Tecnoglass Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing identifies the registrant as Tecnoglass Inc. (NASDAQ: TGLS), a vertically integrated manufacturer and installer of architectural glass, windows, and aluminum products. Financial amounts below are in U.S. dollars; dollar figures are millions unless otherwise noted.
Financial performance
- Q2 revenue: $113.9, up 28.0% from $89.0 a year earlier. U.S. revenue increased 42.2% to $99.3 and represented 87.2% of sales; Colombia revenue declined to $12.2 from $15.6. Product sales were $67.2 and fixed-price contract revenue was $46.7.
- Q2 profitability: Gross profit was $38.8, up 57.6%; gross margin expanded to 34.1% from 27.7%. Operating income was $18.3 versus $7.6, and net income was $7.7 versus a $3.9 loss. Net income attributable to the parent was $7.5, or $0.17 per share, compared with a $3.7 parent-attributable loss, or $0.10 per share.
- First-half revenue and earnings: Revenue was $221.1, up 25.5%; gross profit was $70.7, up 37.6%, with gross margin of 32.0% versus 29.2%. Operating income rose to $32.5 from $17.6. Net income was $15.0 versus $6.7; parent-attributable income was $14.8, or $0.35 per share, versus $7.0, or $0.18 per share.
- Expenses and other items: Q2 operating expenses increased 20.9% to $20.6, less than revenue growth. Interest expense rose 7.4% to $5.8 in Q2 and 9% to $11.3 for the first half. Q2 included a $1.2 foreign-currency transaction loss, compared with an $8.3 loss in Q2 2018; the six-month periods included gains of $2.1 and $1.7, respectively. The Q2 2019 effective tax rate was reported as negative 34%; first-half rate was negative 37%.
- Cash flow: First-half operating cash flow was $9.0, versus an outflow of $6.4 in 2018. Investing cash outflow was $47.9, including $34.1 paid for the Vidrio Andino investment and $13.8 of property and equipment purchases. Financing provided $53.3, including $36.5 net equity-offering proceeds and $36.7 of debt proceeds, partly offset by $17.7 of repayments and $2.2 of cash dividends. Cash increased $14.6 to $47.6.
- Liquidity and debt: Current assets were $333.3 and current liabilities $138.3 at June 30; working capital was approximately $195.0. Total obligations under borrowing arrangements were $262.5, including $250.2 classified as long-term debt and $12.2 current. Debt increased from $242.3 at year-end 2018. The company reported $15.8 of borrowing availability and compliance with covenants on its new term facility.
- Balance sheet and shares: Total assets were $580.5, total liabilities $398.9, and equity $181.6. Ordinary shares outstanding increased to 44.86 million from 38.09 million at year-end, following a 5.0 million-share offering and exercise of part of the underwriters’ option.
Material changes and strategic developments
- Growth was led by U.S. sales and residential Elite and Prestige product lines. Management attributed higher gross margin to scale, cost control, sales growth, and a lower proportion of lower-margin installation revenue. Colombian construction-market weakness reduced domestic sales; management expected a slow recovery.
- On May 3, 2019, the company completed its purchase of a 25.8% interest in Saint-Gobain subsidiary Vidrio Andino for $45.0: $34.1 cash and $10.9 to be settled with land contributed by the CEO and COO, subject to third-party valuation. The land contribution was due by January 2020. The filing describes plans for a new nearby plant and an additional company contribution of approximately $12.5 during 2020–2021.
- The company reported $285.9 of remaining performance obligations, with $145.6 expected to be recognized in 2019, $115.5 in 2020, and $24.9 thereafter. It expects to recognize all of these obligations within three years.
- Capacity investments were underway: management anticipated approximately $20.0 of total investment, with aluminum expansion completed in mid-July 2019 and automation expected to be fully implemented by year-end 2019; some payments could extend into Q1 2020.
Outlook, risks, and contingencies
- The filing provides no formal revenue or earnings guidance. Management cited customer demand, continued U.S. expansion, and capacity and automation projects, but described a slow near- and mid-term recovery in Colombia.
- Key exposures include foreign-exchange movements: Colombian subsidiaries hold a reported $152.0 net liability position in U.S.-dollar-denominated monetary assets and liabilities. U.S. sales concentration also increased, while accounts receivable and contract assets use cash; first-half receivables consumed $16.8 and contract assets/liabilities consumed $9.8. Days sales outstanding was 90 days, unchanged from year-end.
- Internal control over financial reporting was deemed ineffective at June 30 due to a previously disclosed material weakness in accounting for income taxes. Management said remediation was underway and targeted remediation by fiscal year-end 2019.
- The company had a minimum raw-material purchase commitment of $25.1 through May 2026. It described ordinary-course litigation, including project-related disputes, but said available information did not indicate a material adverse effect; outcomes remain uncertain.
- Related-party matters include the proposed land contribution by the CEO and COO for the Vidrio Andino investment, sales to a distributor owned by family members of those executives, and payments to related parties. The quarterly dividend was $0.14 per share and may be changed or discontinued at the board’s discretion.
Important facts for investors to verify
- Confirm the timing, independent valuation, and settlement of the $10.9 related-party land contribution and the anticipated $12.5 future joint-venture contribution.
- Track whether backlog converts on the stated schedule and whether U.S. growth and gross-margin gains persist as capacity expands.
- Assess collections, contract-asset growth, and operating cash conversion relative to reported earnings.
- Monitor debt, interest costs, covenant compliance, and funding needs for capital spending and the planned glass facility.
- Review progress and testing evidence for remediation of the income-tax accounting material weakness.