Tecnoglass Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016; unaudited. The filing identifies the registrant as Tecnoglass Inc. (not Tecnoglass Holdings Inc.). Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Business context and financial performance
Tecnoglass manufactures architectural glass, aluminum products, windows and building systems for residential and commercial construction. It sells in the Americas and exports more than half of production. The company reported one operating segment. The United States was its largest sales market.
- Third quarter: Revenue was $80.0 million, up 27% year over year; gross profit was $29.6 million and gross margin was 37.0%, versus 37.7%. Operating income rose to $15.3 million from $10.8 million. Net loss was $7.9 million, or $0.28 per share, compared with a $1.9 million loss, or $0.08 per share.
- Nine months: Revenue was $218.4 million, up 26%; gross profit was $79.3 million and gross margin was 36.3%, versus 36.5%. Operating income increased to $39.3 million from $28.1 million. Net income was $20.1 million, or $0.73 basic and $0.65 diluted per share, versus a net loss of $11.1 million, or $0.44 per share, in 2015.
- Revenue by geography, nine months: U.S. $132.5 million, Colombia $73.3 million, Panama $7.5 million and other markets $5.1 million. Management attributed growth to U.S. market expansion and large Colombian projects, including the Bogotá airport, as well as projects in Panama.
- Expenses and non-operating items: Nine-month operating expenses increased 14% to $40.0 million, reflecting higher shipping, personnel and other costs. Interest expense increased to $12.1 million from $6.5 million. Third-quarter results included a $12.9 million noncash warrant-liability loss and a $2.6 million earnout-liability loss; these valuation changes materially affected reported earnings. Nine-month results included a $4.4 million earnout-liability gain and a $0.3 million warrant-liability loss. Foreign-exchange gains were $0.2 million for nine months, versus $11.5 million in 2015.
Cash flow, liquidity and debt
- Cash was $18.1 million at September 30, 2016, compared with $18.5 million at year-end 2015. Current assets were $224.2 million and current liabilities $171.0 million, leaving working capital of approximately $53.2 million.
- Nine-month operating cash flow was negative $14.1 million, versus positive $10.2 million in 2015. Receivables absorbed $25.6 million of cash and inventories absorbed $9.7 million. Trade receivables rose to $84.6 million from $52.5 million; amounts due from related parties were $32.4 million.
- Investing cash outflow was $16.7 million, including $15.9 million of cash-funded property and equipment purchases. The company also acquired $19.2 million of assets through debt and capital leases. Financing provided $29.7 million, principally from borrowing. Cash declined $0.4 million during the period.
- Total borrowing obligations, including capital leases, were $202.6 million, of which $62.4 million was current and $140.2 million long term. Rates ranged from 2.7% to 22.9%, with a weighted average of 8.6%. The company reported covenant compliance with its $109.5 million seven-year senior secured facility as of June 30, 2016; a separate subsidiary had previously received a waiver for a debt-service covenant through December 31, 2016.
- In October 2016, the board approved a potential issuance of up to $225 million of unregistered senior unsecured bonds, with maturity of up to seven years, to refinance debt and support general corporate purposes. Approval is not evidence that the bonds were issued.
Outlook, changes, risks and unusual items
- Management said installed capacity was expected to support backlog and expected sales through 2018, with near-term capital spending expected to focus on maintaining capacity. Nine-month capital expenditures were approximately $35.1 million, including new facilities, machinery and adjacent land.
- The company declared quarterly dividends of $0.125 per share, equivalent to $0.50 annually, payable in cash or shares at shareholders’ election. A $4.9 million dividend payable was recorded at quarter-end. The majority shareholder elected shares for the dividend and the next three quarterly payments.
- Management intended to acquire 100% of ESW LLC, a related-party U.S. importer and distributor, for approximately $14.5 million before year-end 2016. No binding agreement had been entered into by the filing date.
- Related-party sales were $43.3 million for the nine months, about 20% of revenue; related-party receivables totaled $32.4 million. ESW LLC is substantially owned by the CEO and COO. Investors should assess collection terms, customer concentration and governance implications.
- Foreign-exchange movements, interest rates, debt covenants, collections and working-capital needs are material considerations. The company noted that receivables reflect extended credit to a major Florida customer, increased related-party demand and longer project cash cycles.
- Disclosure controls were deemed ineffective at September 30, 2016 because of material weaknesses in entity-level controls, financial closing and reporting, and IT general controls. Management was implementing remediation and planned operating-effectiveness testing in the fourth quarter.
- In a contract dispute with Bagatelos, the company reported a $2.0 million surety bond and a cross-complaint seeking damages. Management cited counsel’s view that recovery of approximately $2.0 million was probable; discovery and mediation were ongoing, so the outcome remained uncertain.
Important facts for investors to verify
- Whether the proposed bond offering was completed, on what terms, and how proceeds affected debt maturities, interest costs and covenant headroom.
- Receivables aging, subsequent collections and exposure to related parties, particularly the $32.4 million related-party balance.
- Progress and final terms of the proposed ESW LLC acquisition, including related-party approvals and financing.
- Whether internal-control weaknesses were remediated and tested effectively after quarter-end.
- Resolution of the Bagatelos litigation and any resulting recoveries, damages or costs.
- Subsequent dividend payments and share issuance, and the remaining earnout and warrant liabilities, whose fair values rely on significant unobservable assumptions.