Tecnoglass Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2020; comparisons are with the third quarter and first nine months of 2019. Unless stated otherwise, financial amounts below are in U.S. dollars, millions. The filing identifies the registrant as Tecnoglass Inc.
Business context
Tecnoglass manufactures and installs architectural glass, windows, and aluminum products for residential and commercial construction. Its principal manufacturing operations are in Colombia, and the United States is its largest market. The company reported one operating segment. COVID-19 restrictions temporarily halted Colombian production from March 24 through April 13, 2020; operations resumed under safety measures.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $103.3 | $108.5 | $272.5 | $329.5 |
| Gross profit | $40.1 | $35.7 | $102.3 | $106.5 |
| Gross margin | 38.8% | 33.0% | 37.5% | 32.3% |
| Operating income | $20.2 | $15.6 | $48.6 | $48.1 |
| Net income (loss) | $8.3 | $(1.3) | $5.7 | $13.7 |
| Income (loss) attributable to parent | $8.3 | $(1.2) | $5.8 | $13.6 |
| EPS, basic and diluted | $0.18 | $(0.03) | $0.12 | $0.31 |
- Q3 revenue declined 4.8% year over year but increased 26.1% from Q2 2020. U.S. revenue rose 3.0% year over year to $95.7 million; Latin American revenue fell 51.1% to $7.6 million.
- Nine-month revenue fell 17.3%. Management cited the Colombian shutdown and the slow restart of Latin American construction sites. U.S. sales were down 10.8% for the period.
- Q3 gross profit increased despite lower revenue. Management attributed margin gains to lower aluminum input costs, automation and waste reduction, lower installation costs as manufacturing made up more of the mix, and favorable exchange rates. Lower sales diluted fixed costs and partly offset these benefits.
- Nine-month net income declined, in part because foreign-currency transaction losses were $22.2 million versus $9.9 million in 2019. These losses were described as non-cash and primarily reflected remeasurement of U.S.-dollar-denominated monetary items at Colombian subsidiaries.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $69.4 million at September 30, 2020, versus $47.9 million at December 31, 2019. Current assets were $281.9 million and current liabilities $98.7 million.
- Nine-month operating cash flow was $51.0 million, compared with $9.2 million in 2019; investing cash flow was $(13.5) million and financing cash flow was $(15.2) million. Operating cash generation benefited from working-capital movements, including contract assets and liabilities. It also included a $24.2 million add-back for unrealized currency losses.
- Total debt obligations were approximately $246.4 million at September 30, including $210 million of unsecured senior notes bearing 8.2% interest and maturing in 2022. The reported weighted-average rate on credit facilities was 7.37%.
- After quarter-end, the company entered a $300 million senior secured facility: a $250 million delayed-draw term loan and a $50 million revolver, maturing October 31, 2025, with capacity potentially expandable to $325 million. The company intended to refinance existing borrowings and expected to redeem the $210 million notes after a redemption-price step-down in late January 2021. Management estimated annual cash-interest savings of about $11 million on then-current borrowings.
- Management expected working capital to remain a net cash-flow benefit for 2020 and said liquidity was sufficient to service obligations through the next 12 months.
Outlook, risks, and unusual items
- Remaining performance obligations were $260.8 million at September 30. The company expected to recognize $86.2 million in 2020, $156.6 million in 2021, and $19.4 million thereafter; these orders exclude options, verbal commitments, letters of intent, and potential orders under basic ordering agreements.
- The company held a 25.8% interest in Vidrio Andino, a Saint-Gobain subsidiary and glass supplier. In October 2020, it issued 1,557,142 shares at $7.00 per share to acquire land from a related party, owned by members of the CEO’s family, as payment toward its $10.9 million land contribution for the joint venture. The filing says a third-party valuation was obtained. A planned Galapa plant could require an additional company contribution of approximately $12.5 million between 2020 and 2021, if needed based on debt availability.
- The company had a commitment to purchase at least $12.2 million of specified raw materials before May 2026. Ordinary-course legal claims were described as not currently expected to materially affect the company, though management cautioned outcomes cannot be assured.
- Foreign-exchange exposure is significant: the filing reports a $109.2 million net liability position in U.S.-dollar-denominated monetary items at Colombian subsidiaries. The company had currency collars covering $14 million through February 2021; their net fair-value liability was $0.6 million at quarter-end.
- COVID-19 effects, construction activity, currency movements, and assumptions used in impairment testing remain uncertainties. The company reported no goodwill or long-lived-asset impairment at September 30, 2020. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
- The 2019 comparative cash-flow presentation was revised for foreign-currency classification errors; management concluded the revisions were not material and did not change net cash movement.
Most important facts for investors to verify
- Whether the new credit facility was drawn and used as intended, the timing and completion of the senior-note redemption, and realized interest savings versus management’s estimate.
- Whether the $51.0 million operating cash flow is repeatable, given its dependence on working-capital changes and the sizeable non-cash currency-loss adjustment.
- How revenue, margins, backlog conversion, and project execution develop as U.S. and Latin American construction markets recover.
- The effect of Colombian-peso movements on reported earnings, taxes, and the value or effectiveness of currency hedges.
- Completion, funding, and related-party governance of the Vidrio Andino land contribution and proposed Galapa plant, including any additional $12.5 million contribution.
- Reconciliation of share counts: the filing reports 47,117,631 shares outstanding at September 30, 47,674,773 at October 31, and the subsequent land issuance of 1,557,142 shares.