Tecnoglass Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless stated otherwise, financial amounts are in U.S. dollars, millions. The registrant manufactures and installs architectural glass, windows and aluminum products, with production in Colombia and substantial sales in the United States.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $107.2 | $87.2 |
| Gross profit / margin | $31.9 / 29.8% | $26.7 / 30.7% |
| Operating income / margin | $14.2 / 13.3% | $10.0 / 11.5% |
| Net income | $7.3 | $10.6 |
| Net income attributable to parent | $7.3 | $10.7 |
| Basic / diluted EPS | $0.19 / $0.18 | $0.28 / $0.28 |
| Operating cash flow | $(4.9) | $(10.2) |
| Investing cash flow | $(3.7) | $(1.1) |
| Financing cash flow | $36.9 | $(0.3) |
- Revenue rose 23.0%. U.S. sales increased 46.1% to $92.1 million, or 86% of revenue; Colombian sales fell to $13.0 million from $21.8 million.
- Gross profit grew 19.2%, but gross margin declined 0.9 percentage points, primarily because installation work represented a larger share of sales. Operating expenses increased 5.4% to $17.7 million.
- Net income declined despite higher operating income. Foreign-currency transaction gains fell to $3.3 million from $10.0 million; interest expense rose to $5.6 million from $5.1 million. The effective tax rate increased to 40.0% from 33.7%.
- Q1 cash generation remained negative from operations. Working-capital use included $10.7 million for receivables and $8.0 million for contract assets and liabilities. Management reported DSO of 89 days, versus 90 days at year-end 2018.
Balance sheet and liquidity
- At March 31, cash and cash equivalents were $61.7 million, compared with $33.0 million at December 31, 2018. Current assets were $345.2 million and current liabilities $138.1 million, a current ratio of approximately 2.5x.
- Total debt obligations under borrowing arrangements were $247.9 million, including $28.0 million current and $219.8 million long-term; the reported carrying amount is net of deferred financing costs. Cash less reported debt obligations was approximately $186.2 million. Weighted-average interest rate on credit facilities was 7.51%.
- Cash increased largely because of a March follow-on offering of 5.0 million shares at $7.00 per share, producing $33.1 million net proceeds. The company also reported $12.9 million of available borrowing under bank facilities at quarter-end.
- Property and equipment purchases were $3.7 million; including $1.5 million acquired under credit, management reported Q1 capital expenditures of $5.2 million.
Outlook, significant developments and risks
- No formal earnings or revenue guidance is provided. Remaining performance obligations were $279.4 million at March 31; the company expected to recognize $217.3 million during 2019 and $62.1 million during 2020, with all within three years.
- Management cited continued U.S. growth, including residential Elite and Prestige products, while describing Colombian construction demand as weak and recovery as likely slow. It planned approximately $20 million of capacity and automation investment, targeting aluminum expansion by Q3 2019 and full automation implementation by year-end. Expected benefits include approximately 2.5x capacity on certain glass tempering lines and 25% more aluminum capacity.
- The company entered a Saint-Gobain joint venture to acquire an approximately 25% interest in Vidrio Andino for $45 million: $34.1 million cash and land valued at $10.9 million. The transaction closed May 3, 2019. The land is to be contributed on the company’s behalf by its CEO and COO, making valuation and related-party terms notable. The company also expects an additional approximately $12.5 million contribution in 2020–2021 toward a planned new plant.
- On May 2, 2019, the company closed a $30 million, five-year facility at LIBOR plus 2.95%, intended to refinance short-term debt and help fund capacity expansion. This is a subsequent event, not quarter-end debt.
- Foreign-exchange results are sensitive to peso movements: a 2% peso appreciation contributed to the Q1 $3.3 million noncash transaction gain, while the company reported a $148.5 million net U.S.-dollar-denominated monetary liability position at its peso-functional subsidiaries.
- Management stated internal controls over financial reporting were not effective at March 31 due to a previously identified material weakness in income-tax accounting. Remediation was underway, with a goal of resolving the weakness by year-end 2019. Management nevertheless stated the financial statements were fairly stated in all material respects.
- The company disclosed a minimum $27.9 million raw-material purchase obligation through May 2026. It reported ordinary-course litigation and said available information did not indicate a material adverse effect, while noting outcomes cannot be predicted. No off-balance-sheet arrangements or market-risk disclosures were reported in the respective sections.
Important facts for investors to verify
- Whether revenue growth, the U.S. market mix and backlog convert into cash, given negative operating cash flow and rising receivables and contract assets.
- Whether gross-margin pressure from installation mix persists and whether planned capacity and automation investments deliver expected benefits within budget and timing.
- The total funding, valuation and related-party arrangements for the Saint-Gobain joint venture, land contribution and planned additional investment.
- Debt maturity, interest-rate and currency exposure, including the effect of the post-quarter $30 million facility and future financing needs.
- Progress and testing of remediation for the income-tax accounting material weakness.
- The effects of share issuance on dilution: 5.0 million offering shares were issued in March, and underwriters exercised an option for another 551,423 shares on April 3.