Tecnoglass Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014; unaudited. The filing identifies the registrant as Tecnoglass Inc. (formerly Andina Acquisition Corporation), although the request metadata names Tecnoglass Holdings Inc. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Tecnoglass manufactures architectural glass, windows, aluminum products and building systems through its Colombian subsidiaries. It sells across the Americas and exports almost half of production. The company reported one operating segment. The U.S. was its largest reported market in Q2 2014, with revenue of $26.0 million; Colombia contributed $21.8 million.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $51.9m | $44.3m | $99.8m | $84.0m |
| Gross profit / margin | $16.6m / 32.1% | $13.4m / 30.1% | $31.2m / 31.3% | $25.3m / 30.1% |
| Operating income / margin | $8.4m / 16.2% | $5.9m / 13.3% | $16.3m / 16.3% | $10.8m / 12.9% |
| Net income (loss) | $0.4m | $3.2m | ($4.3m) | $5.7m |
| Basic and diluted EPS | $0.02 | $0.16 | ($0.18) | $0.28 |
Q2 revenue rose 17.2% year over year; six-month revenue rose 18.8%. U.S. sales growth was the main driver, while Colombian sales declined: the filing attributes part of that decline to peso-to-dollar translation. Management linked improved gross margins to greater vertical integration, inventory optimization and higher-specification U.S. exports.
- Cash flow: Six-month operating cash use was $0.4m, versus $0.7m used in 2013. Investing cash use was $4.2m, including $7.3m of property and equipment purchases; financing provided $18.7m, principally from borrowings. Cash ended June at $17.4m, compared with $2.9m at December 31, 2013 on the balance sheet.
- Liquidity and working capital: Current assets were $196.6m and current liabilities $136.6m at June 30. Trade receivables were $80.1m, up from $59.0m at year-end; management cited receivables growth and longer payment terms as a use of cash. The filing’s MD&A gives December cash of approximately $6.5m, which does not match the balance sheet and cash-flow statement’s $2.9m; verify the discrepancy.
- Debt: Borrowings totaled $100.5m, including $55.0m current and $45.5m long term, versus $77.8m at year-end. Stated borrowing rates ranged from 5.6% to 10.2%. Six-month interest expense increased to $4.3m from $3.5m.
- Other balance-sheet items: Warrant liability was $31.7m, up from $18.3m at year-end. Shareholders’ equity was $64.7m, compared with $65.1m at year-end.
Material changes, outlook and risks
- A non-cash fair-value loss on warrants of $4.6m in Q2 and $13.5m for the first half materially reduced reported earnings. Management said warrant remeasurement is not indicative of operating performance; valuation depends partly on share price and other market assumptions.
- Management expected operating cash flow, credit lines and merger proceeds to fund cash requirements for the next 12 months. It also described potential proceeds of up to $90.2m from warrant and unit-option exercises; these proceeds are contingent on exercise and are not assured. No specific revenue or earnings guidance was provided.
- The company was not in compliance with certain Banco Colpatria financial covenants at June 30. The bank had stated it would not accelerate payments or take other action because of the breach and was working with the company to revise the covenants; that position remained in force when the filing was issued.
- Management disclosed material weaknesses in internal controls involving unusual and related-party transactions and estimates, financial closing and reporting, and percentage-of-completion contract revenue accounting. Remediation plans included added finance staff, stronger procedures, training and increased oversight.
- Related-party receivables totaled $20.0m, including $13.6m due from ESW LLC, an entity owned by related parties including the CEO and COO. The company reported $18.2m of first-half sales to ESW LLC. Management concluded that related entities assessed as variable interest entities did not require consolidation.
- Two lawsuits were disclosed, including a wrongful-death claim covered by a $3.0m wasting insurance policy and an indemnification dispute concerning shower-door glass. Management’s counsel considered uninsured or other liability unlikely and immaterial; neither case had a trial date. The filing also disclosed guarantees for related parties and the company’s foundation.
- Currency translation affected reported Colombian sales and equity. The company reported no quantitative or qualitative market-risk disclosure in Item 3. Management was evaluating the impact of the new revenue-recognition standard, effective for the company after December 15, 2016.
Important facts for investors to verify
- Reconcile the December 2013 cash figures: $2.9m in the balance sheet and cash-flow statement versus approximately $6.5m in MD&A.
- Track progress on the Banco Colpatria covenant revisions, current debt maturities and refinancing terms.
- Assess receivables collection, longer customer payment terms and exposure to related-party customers, particularly ESW LLC.
- Monitor remediation and independent testing of the disclosed material weaknesses in financial reporting and contract revenue accounting.
- Distinguish operating results from warrant fair-value changes, and do not assume potential warrant-exercise proceeds will be received.
- Review subsequent updates on litigation, guarantees, currency effects and the expansion of U.S. sales.