Tecnoglass Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. This is an annual filing, not a standalone fourth-quarter report. Financial amounts below are in U.S. dollars; unless noted, millions.
Business context
Tecnoglass manufactures architectural glass, windows, aluminum products and building systems, with design, distribution and installation services. Its main vertically integrated manufacturing complex is in Barranquilla, Colombia. The United States accounted for about 76% of 2017 revenue; Colombia accounted for about 20%. The March 2017 acquisition of Florida glazing contractor GM&P extended the company’s U.S. installation and design offering.
Key financial metrics
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Revenue | $314.5 | $305.0 | Up 3% |
| Gross profit / margin | $99.2 / 31.5% | $112.6 / 36.9% | Margin fell about 5.4 percentage points |
| Operating income / margin | $34.4 / 10.9% | $47.8 / 15.7% | Operating income down 28% |
| Net income | $5.7 | $23.2 | Parent-attributable income was $5.4; diluted EPS was $0.16 versus $0.72 |
| Cash from operations | $14.2 | $(3.1) | Improved by $17.3 |
| Cash and cash equivalents | $40.9 | $26.9 | Up $14.0 |
| Total assets / liabilities | $468.0 / $346.3 | $394.7 / $281.2 | Shareholders’ equity was $121.7 at year-end 2017 |
Current assets were $261.9 million and current liabilities $121.4 million. Year-end debt obligations under borrowing arrangements were reported at $224.3 million, including a $210 million senior unsecured note; the balance sheet reports $221.0 million of long-term debt and $3.3 million current debt. The $210 million note carries an 8.2% coupon, matures in five years, and was issued in January 2017. Interest expense rose to $19.9 million from $16.8 million. The company reported $14.9 million of investing cash outflow, including $7.0 million for property and equipment and $7.9 million for acquisitions and intangible assets. Capital expenditures were $8.8 million, compared with $42.5 million in 2016.
Material changes and drivers
- U.S. revenue rose $48.5 million, or 26%, to $238.5 million, supported by market expansion and GM&P, consolidated from March 1, 2017. Colombian revenue fell $35.2 million, or 36%, amid weaker market conditions and delayed construction; Panama revenue fell $5.2 million, or 55%.
- Gross margin contracted due to higher depreciation and amortization after the prior investment cycle, a larger fixed-cost base than sales supported, and GM&P’s lower-margin installation and design mix.
- Operating expenses were broadly flat at $64.8 million. Lower shipping costs partly offset higher personnel and GM&P-related amortization expenses.
- Net income declined despite revenue growth, reflecting lower operating income, higher interest expense, a $3.1 million debt-extinguishment loss, and a $3.0 million foreign-exchange loss. The 2016 comparison also included non-cash gains from changes in warrant and earnout liabilities.
- Operating cash flow improved largely because receivables generated cash in 2017, versus a substantial use in 2016, and accounts payable provided $13.1 million. Inventory and unbilled receivables remained significant cash uses.
- Backlog was $499 million at December 31, 2017, versus $396 million a year earlier; management cautioned backlog is not necessarily indicative of future results. No single customer represented over 10% of 2017 revenue, though the ten largest third-party customers together represented 49%.
Outlook, risks and unusual items
- Management forecast 2018 revenue of $345 million to $365 million and expected margins to improve as higher sales absorb fixed costs. It said existing capacity should support backlog and expected sales through 2018, with near-term capital spending mainly for maintenance.
- Management expected cash on hand and operating cash generation to meet working-capital needs and service debt. Contractual obligations totaled approximately $345.2 million, including $73.5 million of estimated interest and $40.5 million of raw-material purchase commitments. The $29 million remaining GM&P purchase-price obligation was payable by May 15, 2018.
- Principal risks include construction-market cyclicality and geographic concentration in the U.S./Florida; Colombian political, economic and currency exposure; raw-material prices and supplier concentration; tariffs or changes to U.S.-Colombia trade arrangements; customer collections and project delays; manufacturing interruptions, product claims and workplace safety; and substantial debt and interest costs.
- Foreign-exchange exposure is material: Colombian subsidiaries’ U.S.-dollar monetary liabilities exceeded monetary assets by $149.5 million; the filing estimates a 1% peso devaluation would cause a $1.5 million remeasurement loss. The filing also estimates a 1% peso devaluation would increase net earnings by $0.5 million through the effect on revenues and expenses.
- The company reported routine-course legal matters and said it did not expect them to have a material adverse effect. It disclosed two workplace fatalities since January 2014. The company completed remediation actions for a 2016 material weakness in entity-level controls and management and the auditor concluded internal control over financial reporting was effective at year-end 2017. However, GM&P, representing 11% of assets and 19% of revenue, was excluded from the internal-control assessment and audit because of the timing of its acquisition.
- The company paid quarterly dividends of $0.125 per share early in 2017 and $0.14 later in the year; future dividends remain at the board’s discretion. Energy Holding Corporation owned approximately 65.4% of ordinary shares. Sales to related-party Ventanas Solar were $3.7 million, with $6.2 million receivable at year-end.
Investor verification priorities
- Verify the quality and timing of the $499 million backlog conversion, particularly given the revenue-growth forecast and project delays cited in Colombia.
- Track gross-margin recovery and whether the fixed-cost base, depreciation, and GM&P integration deliver the expected operating leverage.
- Review debt-service capacity, the 8.2% note, available credit facilities, and payment of the remaining $29 million GM&P consideration.
- Assess cash conversion, inventory and unbilled receivables, customer retainage, and collection of related-party receivables from Ventanas Solar.
- Confirm the final purchase-price allocation and performance of GM&P, and monitor control integration because GM&P was excluded from the year-end internal-control review.
- Monitor currency and trade-policy exposure, raw-material commitments, customer concentration, safety risks, and the board’s continuation of cash-or-share dividends.