Tecnoglass Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2017. Financial statement amounts below are in U.S. dollars; monetary figures are shown in millions unless stated otherwise. The filing is for Tecnoglass Inc., the registrant identified in the supplied filing.
Business context
Tecnoglass manufactures architectural glass, aluminum products, windows and building systems, with operations headquartered in Barranquilla, Colombia. It sells across the Americas and reported that the United States accounted for 82% of third-quarter revenue and 76% of nine-month revenue. Results include GM&P, acquired March 1, 2017; its commercial glazing and engineering activities affect comparability and generally carry lower gross margins. Prior-period results were also retrospectively adjusted for the ESWindows LLC common-control acquisition.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $83.4 | $81.1 | $230.2 | $224.7 |
| Gross profit | $27.2 | $31.3 | $72.0 | $84.0 |
| Gross margin | 32.6% | 38.6% | 31.3% | 37.4% |
| Operating income | $11.4 | $14.3 | $23.7 | $38.8 |
| Net income (loss) attributable to parent | $6.9 | $(8.8) | $4.4 | $20.3 |
| Diluted earnings (loss) per share | $0.20 | $(0.29) | $0.13 | $0.61 |
- Third-quarter revenue rose 3%, but gross profit fell 13%; operating income declined 20%. Revenue growth was supported by the U.S. market and GM&P, while Colombia and Panama sales weakened.
- For the first nine months, revenue increased 2.4%, while gross profit fell 14% and operating income fell 39%. Parent-attributable net income declined from $20.3 million to $4.4 million.
- Gross margin pressure reflected GM&P’s lower-margin installation and engineering work, higher depreciation and labor costs, lower-than-expected volume against fixed costs, and higher installation costs on certain projects. Management attributed approximately 200 basis points of third-quarter margin decline and 100 basis points of nine-month decline to GM&P.
- Third-quarter results included a $5.4 million foreign-currency transaction gain, primarily from remeasurement of U.S.-dollar monetary items at Colombian subsidiaries. Nine-month results included a $3.1 million debt-extinguishment loss and a $0.9 million foreign-currency loss. These items affect period comparisons.
- Operating expenses were $15.8 million in Q3, down 7%; for nine months they were $48.3 million, up 7%. The nine-month increase included higher personnel costs and a $2.7 million bad-debt provision, partly offset by lower shipping and handling costs.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was positive $9.1 million, versus negative $11.9 million in 2016. Investing cash flow was negative $14.8 million; financing cash flow was positive $14.6 million. Cash increased to $36.2 million from $26.9 million at year-end 2016.
- At September 30, current assets were $241.6 million and current liabilities $101.6 million, for a current ratio of approximately 2.4. Trade receivables, net, were $108.5 million and inventory was $65.1 million.
- Reported borrowing obligations were $224.1 million, net of deferred financing costs, compared with $199.6 million at December 31, 2016. Cash less reported debt was approximately $187.9 million. The filing reports a 7.7% weighted-average borrowing rate. Long-term debt fair value was $234.8 million versus a $220.4 million carrying amount.
- In January 2017, the company issued $210 million of five-year senior unsecured notes at an 8.2% coupon, using approximately $182.2 million of proceeds to repay existing debt. Management said debt was expected to remain at current levels through the rest of 2017.
- Capital expenditures were $6.7 million for the first nine months, down from $15.9 million in cash purchases in the comparable period. Management said existing capacity was expected to support backlog and sales through 2018, with future spending focused mainly on maintenance and planned solar panels.
Outlook, risks and notable items
- No quantified company-wide financial guidance was provided. Management expected U.S. revenue to continue growing as a share of sales and said Colombian activity could begin to recover after delays associated with market conditions, tax reform and the peace process.
- Hurricane Irma delayed approximately $5 million of ESWindows distribution sales into Q4 2017. Management said it did not expect a related loss or liability.
- Receivables and collection timing warrant attention: reported DSO was 126 days, compared with 109 days at year-end; excluding retainage, DSO was 95 days versus 102. Retainage was 26% of receivables, up from 7%, primarily reflecting GM&P receivables. Management noted that project milestones and customer collections can lengthen payment cycles.
- The remaining GM&P purchase consideration was payable in cash, company stock or a combination, at the company’s discretion, by May 15, 2018. The balance sheet included a $29.0 million current acquisition-related payable.
- The company declared a quarterly dividend of $0.14 per share, payable in cash or shares at holders’ election. Future dividends remain subject to board discretion.
- In litigation with Bagatelos, the company reported a $2.6 million outstanding amount it believed it would probably recover, while the defendant sought approximately $3.0 million in a cross-complaint. Discovery was continuing; the filing states that the facts remained under development.
- Management concluded disclosure controls were not effective at September 30, 2017 because of a previously reported material weakness in entity-level controls. A remediation plan was underway. Management nevertheless stated that the financial statements were fairly stated in all material respects.
- Adoption of the new revenue recognition standard was planned for 2018; the company had identified contracts and performance obligations and said it would assess the impact during Q4. The filing did not quantify that impact.
Important facts for investors to verify
- Whether delayed hurricane-related sales were recognized in Q4 and whether Colombia’s anticipated recovery materialized.
- GM&P’s contribution to revenue, margins, cash generation and the final purchase-price allocation, including settlement of the $29.0 million payable.
- Receivable aging, collection performance, retainage conversion and the adequacy of the bad-debt allowance.
- Debt-service capacity and the terms, maturity and refinancing implications of the 8.2% senior notes and other borrowings.
- Progress on remediation of the material weakness and any resulting changes to disclosure controls.
- Developments and financial exposure in the Bagatelos litigation, and the eventual impact of the new revenue recognition standard.