Tecnoglass Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Financial statement amounts are in U.S. dollars, in thousands, except per-share data. The filing identifies the registrant as Tecnoglass Inc.
Business context
The company manufactures architectural glass, aluminum products, windows and building systems through its Colombian subsidiaries, serving construction customers across the Americas. It reported one operating segment. Management says it exports almost half of production. U.S. revenue rose substantially, while Colombia and Panama revenue declined.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $52,043 | $47,841 | Up 8.8% |
| Gross profit / margin | $17,182 / 33.0% | $14,596 / 30.5% | Margin improved |
| Operating expenses | $9,180 | $6,739 | Up 36.2% |
| Operating income / margin | $8,002 / 15.4% | $7,857 / 16.4% | Income nearly flat; margin lower |
| Net income (loss) | $9,881 | $(4,681) | Includes a $5,078 noncash warrant fair-value gain in 2015 versus an $8,880 loss in 2014 |
| Diluted EPS | $0.35 | $(0.20) | 2015 diluted weighted-average shares were 28.1 million |
| Operating cash flow | $5,339 | $(11,381), restated | Improved; working capital included higher receivables and inventory, offset partly by customer advances and payables |
| Investing cash flow | $(4,917) | $(1,535) | 2015 property and equipment purchases were $4,769 |
| Financing cash flow | $488 | $30,218, restated | 2015 debt proceeds and repayments were broadly offsetting |
| Cash and equivalents | $17,132 | $15,930 at Dec. 31, 2014 | Quarter-end balance-sheet value |
| Total debt | $96,936 | $94,198 at Dec. 31, 2014 | $59,886 current; $37,050 long-term |
Total assets were $271,796 and shareholders’ equity was $79,972 at March 31, 2015. Current liabilities were $133,094, compared with current assets of $154,433. Interest expense was $2,152. Debt arrangements bear interest at rates reported as 2.9%–12.03%, are generally secured by receivables and/or inventory, and include financial and sales-growth covenants. Approximately $1.7 million was available under revolving credit lines.
Management states that operating cash flow and borrowing availability should fund requirements for the next 12 months. The MD&A, however, describes cash as approximately $15 million at quarter-end, while the balance sheet and cash flow statement report $17.132 million; the filing does not reconcile this difference.
Material changes and notable items
- U.S. sales increased $9.8 million (44.9%) to $31.678 million. Colombia sales fell $3.6 million (17.1%) to $17.382 million; management attributes the dollar decline primarily to peso depreciation and reports a 1.3% decline in local-currency sales. Panama sales fell $2.9 million (66.7%) to $1.468 million.
- Management attributes higher operating expenses mainly to a $0.8 million Colombian equity tax, higher sales commissions and shipping, and amortization of purchased Notices of Acceptance.
- Non-operating revenue was $3.725 million, including $3.361 million of foreign-currency transaction gains, versus $1.286 million and $0.602 million, respectively, in Q1 2014. The $5.078 million warrant-liability gain was noncash and driven by fair-value changes.
- Management reports approximately $13.9 million of capital expenditures, including a jumbo-glass production line and four tempering ovens; $9.1 million of assets were acquired under capital leases. The cash-flow statement separately reports $4.769 million of property and equipment purchases.
- The company restated the Q1 2014 cash-flow statement after identifying a material classification error: operating cash flow decreased by $22.519 million to $(11.381) million, with a corresponding increase in financing cash flow to $30.218 million. The restatement did not affect the balance sheet or statement of operations.
Outlook, risks and contingencies
- No specific revenue or earnings guidance is provided. Management’s stated liquidity outlook is that available cash flow and borrowing sources will be sufficient for the next 12 months. It also noted potential proceeds of up to $89.4 million from warrant and unit-purchase-option exercises or conversion, but these proceeds are contingent and not assured.
- Management disclosed material weaknesses in financial reporting controls involving unusual transactions and estimates, related-party reconciliations, entity-level and IT controls, cash-flow preparation, and percentage-of-completion revenue accounting. Remediation efforts were underway; some IT control work remained planned for Q2 and Q3 2015.
- Related-party receivables totaled $32.671 million current and $3.392 million long-term. Q1 sales to ESW LLC, owned by the CEO, COO and related parties, were $11.871 million; receivables from ESW LLC were $18.853 million. Management concluded ESW LLC and Ventanas Solar were not required to be consolidated and said neither had received subordinated financial support.
- Colombian income-tax reform provides for combined income, CREE and surtax rates of 39% in 2015, rising to 43% in 2018 before falling to 34% in 2019. The company reported a 33.1% effective tax rate for Q1 2015.
- A Florida indemnification lawsuit remains pending; management and counsel assess liability as remote and immaterial, with no significant reasonably estimable loss. The filing also describes guarantees for related parties and ordinary-course legal risks.
- Subsequent to quarter-end, the board authorized a quarterly dividend of $0.125 per share and approved an offer to exchange three warrants for one ordinary share. The filing also reports 500,000 shares issued to Energy Holding Corporation upon satisfaction of specified EBITDA targets.
Important facts for investors to verify
- Reconcile the reported quarter-end cash figures of $17.132 million in the financial statements and approximately $15 million in MD&A.
- Assess the sustainability of earnings excluding the warrant fair-value gain and foreign-currency transaction gains, and the drivers of higher operating expenses.
- Review receivable collection, especially related-party balances, and the effect of growth in receivables and inventory on operating cash flow.
- Monitor debt covenant compliance, near-term maturities, borrowing costs, and whether management’s 12-month liquidity assessment remains supportable.
- Track remediation and independent validation of the disclosed material weaknesses, particularly revenue recognition, related-party accounting, and cash-flow classification.
- Verify the outcome and dilution effects of the warrant exchange offer and dividend, and any developments in the pending legal matter or guarantees.