Tecnoglass Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018; filed November 7, 2018. The filing identifies the registrant as Tecnoglass Inc. (not Tecnoglass Holdings Inc.). Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless noted.
Business context and reporting period
Tecnoglass manufactures architectural glass, windows and aluminum products and provides related design and installation services. It operates primarily from Colombia and sells across the Americas. The U.S. generated about 85% of third-quarter revenue and 79% of nine-month revenue. The company reports one operating segment.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $97.0M | $83.4M | $273.1M | $230.2M |
| Gross profit / margin | $34.7M / 35.8% | $27.2M / 32.6% | $86.1M / 31.5% | $72.0M / 31.3% |
| Operating income / margin | $15.3M / 15.7% | $11.4M / 13.7% | $32.9M / 12.0% | $23.7M / 10.3% |
| Net income | $6.2M | $7.0M | $12.9M | $4.6M |
| Net income attributable to parent | $6.3M | $6.9M | $13.3M | $4.4M |
| Basic and diluted EPS | $0.16 | $0.19 | $0.35 | $0.13 basic / $0.12 diluted |
- Growth and profitability: Revenue rose 16.3% in Q3 and 18.7% for the nine months. Nine-month operating income increased about 39%; nine-month net income nearly tripled from the prior-year period.
- Cash flow: The cash flow statement reports operating cash use of $9.5M for the nine months, versus $9.1M provided in 2017. Investing used $12.9M; financing provided $8.9M. Cash declined $13.0M to $28.0M from $40.9M at year-end 2017.
- Liquidity and working capital: Current assets were $285.1M and current liabilities $110.2M at September 30, compared with $261.9M and $121.4M at December 31, 2017. Inventory was $88.5M, up from $71.7M. Management attributed cash use chiefly to growth-related inventory and receivables.
- Debt: Borrowing obligations were $236.0M net of deferred financing costs, including $16.1M current and $219.9M long-term, versus $224.3M at year-end 2017. The $210M senior unsecured notes carry an 8.2% coupon and mature in 2022. Credit facilities had a weighted-average rate of 7.6%. Debt maturities are concentrated in 2022, with $212.4M scheduled that year.
- Backlog: Remaining performance obligations were $276M at September 30. The company expected to recognize them within three years: approximately $91M in 2018, $181M in 2019 and $3.7M in 2020.
Material changes versus the prior comparable period
- Q3 revenue growth was driven primarily by U.S. sales, up $14.1M or 20.7%; U.S. revenue represented 85% of total, versus 82% a year earlier. Colombian Q3 sales declined to $12.1M from $13.3M.
- Q3 gross margin expanded about 320 basis points, which management attributed to raw-material efficiencies, cost controls, operating leverage and vertical integration. Nine-month gross margin was broadly stable, up 20 basis points.
- Operating expenses rose 23% in Q3, mainly from higher shipping and commissions; nine-month operating expenses rose 10.2%, but fell to 19.5% of revenue from 21.0%.
- Q3 results included a $2.5M foreign-currency transaction loss, compared with a $5.4M gain in Q3 2017. This more than offset operating improvement in the comparison of net income. Nine-month foreign-currency losses were $0.8M versus $0.9M.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. It reduced opening retained earnings by $0.187M and changed presentation of contract assets and liabilities. Its reported impact on nine-month 2018 revenue was a reduction of $1.351M and on net income a reduction of $0.084M; 2017 comparatives were not restated.
- GM&P acquisition consideration was settled partly through 1,238,095 shares and an $8.5M seller note due 2022. A $3.606M related-party debt-extinguishment gain was recorded in additional paid-in capital, rather than earnings. The share issuance increased outstanding shares.
Guidance, management commentary, risks and unusual items
- Outlook: No formal earnings or revenue guidance is provided. Management described U.S. construction conditions as strong, with continued plans to expand beyond Florida and diversify geographically. It said existing installed capacity was expected to meet backlog and anticipated sales through 2018.
- Commercial development: A September 2018 alliance with Schüco USA allows Tecnoglass to manufacture and sell Schüco architectural systems in North and Latin America and supply aluminum profiles for Schüco’s global supply chain.
- Market and currency risks: Results are exposed to construction cycles, with significant U.S. sales concentration. Colombian subsidiaries had $141.6M more U.S.-dollar monetary liabilities than assets; management estimated a 1% peso devaluation could cause a $1.4M remeasurement loss. A 200-basis-point interest-rate increase was estimated to reduce nine-month net earnings by about $0.6M. The company reported no use of derivatives to manage interest-rate risk.
- Tariffs: A U.S. 10% tariff on certain Colombian aluminum products resulted in $1.0M of expense through September 30; management said the cost was being passed through to customers.
- Internal controls: Disclosure controls were deemed ineffective at quarter-end because of a material weakness in deferred-tax valuation, presentation and effective-tax-rate controls. The issue was identified earlier in 2018 and could have understated net income by $1.2M. Management described remediation steps and expected remediation before year-end 2018; the filing does not establish that remediation was complete.
- Commitments and contingencies: The company was committed to purchase at least $34.270M of raw materials from a supplier before May 2026. Management said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes are uncertain. No additional subsequent events requiring disclosure were identified.
Most important facts for investors to verify
- Track operating cash flow and working-capital conversion, particularly inventory growth, receivables, and the reported 121-day DSO.
- Assess the large 2022 debt maturity, interest costs, variable-rate exposure, and the seller note’s terms.
- Monitor whether the deferred-tax control material weakness is fully remediated and whether any further financial-statement adjustments are required.
- Evaluate U.S. market concentration, construction-cycle sensitivity, tariff pass-through effectiveness, and foreign-exchange exposure.
- Reconcile reported figures where the MD&A differs from the financial statements: the MD&A narrative cites Q3 net income of $5.8M versus $6.152M in the statements, and cites operating cash use of about $8.6M versus $9.474M in the cash flow statement. The filing text does not clearly reconcile these differences.