the company has engaged in discussions with its lender to amend the terms of its financial covenant under the Senior Term Loan Credit Agreement. Horizon Global has a history of successfully amending and extending credit agreements with its current lenders, and the process of undertaking such activities is actively ongoing.
Segment Performance
Horizon Americas
The Horizon Americas segment experienced a 17.5% decrease in net sales during the nine-month period ended September 30, 2022, compared to the same period in 2021. This decline was primarily attributable to lower sales volumes in the aftermarket and retail sales channels, driven by customers using existing inventories to satisfy consumer demand and material availability constraints. The segment's gross profit margin declined from 26.5% to 14.3% during this period, reflecting the lower sales volumes, a significant mix shift from higher-margin to lower-margin sales channels, and the inability to fully pass through increased material and input costs to customers.
Horizon Europe-Africa
The Horizon Europe-Africa segment experienced a 17.0% decrease in net sales during the nine-month period ended September 30, 2022, compared to the same period in 2021. This decline was primarily driven by lower sales volumes in the aftermarket and OE sales channels, resulting from supply chain disruptions and material availability constraints. The segment's gross profit margin declined from 12.5% to 7.2% during this period, reflecting the lower sales volumes, the unfavorable impact of increased material and input costs, and the inability to efficiently flex costs due to the lower sales volumes.
Financials
Liquidity
As of September 30, 2022, Horizon Global had $7.76 million in cash and cash equivalents and $5.38 million in restricted cash, totaling $13.14 million in available liquidity. The company also had $9.7 million of availability under its Revolving Credit Facility, resulting in total cash and availability of $17.5 million.
However, the company currently projects that it will not generate sufficient cash flows from operations or have access to other sources of liquidity to sustain its operating needs or meet its obligations as they become due over the next twelve-month period. This is primarily due to the company's history of recurring net operating losses and cash outflows from operations, as well as the expectation that it will not be in compliance with a financial covenant under its Senior Term Loan Credit Agreement as of March 31, 2023.
Risks and Challenges
Horizon Global's business remains susceptible to various macroeconomic conditions, including the current inflationary environment, rising energy prices, increasing interest rates, the ongoing global semiconductor shortage, and transportation and other logistic constraints. The conflict between Russia and Ukraine has also placed added constraints on the global automotive supply chain, which may adversely impact the company's business.
Additionally, the company's common stock is currently out of compliance with the New York Stock Exchange's ("NYSE") minimum market capitalization and average closing price requirements, and the company is at risk of the NYSE delisting its common stock. This could have an adverse impact on the trading volume, liquidity, and market price of Horizon Global's shares.
Outlook
Horizon Global's management team is actively engaged in addressing the company's operational and financial challenges. The strategic review process and discussions with the company's lender to amend the terms of its financial covenant are ongoing, and the outcome of these efforts will be crucial in determining the company's future direction.
Despite the current headwinds, Horizon Global's unique strategic footprint, brand recognition, and portfolio of product offerings present long-term opportunities for the company. As the automotive accessories market continues to evolve, the company's ability to adapt and execute its operational improvement initiatives will be key to achieving margin expansion, liquidity management, and organic business growth.
Conclusion
Investors should closely monitor Horizon Global's progress in navigating the challenging environment and implementing its strategic initiatives. The company's ability to address its liquidity concerns and regain compliance with the NYSE's listing requirements will be critical in determining the long-term viability of the business.