Tecnoglass Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed April 15, 2015. This is an annual report, not a standalone fourth-quarter report. The filing identifies the registrant as Tecnoglass Inc.
Business context
Tecnoglass manufactures architectural glass, aluminum products, windows and façade systems, primarily through Colombian subsidiaries Tecnoglass and ES. Its vertically integrated manufacturing complex is based in Barranquilla, with U.S. facilities established or acquired in 2014 to support growth. The United States generated 51% of 2014 revenue, Colombia 41%, Panama 6%, and other markets the balance. The company reported more than 800 customers.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $197.5 | $183.3 | +7.7% |
| Gross profit | $61.4 | $55.4 | +10.9% |
| Gross margin | 31.1% | 30.2% | +0.9 percentage points |
| Operating income | $27.2 | $27.3 | Approximately flat |
| Net income | $20.3 | $22.3 | -8.9% |
| Basic / diluted EPS | $0.83 / $0.73 | $1.08 / $1.08 | Declined |
| Cash from operations | $(4.8) | $10.7 | Turned negative |
| Cash and equivalents at year-end | $15.9 | $2.9 | Increased |
Selling and administrative expenses rose 21.5% to $34.2 million, including higher administrative costs associated with the merger, public-company reporting and adoption of IFRS by Colombian subsidiaries. Interest expense increased to $8.9 million from $7.9 million. Non-operating revenues included $10.8 million of foreign-currency transaction gains; the company also recorded a $1.7 million non-cash loss from the change in warrant fair value. Foreign-currency translation reduced comprehensive income by $16.0 million; total comprehensive income was $4.3 million, versus $21.4 million in 2013.
Year-end current assets were $141.5 million and current liabilities $113.0 million. The balance sheet reported $54.9 million of short-term debt and current maturities and $39.3 million of long-term debt. The debt note reports $94.2 million of obligations under borrowing arrangements, including capital lease obligations; capital leases had a present value of $15.5 million. Reported interest rates on bank obligations ranged from 4.56% to 12.01%. The company said it was in compliance with its financial covenants at December 31, 2014, after modifying a Banco Colpatria agreement in December 2014.
Changes, investment and outlook
- U.S. revenue increased by $34.9 million, while Colombian revenue fell by $21.7 million amid a transition between large projects and delays in projects expected to start in 2015. Revenue share shifted toward the U.S. from Colombia.
- Backlog was $280 million at year-end, compared with $120 million a year earlier, mainly reflecting project awards and growth in U.S. markets. Management expected the year-end backlog to be filled during 2015, but cautioned that backlog is not necessarily indicative of future results.
- Capital investment was substantial: the company reported $56.9 million invested in 2014 in its business discussion, while the cash-flow statement shows $24.8 million of cash purchases of property and equipment. It also signed an estimated $45 million equipment-and-facilities project for low-emissivity glass, planned for 2015–2016 and expected to be financed primarily through an export-credit-backed facility.
- Acquisitions expanded U.S. operations: selected RC Aluminum assets, including a reported $70 million backlog and product approvals, were acquired in June; Glasswall assets, including a Miami facility, equipment and product approvals, were acquired in December for reported consideration of approximately $9.3 million.
- Management stated that cash from operations, credit lines and merger proceeds were expected to meet cash requirements for the next 12 months. No formal revenue or earnings guidance was provided.
- Subsequent to year-end, the board authorized a quarterly dividend of $0.125 per share and a warrant exchange offer at three warrants for one ordinary share.
Risks, contingencies and unusual items
- Financial reporting controls: Management concluded disclosure controls were not effective because of material weaknesses in unusual and related-party transaction reporting, entity-level and IT controls, and revenue accounting for fixed-price contracts. Remediation steps were underway. The auditor did not attest to internal control effectiveness.
- Related parties: 2014 sales to ES Windows LLC and Ventanas Solar, entities owned by executives’ relatives or related parties, totaled $47.6 million. Year-end current amounts due from related parties were $28.3 million, with an additional $4.2 million long-term receivable from Ventanas Solar. Management concluded these entities did not require consolidation.
- Cash conversion and working capital: Operating cash flow was negative despite positive net income, reflecting changes in receivables, inventory, related-party balances and customer advances. The company also reported substantial short-term debt and current maturities.
- Currency, interest and valuation exposure: Colombian operations use the Colombian peso, while reporting is in U.S. dollars; the filing reports a large negative currency translation adjustment. Borrowings are largely floating-rate, and warrant valuations rely on significant unobservable inputs.
- Legal matters: A workplace wrongful-death claim was settled for $1.075 million; the company reported insurance covered 90% of the loss. A separate Diplomat Properties indemnification claim remained pending; management and counsel considered liability remote and immaterial.
- Prior-period revision: The company revised 2013 balance-sheet classifications for receivables, including related-party balances. It reported no effect on previously reported net income and characterized the errors as immaterial.
- Tax change: Colombian tax reform made the 9% CREE tax permanent and introduced a surtax for 2015–2018; the company disclosed total statutory rates of 39% to 43% for those years.
Important facts for investors to verify
- Whether operating cash flow improves and how the company funds its near-term debt maturities, capital spending and planned low-emissivity-glass investment.
- Backlog conversion, project timing and profitability, particularly the reported $280 million backlog and large U.S. contracts.
- Collection and terms of related-party receivables, especially the Ventanas Solar payment arrangement, and the adequacy of related-party transaction oversight.
- Progress in remediating material weaknesses and whether revenue estimates for fixed-price contracts are supported by reliable controls.
- The reconciliation of the filing’s capital-investment disclosures and debt/lease maturity presentations; the text reports different figures in different sections.
- Potential dilution from warrants and earnout shares. The filing reports 500,000 shares earned for 2014 and up to 2.5 million further earnout shares tied to 2015–2016 targets.