Tecnoglass Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results are presented under U.S. GAAP. Unless otherwise noted, financial amounts are in U.S. dollars; statements are in thousands. The filing identifies the registrant as Tecnoglass Inc.
Business context
Tecnoglass manufactures, distributes and installs architectural glass, windows and aluminum products, primarily for construction markets in the Americas. It reports one operating segment. The United States was its largest market, accounting for $161.5 million of Q2 revenue and $288.5 million for the first half.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $169.1m | $121.8m | $303.7m | $233.3m |
| Gross profit | $73.6m | $49.1m | $134.0m | $94.4m |
| Gross margin | 43.5% | 40.4% | 44.1% | 40.5% |
| Operating income | $45.5m | $28.8m | $79.5m | $54.2m |
| Net income | $33.4m | $19.6m | $54.4m | $27.9m |
| Income attributable to parent | $33.2m | $19.6m | $54.0m | $27.8m |
| Basic and diluted EPS | $0.70 | $0.41 | $1.14 | $0.59 |
Q2 revenue rose 38.9% year over year; first-half revenue rose 30.2%. Management attributed growth principally to U.S. residential and commercial demand. U.S. single-family residential sales rose 85.6% in Q2 and 110.8% for the first half, reaching 44.9% and 44.6% of total revenue, respectively. Latin American sales, including Colombia, declined year over year in both periods.
Gross margin expanded 310 basis points in Q2 and 360 basis points in the first half. Management cited higher sales and operating leverage, a greater manufacturing mix relative to installation, and efficiencies from automation. Operating expenses rose 38.2% in Q2 and 35.5% for the first half, including higher freight costs and non-recurring Special Committee-related fees.
Cash flow, balance sheet and liquidity
- First-half operating cash flow: $63.0 million, versus $60.1 million in 2021. Inventory was a $31.3 million use of operating cash; contract assets and liabilities provided $17.5 million and payables provided $16.5 million.
- Investing cash flow: $27.2 million used, including $26.3 million cash purchases of property and equipment. Including $5.8 million of assets acquired through credit or debt, reported capital expenditures were $32.1 million.
- Financing cash flow: $21.3 million used, including a voluntary $15 million debt prepayment and $6.2 million of cash dividends. Cash increased by $13.6 million to $98.6 million.
- June 30 liquidity: Current assets were $368.7 million and current liabilities were $180.7 million. Management reported approximately $170 million available under credit lines and said it expected working capital to remain a net cash-flow benefit for full-year 2022.
- Debt: Total borrowing obligations were $184.9 million, including $182.5 million under the senior secured credit facility; balance-sheet long-term debt, net of deferred financing costs, was $184.3 million. Cash less total borrowing obligations implies approximate net debt of $86.2 million. The facility maturity was extended to the end of 2026; the filing reports a 2.50% weighted-average rate on credit facilities at June 30. The company had interest-rate swaps covering $125 million of debt through November 2026.
- Other balance-sheet movements: Inventories increased to $111.9 million from $85.0 million at year-end 2021. Total shareholders’ equity was $287.2 million. The company declared a $0.065-per-share quarterly dividend, paid July 29, 2022.
Outlook, risks and other material items
- Firm remaining performance obligations were $355.9 million at June 30, 2022. The company expected to recognize $239.1 million in 2022 and $116.8 million in 2023; the filing says all were expected to be recognized within three years. These obligations exclude options, verbal commitments and other potential orders.
- The filing provides no numerical full-year revenue or earnings guidance. Management described liquidity as adequate to meet obligations over the next 12 months and expected working capital to support cash flow.
- Risks include variable interest rates, Colombian peso movements, aluminum-price volatility, freight costs and possible difficulty passing higher commodity costs through to customers. Management estimated that a 100-basis-point rate increase would reduce annual net earnings by about $0.6 million after hedging. A 5% Colombian peso appreciation was estimated to reduce earnings by about $10.2 million, based on first-half results.
- Q2 included a $2.5 million foreign-currency transaction gain in earnings, while foreign-currency translation adjustments reduced Q2 comprehensive income by $23.6 million. For the first half, the translation adjustment was a $10.0 million loss. These effects are distinct from net income.
- First-half operating expenses included $3.4 million of non-recurring professional fees and other costs related to a Special Committee assessment following a December 2021 short-seller report. The filing also describes related-party transactions, including purchases from A Construir for facility construction; affiliates of the CEO and COO held an ownership stake through June 1, 2022.
- The company committed to purchase at least $90 million of specified raw materials from a supplier through November 2030. It may contribute approximately $12.5 million, if needed, to the Vidrio Andino joint venture’s planned second float-glass plant. Management said ordinary-course legal matters were not then expected to have a material adverse effect, while noting outcomes are uncertain.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Its June 2022 credit-agreement amendment permits dividends and share repurchases without a cap when a pro-forma leverage-ratio condition is met.
Important facts for investors to verify
- Whether U.S. residential demand and the reported backlog convert into revenue on the expected schedule, and how much of growth depends on single-family housing.
- Whether expanded margins persist as shipping, labor and material costs change, and whether inventory growth supports planned output without creating working-capital or obsolescence pressure.
- Availability and terms of the stated $170 million in credit lines, debt covenants and the leverage condition governing restricted payments.
- Progress, funding requirements and timing for the Vidrio Andino plant, including any additional company contribution.
- Exposure to related parties, foreign exchange and floating interest rates, including the coverage and effectiveness of the interest-rate swaps.