Tecnoglass Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Financial amounts below are U.S. dollars in millions unless stated otherwise. The filing identifies the registrant as Tecnoglass Inc.
Business context
Tecnoglass manufactures architectural glass, windows, doors and related building systems, with major operations in Colombia and growing U.S. sales. On March 1, 2017, it acquired Florida-based glazing and engineering contractor GM&P for $35 million, including a $35 million note payable, and acquired a 60% interest in GM&P subsidiary Componenti USA. GM&P contributed $8.1 million of revenue for the month included in Q1. The company also established an Italian subsidiary to pursue European and Middle Eastern sales.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $65.8 | $63.9 |
| Gross profit / gross margin | $22.3 / 33.8% | $24.7 / 38.7% |
| Operating income | $6.9 | $11.7 |
| Net income | $1.0 | $14.4 |
| Basic / diluted earnings per share | $0.03 / $0.03 | $0.51 / $0.46 |
| Cash from operations | $11.4 | $(9.2) |
| Cash from investing activities | $(3.4) | $(23.4) |
| Cash from financing activities | $18.7 | $32.1 |
- Revenue rose 3%. U.S. revenue increased 11% to $46.3 million and represented 70% of sales, compared with 63% a year earlier. Colombia revenue declined 12% to $16.4 million; Panama revenue declined 57% to $1.3 million.
- Gross margin declined 4.9 percentage points. Management cited higher depreciation and fixed costs, seasonally low quarterly revenue, and GM&P’s lower-margin services. Operating expenses rose 18% to $15.4 million, including a bad-debt provision, higher personnel costs, acquisition-related amortization and GM&P expenses.
- Q1 2017 included a $3.2 million debt-extinguishment loss and a $2.4 million foreign-currency transaction gain. Q1 2016 included $9.6 million of gains from changes in fair value of earnout and warrant liabilities, helping explain the year-over-year net-income decline alongside lower operating income and higher interest expense.
- At March 31, cash and cash equivalents were $54.4 million, versus $26.9 million at year-end 2016. Current assets were $250.6 million and current liabilities $118.2 million. Trade receivables, net, were $103.3 million; the doubtful-account allowance was $3.5 million.
- Borrowings under the debt arrangements totaled $227.3 million, including a $210 million five-year senior unsecured note bearing 8.2%. Separately, the balance sheet reports a $35 million current GM&P acquisition note payable. Total liabilities were $346.5 million. Interest expense was $5.1 million, up from $3.1 million.
- The company generated $11.4 million of operating cash, with receivables contributing $15.2 million to operating cash flow and accounts payable using $8.8 million. Capital expenditures were $1.9 million. Cash increased by $27.5 million during the quarter, including the effect of financing and exchange rates.
Changes, outlook and notable matters
- The $210 million note issuance was used primarily to repay outstanding debt; management said the transaction lowered borrowing costs and provided a non-amortizing structure. The company also reported $3.2 million of extinguishment costs from retiring prior debt.
- Management said existing installed capacity was expected to support backlog and expected sales through 2018. Near-term capital spending was expected to focus on maintaining capacity and solar-panel initiatives. No specific revenue or earnings guidance was provided.
- The filing reported a planned increase in the quarterly dividend from $0.125 to $0.14 per share beginning with Q3 2017 and through Q2 2018, subject to future board decisions. The majority shareholder elected to receive dividends in shares.
- Management reported that disclosure controls were not effective at March 31, 2017 because of a material weakness in entity-level controls identified in the prior annual report; remediation work was underway. Management nevertheless stated it believed the interim financial statements were fairly stated in all material respects.
- Risks and contingencies include project-related receivable collection timing, foreign-exchange exposure, acquisition integration and provisional purchase-price allocations, and litigation. In the Bagatelos dispute, the company is pursuing approximately $2 million; Bagatelos has asserted a cross-claim seeking approximately $3 million. Mediation was unsuccessful and discovery continued.
Important facts for investors to verify
- Assess whether revenue and margin trends improve after considering GM&P’s contribution and its lower-margin service mix; the filing’s pro forma Q1 2017 figures show $75.8 million of sales and a small net loss.
- Review debt service capacity, the terms and settlement of the $35 million GM&P acquisition note, and the use and return on cash retained after the refinancing.
- Monitor receivable quality, collections and the allowance for doubtful accounts, particularly given the $0.9 million project-related bad-debt provision and longer project collection cycles.
- Track remediation of the material weakness and any subsequent changes in disclosure-control effectiveness.
- Reconcile share-count disclosures: the cover and balance sheet report 33,487,982 shares at March 31, while the shareholders’ equity rollforward reports 33,172,144 at period-end.
- Follow final acquisition valuation adjustments, the Bagatelos litigation, and whether the announced dividend increase is maintained by the board.