Tecnoglass Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The filing is for Tecnoglass Inc.; the request metadata names Tecnoglass Holdings Inc. Unless otherwise indicated, financial amounts below are in U.S. dollars and millions.
Business context and financial performance
Tecnoglass manufactures architectural glass, aluminum products, windows and related systems for residential and commercial construction. It serves more than 800 customers, with sales across the Americas and more than half of production exported.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue | $77.5 | $58.1 | $138.4 | $110.1 |
| Gross profit | $26.5 | $20.9 | $49.7 | $39.5 |
| Gross margin | 34.1% | 35.9% | 35.9% | 35.9% |
| Operating income | $12.5 | $9.3 | $24.0 | $17.3 |
| Net income (loss) | $14.4 | $(21.0) | $28.0 | $(9.1) |
| Diluted EPS | $0.47 | $(0.84) | $0.91 | $(0.37) |
- Q2 revenue rose 34% year over year; first-half revenue rose 26%. U.S. and Colombian sales were key growth contributors. The United States represented $82.6 million of first-half sales and Colombia $46.9 million.
- Q2 gross margin declined to 34.1% from 35.9%; management attributed the compression to foreign-exchange effects on dollar-purchased inventory and subsequent peso movements. First-half gross margin was unchanged at 35.9%.
- Operating expenses increased 21% in Q2 and 16% in H1, including higher shipping, personnel and professional fees. Interest expense rose to $7.4 million in H1 from $4.2 million.
Cash flow, debt and liquidity
- H1 operating cash flow was negative $7.4 million, compared with positive $7.2 million a year earlier. Higher receivables and inventory were significant cash uses; receivables also reflect extended credit terms and longer project cash cycles.
- Investing cash outflow was $27.5 million, including a $25 million U.S.-dollar deposit associated with a peso-denominated borrowing to hedge currency exposure. Financing provided $46.2 million. Cash ended June at $29.5 million, up from $18.5 million at year-end.
- Total borrowings, including capital leases, were $210.9 million: $70.0 million current and $140.9 million long-term. Rates ranged from 3.9% to 18.8%, with an 8.4% weighted average. Current assets were $250.9 million and current liabilities $195.5 million; the $25 million deposit was restricted for repayment of the associated borrowing.
- The January seven-year, $109.5 million secured facility refinanced existing debt and provided funds for capital expenditure and working capital. The company reported compliance with its covenants at June 30. A separate subsidiary missed a 1.0:1.0 minimum debt service ratio; the lender waived the requirement through December 31, 2016.
Material changes, outlook and risks
- Reported H1 profit includes non-cash gains of $12.6 million from remeasurement of warrant liabilities and $7.0 million from earnout-share liabilities. These Level 3 valuations depend on market prices and other unobservable inputs; reported earnings therefore benefited materially from liability fair-value changes.
- Management provided no specific revenue or earnings guidance in the filing. It described continued growth plans and capital investment; H1 capital expenditures were approximately $16.5 million, including $11.4 million financed through leases or debt.
- After quarter-end, the company paid $10.5 million for adjacent land to expand manufacturing facilities and obtained a six-month, $10 million working-capital facility at 6.5%. It also said it was working to unwind the $25 million deposit and repay the related peso debt.
- Related-party sales were $28.7 million in H1, and amounts due from related parties were $37.0 million at June 30. The company disclosed these relationships and stated that receivables continued to be paid under contractual arrangements.
- Disclosure controls were deemed ineffective because of previously reported material weaknesses in entity-level controls, financial closing and reporting, and IT general controls. Management said remediation was ongoing.
- The company sued Bagatelos over $2.0 million of unpaid invoices and said management and counsel believed recovery was likely; the outcome is uncertain. Management also noted ordinary-course litigation could adversely affect results.
- Foreign-exchange movements affected operating margins and non-operating results. More broadly, the filing warns that actual results may differ from forward-looking statements; interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether revenue growth converts to operating cash flow as receivables and inventory rise, and whether extended customer credit terms affect collections.
- Debt maturities, interest costs and covenant compliance, including the separate subsidiary waiver and the repayment of the peso facility using the restricted deposit.
- How much reported earnings depend on non-cash warrant and earnout liability remeasurements, and the potential dilution from warrants and earnout shares.
- Progress in remediating material weaknesses and whether disclosure controls become effective.
- Collection of related-party receivables and the disputed Bagatelos balance; confirm the results of the litigation and any material changes in credit exposure.