Tecnoglass Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited consolidated results. Dollar figures below are in millions unless otherwise noted. Tecnoglass manufactures architectural glass, aluminum products, windows and building systems, primarily in Colombia, and sells across the Americas.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $62.9 | $53.5 | $173.0 | $153.2 |
| Gross profit / margin | $21.7 / 34.5% | $16.4 / 30.8% | $57.9 / 33.5% | $47.7 / 31.1% |
| Operating income | $10.8 | $7.7 | $28.1 | $23.9 |
| Net income | $7.6 | $11.3 | $6.1 | $7.0 |
| Diluted EPS | $0.25 | $0.40 | $0.21 | $0.25 |
- Cash flow: Nine-month operating cash flow was $10.2 million, versus cash used of $14.2 million in 2014. Investing used $19.2 million, including significant equipment and facility investment. Financing provided $7.1 million, compared with $49.9 million in 2014, which included $22.5 million of merger proceeds. Cash ended at $16.9 million, up from $15.9 million at year-end 2014.
- Balance sheet and liquidity: Current assets were $159.6 million and current liabilities $140.7 million at September 30. Total debt and borrowing obligations were $116.8 million, including $67.7 million current and $49.1 million long-term; debt was $94.2 million at year-end 2014. The company reported about $7.1 million available under two revolving lines of credit.
- Other balance-sheet items: Related-party receivables were $31.6 million, inventories $39.6 million, and warrant liability $34.5 million. Shareholders’ equity fell to $61.7 million from $75.3 million, including a $19.7 million foreign-currency translation loss in accumulated other comprehensive loss.
Material changes and drivers
- Revenue rose 18% in Q3 and 13% for the nine-month period. U.S. sales grew 60% in Q3 and 44% year to date, while Colombian reported sales declined 21% and 13%, respectively, largely reflecting peso depreciation. Panama sales also declined as major projects were completed.
- Management attributed improved gross margins to product mix, greater vertical integration, higher-specification U.S. exports and, in part, favorable currency effects on Colombian manufacturing costs.
- Operating expenses increased 24% in Q3 and 25% year to date, reflecting higher bad-debt provisions, commissions, shipping, advertising, depreciation/amortization and, year to date, a Colombian capital tax.
- Net income declined despite higher revenue and operating income. Results were affected by a $14.5 million nine-month noncash loss from warrant remeasurement, higher income taxes, and foreign-exchange gains included in non-operating revenue. Net foreign-currency transaction gains were $11.5 million for the nine months, versus $1.5 million in 2014.
Outlook, risks and unusual items
- Management said operating cash flow and credit availability should cover cash needs for the next 12 months. It reported approximately $100 million of additional long-term loan availability, while also noting that bridge loans had increased short-term debt and that refinancing maturing obligations remained important. Failure to refinance could impair payment of suppliers and other creditors.
- After quarter-end, the company reported receiving $20.8 million through November 9 from a 10-year credit line, primarily to repay short-term obligations. Management provided no quantified revenue or earnings guidance.
- Capital investment was substantial: management reported approximately $62.9 million of expenditures for the nine months, including a new soft-coat low-emissivity glass plant and four tempering ovens. Cash purchases of property and equipment were $18.2 million; assets acquired under capital leases were $44.6 million.
- The warrant liability is a Level 3 fair-value estimate based on significant unobservable inputs; its changes are noncash and can materially affect earnings. The nine-month income-tax provision was $16.9 million, with a 73.5% effective rate, affected by nondeductible warrant losses and Colombia’s higher statutory tax rate.
- Related-party exposure is notable: nine-month sales to ESW LLC, owned by the CEO, COO and related parties, were $37.3 million; receivables from ESW LLC were $20.5 million. The company also reported receivables from other related parties and concluded it was not the primary beneficiary of evaluated entities.
- Management concluded disclosure controls were ineffective at September 30 due to previously reported material weaknesses in internal control over financial reporting; it used additional manual procedures to prepare the statements.
- A Florida indemnification lawsuit remains pending; management and counsel considered liability remote and immaterial. The filing says ordinary-course legal matters could nonetheless have an adverse effect. The company also disclosed a $0.2 million guarantee for a related-party fuel-station development, which was in good standing.
- The company had proposed exchanging 2.3 warrants for one ordinary share, subject to the registration statement becoming effective. It had also authorized a $0.125 quarterly dividend after completion of a warrant exchange.
Key facts for investors to verify
- Availability, draw conditions, covenants and maturities for the stated long-term facilities, and the company’s ability to refinance the $67.7 million current debt balance.
- Cash conversion and working-capital trends, especially receivable growth, inventory investment and related-party collection timing.
- Underlying operating earnings and margins excluding foreign-exchange gains and warrant fair-value changes; also the sustainability of the unusually high effective tax rate.
- Progress remediating internal-control material weaknesses and the status of the proposed warrant exchange and dividend.
- Actual capital spending and financing costs associated with the new plant, equipment and capital leases.