Tecnoglass Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2018. The filing registrant is Tecnoglass Inc. (not “Tecnoglass Holdings Inc.”). Amounts below are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise.
Business context and period
Tecnoglass manufactures architectural glass, aluminum products, windows and building systems, and provides related design and installation services. It operates primarily from Colombia and sells across the Americas. The United States generated 79% of second-quarter revenue and 75% of first-half revenue. The company reports one operating segment.
Financial performance and liquidity
- Revenue: Q2 revenue was $89.0 million, up 9.9% year over year. First-half revenue was $176.1 million, up 20.0%. First-half U.S. revenue increased 24.6% to $132.8 million.
- Profit and margins: Q2 gross profit was $24.6 million, with a 27.7% gross margin versus 27.8% a year earlier. Operating income rose to $7.6 million from $5.4 million; net loss was $3.9 million versus $3.5 million. First-half gross profit increased 14.7% to $51.4 million, but gross margin declined to 29.2% from 30.5%. First-half net income was $6.7 million, compared with a $2.5 million loss; parent-attributable net income was $7.0 million, or $0.19 per diluted share.
- Foreign exchange and interest: Q2 included an $8.3 million foreign-currency transaction loss, largely cashless, while first-half results included a $1.7 million gain. First-half interest expense was $10.4 million, broadly flat year over year.
- Cash flow: First-half operating cash flow was negative $6.4 million, versus positive $12.2 million in 2017. Investing used $11.2 million; financing provided $5.8 million. Cash declined to $29.9 million from $40.9 million at year-end 2017. Management attributed operating cash use mainly to working-capital needs, including inventory, receivables and tax payments.
- Balance sheet and debt: At June 30, cash was $29.9 million, current assets $271.9 million, and current liabilities $108.6 million. Reported debt obligations, net of deferred financing costs, were $231.9 million, including $11.5 million current and $220.4 million long term. The $210 million senior unsecured notes carry an 8.2% coupon and mature in 2022.
Material changes versus the comparable period
- Revenue growth was supported by U.S. sales and, for the first half, inclusion of GM&P for a full six months in 2018 versus from March 1 in 2017. Q2 Colombian revenue was essentially unchanged; management cited uncertainty around the June presidential election and delayed project financing.
- First-half gross margin fell, which management attributed mainly to additional installation and other non-recurring costs on several completed projects. Operating expenses increased modestly in dollars but declined as a share of revenue.
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. The adoption reduced opening retained earnings by $187, reclassified certain receivables and advances into contract assets and liabilities, and reduced reported first-half revenue by $1.8 million versus the filing’s ASC 605 comparison. Prior-year figures were not restated, so comparisons are not fully like-for-like.
- Shares outstanding rose to 37.0 million from 34.8 million at year-end, including shares issued in the GM&P settlement and stock dividends. The company also reduced the GM&P seller note by $1.5 million and recorded a $3.6 million debt-extinguishment gain in additional paid-in capital, not earnings.
Outlook, risks and unusual items
- Outlook: No formal earnings or revenue guidance is provided. Remaining performance obligations were $273 million at June 30; the company expected to recognize all of them within three years. Management said existing capacity should support backlog and expected sales through 2018.
- Market and execution risks: Management identified sensitivity to U.S. construction activity and geographic concentration. It also cited project-cost estimates, contract modifications, working-capital requirements, interest rates and currency movements as factors that can affect results. A 200-basis-point rate change was estimated to alter six-month net earnings by about $0.5 million. Colombian subsidiaries had $152.4 million more U.S.-dollar monetary liabilities than assets; a 1% peso devaluation was estimated to cause a $1.5 million loss.
- Commitments and contingencies: The company committed to purchase at least $39.1 million of specified raw materials through May 2026. Management said ordinary-course litigation was not expected to have a material adverse effect, while noting outcomes are uncertain.
- Controls: Management concluded disclosure controls were ineffective due to a material weakness in controls over deferred-tax valuation, presentation and effective tax-rate accuracy. The filing says the deficiency could have resulted in net income being understated by $1.2 million for the three- and six-month periods; management planned remediation before year-end 2018.
- Other notable items: U.S. aluminum and steel tariffs added about $0.5 million of expense in the first half; management said these costs were being passed through to customers. No off-balance-sheet arrangements were reported.
Key facts for investors to verify
- How the material weakness and the stated $1.2 million deferred-tax impact were evaluated, whether any financial-statement adjustment is needed, and whether remediation was completed.
- Whether operating cash flow improves as inventory and receivables are converted to cash, and how the $273 million performance-obligation balance translates into billings and collections.
- The debt maturity schedule and refinancing plan: the filing reports $212.4 million of scheduled 2022 maturities, while reported debt obligations are $231.9 million; reconcile the amounts and terms.
- Whether gross margins recover as project installation costs normalize, and whether U.S. tariff costs continue to be fully passed through.
- The sensitivity of earnings and cash flows to peso movements, floating interest rates, U.S. construction demand, and GM&P integration and project-cost estimates.