Tecnoglass Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; unaudited. The filing is by Tecnoglass Inc. (not “Tecnoglass Holdings Inc.”). Financial amounts below are in U.S. dollars; figures are rounded to millions unless noted.
Business context and reporting period
Tecnoglass manufactures architectural glass, aluminum products, windows and related building systems, with operations centered in Barranquilla, Colombia and sales across the Americas. It reported that about half of production is exported. On March 1, 2017, it acquired Florida-based commercial glazing and engineering company GM&P, including its 60%-owned subsidiary Componenti, to support vertical integration and U.S. growth. GM&P’s results are included from the acquisition date. The company also established an Italian subsidiary in March to pursue European and Middle Eastern sales.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $81.0m | $79.8m | $146.8m | $143.7m |
| Gross profit / margin | $22.5m / 27.8% | $28.0m / 35.1% | $44.8m / 30.5% | $52.7m / 36.7% |
| Operating income | $5.4m | $12.7m | $12.3m | $24.5m |
| Net income (loss) attributable to parent | $(3.6)m | $14.7m | $(2.5)m | $29.0m |
| Parent diluted EPS | $(0.11) | $0.44 | $(0.08) | $0.87 |
| Operating cash flow | Not separately presented | $12.2m | $(2.6)m |
Second-quarter revenue rose 1%; first-half revenue rose 2.2%. Revenue growth was supported by U.S. sales and GM&P, but was partly offset by weaker Colombia and Panama sales. First-half U.S. revenue increased $18.8m (21%), while Colombian revenue declined $14.9m (32%).
Gross margin contracted materially. Management attributed the pressure to higher depreciation and fixed labor costs, delays in large projects that left capacity underutilized, and GM&P’s lower-margin engineering and installation mix. Q2 operating expenses increased to $17.1m from $15.3m, including a $1.6m bad-debt provision largely related to a project scope change. First-half bad-debt provision was $2.6m.
Reported results were also affected by foreign-currency transaction losses of $8.7m in Q2 and $6.3m in the first half, primarily from remeasurement of U.S.-dollar monetary items at Colombian subsidiaries, including an intercompany loan related to the bond. Interest expense was $5.2m in Q2 and $10.3m in the first half. First-half results included a $3.2m loss on debt extinguishment. Income-tax benefits were $4.1m for Q2 and $3.0m for the first half; the six-month effective tax rate was 40.4%.
Cash from operations improved to $12.2m from a $2.6m use in the prior-year half. Investing used $12.5m, including $8.4m for acquisitions and $4.3m for property and equipment. Financing provided $17.7m. Cash rose to $43.7m from $26.9m at year-end. Management cited operating cash generation and bond proceeds among the sources of liquidity.
At June 30, 2017, total borrowing obligations were $226.9m, including $5.5m current and $221.5m long-term debt. The company issued a five-year, $210m senior unsecured note at an 8.2% coupon in January and used about $182.2m of proceeds to repay existing debt. Disclosed borrowing rates ranged from 2.9% to 8.2%, with a 7.7% weighted average. Current assets were $236.9m and current liabilities $105.0m; the latter included $29.0m payable associated with the GM&P acquisition. Trade receivables were $106.3m, up from $92.3m at year-end.
Material changes, outlook and risks
- Geographic mix and project timing: The U.S. represented 75% of Q2 revenue versus 60% a year earlier, while Colombia declined 45% in the quarter. Management said several large projects were delayed by financing close and design changes, pushing deliveries and invoicing into the second half of 2017 and 2018; it said expected project revenues were not reduced.
- Outlook: No formal earnings or revenue guidance is provided. Management expects U.S. revenue to continue growing as a share of sales, debt to remain around current levels for the rest of 2017, and near-term capital spending to be limited largely to maintenance and solar panels. It stated existing capacity could support backlog and expected sales through 2018 and described a company-wide cost-reduction and efficiency review.
- Acquisition and payment obligation: GM&P purchase consideration was $35m, with $6m paid in cash and the balance payable in cash, shares or a combination at the company’s discretion within 180 days of closing. The preliminary purchase-price allocation included $18.6m goodwill; the allocation remained subject to measurement-period adjustments. GM&P contributed $43.5m of sales and $3.6m of net income to the reported six-month period, as stated in the filing.
- Foreign exchange and collections: Currency movements materially affected earnings. Management reported 126 days sales outstanding including GM&P, versus 97 days on a basis excluding the acquisition; it cautioned that GM&P’s full receivable balance was included while only four months of its sales were included. Long project and collection cycles are also described.
- Controls: Management concluded disclosure controls were not effective at June 30, 2017 because of a previously reported material weakness in entity-level controls. A remediation plan was underway; management nevertheless stated the interim financial statements were fairly stated in all material respects.
- Legal and other items: In litigation with Bagatelos, Tecnoglass seeks about $2.0m; Bagatelos has a cross-complaint seeking about $3.0m. Mediation failed and discovery continued. Counsel’s view, as reported by management, was that recovery of the $2.0m was probable. The company also reported related-party sales and payments, including amounts involving an entity owned by relatives of its CEO and COO. Quarterly dividends were increased from $0.125 to $0.14 per share for Q3 2017 through Q2 2018, subject to board discretion.
Important facts for investors to verify
- Whether delayed projects convert to deliveries, invoicing and cash collections on the revised schedule, and whether receivable aging or bad-debt provisions worsen.
- Whether gross margins recover as capacity is utilized and integration of GM&P proceeds; assess the lower-margin acquired business mix and stated cost initiatives.
- The final GM&P purchase-price allocation, settlement of the $29.0m acquisition-related payable, and the financing or share dilution used to meet the remaining consideration.
- The effect of U.S.-dollar debt and intercompany balances on foreign-exchange earnings, and the company’s ability to service the $210m note and other obligations.
- Progress in remediating the material weakness, the status and potential outcome of the Bagatelos litigation, and the terms and continuing approval of dividends.