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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2019
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-35436
TECNOGLASS INC.
(Exact Name of Registrant as Specified in Its Charter)
| Cayman Islands | 98-1271120 | |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
Avenida Circunvalar a 100 mts de la Via 40, Barrio Las Flores Barranquilla, Colombia
(Address of principal executive offices)
(57)(5) 3734000
(Issuer’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report):
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Ordinary Shares, par value $0.0001 per share | TGLS | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | [ ] | Accelerated filer | [X] |
| Non-accelerated filer | [ ] | Smaller reporting company | [X] |
| (Do not check if smaller reporting company) | |||
| Emerging growth company | [ ] | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 45,519,472 ordinary shares as of September 30, 2019.
TECNOGLASS INC.
FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
| 2 |
PART I - FINANCIAL INFORMATION
Tecnoglass Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
(Unaudited)
| September 30, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 41,739 | $ | 33,040 | ||||
| Investments | 2,273 | 1,163 | ||||||
| Trade accounts receivable, net | 112,687 | 92,791 | ||||||
| Due from related parties | 8,388 | 8,239 | ||||||
| Inventories | 82,140 | 91,849 | ||||||
| Contract assets – current portion | 43,384 | 46,018 | ||||||
| Other current assets | 24,906 | 20,299 | ||||||
| Total current assets | $ | 315,517 | $ | 293,399 | ||||
| Long term assets: | ||||||||
| Property, plant and equipment, net | $ | 146,581 | $ | 149,199 | ||||
| Deferred income taxes | 7,339 | 4,770 | ||||||
| Contract assets – non-current | 9,104 | 6,986 | ||||||
| Intangible assets | 7,135 | 9,006 | ||||||
| Goodwill | 23,561 | 23,561 | ||||||
| Long term investments | 45,273 | - | ||||||
| Other long term assets | 3,079 | 2,853 | ||||||
| Total long term assets | 242,072 | 196,375 | ||||||
| Total assets | $ | 557,589 | $ | 489,774 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Short-term debt and current portion of long-term debt | $ | 16,168 | $ | 21,606 | ||||
| Trade accounts payable and accrued expenses | 67,210 | 65,510 | ||||||
| Accrued interest expense | 3,184 | 7,567 | ||||||
| Due to related parties | 5,099 | 1,500 | ||||||
| Dividends payable |
1,615 |
736 | ||||||
| Contract liability – current portion | 12,750 | 16,789 | ||||||
| Due to equity partners | 10,900 | - | ||||||
| Other current liabilities | 13,973 | 8,887 | ||||||
| Total current liabilities | $ |
130,899 |
$ | 122,595 | ||||
| Long term liabilities: | ||||||||
| Deferred income taxes | $ | 542 | $ | 2,706 | ||||
| Long term payable associated to GM&P acquisition | 8,500 | 8,500 | ||||||
| Long term liabilities from related parties | 617 | 600 | ||||||
| Contract liability – non-current | 177 | 1,436 | ||||||
| Long term debt | 247,776 | 220,709 | ||||||
| Total long term liabilities | 257,612 | 233,951 | ||||||
| Total liabilities | $ |
388,511 |
$ | 356,546 | ||||
| SHAREHOLDERS’ EQUITY | ||||||||
| Preferred shares, $0.0001 par value, 1,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2019 and December 31, 2018 respectively | $ | - | $ | - | ||||
| Ordinary shares, $0.0001 par value, 100,000,000 shares authorized, 45,519,472 and 38,092,996 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 5 | 4 | ||||||
| Legal Reserves | 1,367 | 1,367 | ||||||
| Additional paid-in capital | 208,250 | 157,604 | ||||||
| Retained earnings | 5,320 | 10,439 | ||||||
| Accumulated other comprehensive (loss) | (46,767 | ) | (37,058 | ) | ||||
| Shareholders’ equity attributable to controlling interest | 168,175 | 132,356 | ||||||
| Shareholders’ equity attributable to non-controlling interest | 903 | 872 | ||||||
| Total shareholders’ equity | 169,078 | 133,228 | ||||||
| Total liabilities and shareholders’ equity | $ | 557,589 | $ | 489,774 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
Tecnoglass Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Other Comprehensive Income
(In thousands, except share and per share data)
| Three months ended | Nine months ended | |||||||||||||||
| Sept 30, | Sept 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Operating revenues: | ||||||||||||||||
| External customers | $ | 106,741 | $ | 95,325 | $ | 323,808 | $ | 269,317 | ||||||||
| Related parties | 1,729 | 1,667 | 5,713 | 3,804 | ||||||||||||
| Total operating revenues | 108,470 | 96,992 | 329,521 | 273,121 | ||||||||||||
| Cost of sales | 72,729 | 62,299 | 223,051 | 187,038 | ||||||||||||
| Gross profit | 35,741 | 34,693 | 106,470 | 86,083 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling expense | (11,334 | ) | (10,922 | ) | (32,115 | ) | (28,626 | ) | ||||||||
| General and administrative expense | (8,855 | ) | (8,504 | ) | (26,303 | ) | (24,578 | ) | ||||||||
| Total operating expenses | (20,189 | ) | (19,426 | ) | (58,418 | ) | (53,204 | ) | ||||||||
| Operating income | 15,552 | 15,267 | 48,052 | 32,879 | ||||||||||||
| Non-operating income | 450 | 780 | 1,078 | 2,588 | ||||||||||||
| Equity method income | 295 | - | 273 | - | ||||||||||||
| Foreign currency transactions (losses) gains | (12,006 | ) | (2,494 | ) | (9,921 | ) | (828 | ) | ||||||||
| Interest expense and deferred cost of financing | (5,876 | ) | (5,140 | ) | (17,220 | ) | (15,551 | ) | ||||||||
| (Loss) Income before taxes | (1,585 | ) | 8,413 | 22,262 | 19,088 | |||||||||||
| Income tax benefit (provision) | 266 | (2,261 | ) | (8,590 | ) | (6,187 | ) | |||||||||
| Net (loss) income | $ | (1,319 | ) | $ | 6,152 | $ | 13,672 | $ | 12,901 | |||||||
| Loss (Income) attributable to non-controlling interest | 144 | 145 | (30 | ) | 429 | |||||||||||
| (Loss) Income attributable to parent | $ | (1,175 | ) | $ | 6,297 | $ | 13,642 | $ | 13,330 | |||||||
| Comprehensive income: | ||||||||||||||||
| Net income (loss) | $ | (1,319 | ) | $ | 6,152 | $ | 13,672 | $ | 12,901 | |||||||
| Foreign currency translation adjustments | (8,486 | ) | (1,998 | ) | (8,768 | ) | 564 | |||||||||
| Change in fair value derivative contracts | (941 | ) | - | (941 | ) | - | ||||||||||
| Total comprehensive income (loss) | $ | (10,746 | ) | $ | 4,154 | $ | 3,963 | $ | 13,465 | |||||||
| Comprehensive (income) loss attributable to non-controlling interest | 144 | 145 | (30 | ) | 429 | |||||||||||
| Total comprehensive income (loss) attributable to parent | $ | (10,602 | ) | $ | 4,299 | $ | 3,933 | $ | 13,894 | |||||||
| Basic income (loss)per share | $ | (0.03 | ) | $ | 0.15 | $ | 0.31 | $ | 0.33 | |||||||
| Diluted income (loss) per share | $ | (0.03 | ) | $ | 0.15 | $ | 0.31 | $ | 0.32 | |||||||
| Basic weighted average common shares outstanding | 45,519,472 | 40,294,762 | 43,793,163 | 39,301,161 | ||||||||||||
| Diluted weighted average common shares outstanding | 45,519,472 | 40,887,997 | 44,386,398 | 39,894,396 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
Tecnoglass Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net income | $ | 13,672 | $ | 12,901 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Provision for bad debts | 1,046 | (231 | ) | |||||
| Provision for obsolete inventory | - | 26 | ||||||
| Depreciation and amortization | 17,189 | 17,483 | ||||||
| Deferred income taxes | (5,140 | ) | 1,233 | |||||
| Director stock compensation | - | 213 | ||||||
| Equity method income | (273 | ) | - | |||||
| Deferred cost of financing | 1,213 | 1,078 | ||||||
| Other non-cash adjustments | 41 | (100 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Trade accounts receivables | (30,040 | ) | (10,551 | ) | ||||
| Inventories | 3,939 | (17,025 | ) | |||||
| Prepaid expenses | (3,013 | ) | (509 | ) | ||||
| Other assets | (5,081 | ) | (3,834 | ) | ||||
| Trade accounts payable and accrued expenses | 16,501 | 4,677 | ||||||
| Accrued interest expense | (4,362 | ) | (4,368 | ) | ||||
| Taxes payable | 3,645 | (6,361 | ) | |||||
| Labor liabilities | 626 | 934 | ||||||
| Contract assets and liabilities | (5,139 | ) | (5,480 | ) | ||||
| Related parties | 2,724 | 440 | ||||||
| CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | $ | 7,548 | $ | (9,474 | ) | |||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Proceeds from sale of investments | 858 | 1,093 | ||||||
| Acquisition of businesses | (34,100 | ) | (6,000 | ) | ||||
| Purchase of investments | (1,172 | ) | (828 | ) | ||||
| Acquisition of property and equipment | (19,887 | ) | (7,195 | ) | ||||
| CASH USED IN INVESTING ACTIVITIES | $ | (54,301 | ) | $ | (12,930 | ) | ||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Cash dividend | (3,714 | ) | (2,044 | ) | ||||
| Proceeds from equity offering | 36,478 | - | ||||||
| Proceeds from debt | 70,880 | 16,272 | ||||||
| Repayments of debt | (47,168 | ) | (5,288 | ) | ||||
| CASH PROVIDED BY FINANCING ACTIVITIES | $ | 56,476 | $ | 8,940 | ||||
| Effect of exchange rate changes on cash and cash equivalents | $ | (1,024 | ) | $ | 492 | |||
| NET INCREASE (DECREASE) IN CASH | 8,699 | (12,972 | ) | |||||
| CASH - Beginning of period | 33,040 | 40,923 | ||||||
| CASH - End of period | $ | 41,739 | $ | 27,951 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 19,206 | $ | 9,516 | ||||
| Income Tax | $ | 11,090 | $ | 6,984 | ||||
| NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Assets acquired under credit or debt | $ | 1,667 | $ | 1,249 | ||||
| Gain in extinguishment of GM&P payment settlement | $ | - | $ | 3,606 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
Tecnoglass Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(Amounts in thousands, except share and per share data)
(Unaudited)
| Ordinary Shares, $0.0001 Par Value | Additional Paid in | Legal | Retained | Accumulated Other Comprehensive | Total Shareholders' | Non-Controlling | Total Shareholders' Equity and Non-Controlling | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Reserve | Earnings | Loss | Equity | Interest | Interest | ||||||||||||||||||||||||||||
| Balance at December 31, 2018 | 38,092,996 | 4 | 157,604 | 1,367 | 10,439 | (37,058 | ) | 132,356 | 872 | 133,228 | ||||||||||||||||||||||||||
| Issuance of common stock | 5,000,000 | - | 33,050 | - | - | - | 33,050 | - | 33,050 | |||||||||||||||||||||||||||
| Stock dividend | 538,657 | - | 5,162 | - | (6,109 | ) | - | (947 | ) | - | (947 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | 1,770 | 1,770 | - | 1,770 | |||||||||||||||||||||||||||
| Net income | - | - | - | - | 7,338 | - | 7,338 | (7 | ) | 7,331 | ||||||||||||||||||||||||||
| Balance at March 31, 2019 | 43,631,653 | 4 | 195,816 | 1,367 | 11,668 | (35,288 | ) | 173,567 | 865 | 174,432 | ||||||||||||||||||||||||||
| Issuance of common stock | 551,423 | - | 3,428 | - | - | - | 3,428 | - | 3,428 | |||||||||||||||||||||||||||
| Stock dividend | 675,366 | - | 4,416 | - | (6,280 | ) | - | (1,864 | ) | - | (1,864 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (2,052 | ) | (2,052 | ) | - | (2,052 | ) | ||||||||||||||||||||||||
| Net income | - | - | - | - | 7,479 | - | 7,479 | 181 | 7,660 | |||||||||||||||||||||||||||
| Balance at June 30, 2019 | 44,858,442 | 4 | 203,660 | 1,367 | 12,867 | (37,340 | ) | 180,558 | 1,046 | 181,604 | ||||||||||||||||||||||||||
| Stock dividend | 661,030 | 1 |
4,590 |
- | (6,372 | ) | - | (1,781 | ) | - | (1,781 | ) | ||||||||||||||||||||||||
| Derivative financial instruments | - | - | - | - | - | (941 | ) | (941 | ) | - | (941 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (8,486 | ) | (8,486 | ) | - | (8,486 | ) | ||||||||||||||||||||||||
| Net income | - | - | - | - | (1,175 | ) | - | (1,175 | ) | (144 | ) | (1,319 | ) | |||||||||||||||||||||||
| Balance at September 30, 2019 | 45,519,472 | 5 | 208,250 | 1,367 | 5,320 | (46,767 | ) | 168,175 | 903 | 169,078 | ||||||||||||||||||||||||||
| Ordinary Shares, $0.0001 Par Value | Additional Paid in | Legal | Retained | Accumulated Other Comprehensive | Total Shareholders’ | Non- Controlling | Total Shareholders’ Equity and Non-Controlling | |||||||||||||||||||||||||||||
| Shares | Amount | Capital | Reserve | Earnings | Loss | Equity | Interest | Interest | ||||||||||||||||||||||||||||
| Balance at December 31, 2017 | 34,836,575 | 3 | 125,317 | 1,367 | 22,212 | (28,651 | ) | 120,248 | 1,417 | 121,665 | ||||||||||||||||||||||||||
| Issuance of common stock | 4,564 | - | 34 | - | - | - | 34 | - | 34 | |||||||||||||||||||||||||||
| Adoption of ASC 606 | - | - | - | - | (187 | ) | - | (187 | ) | - | (187 | ) | ||||||||||||||||||||||||
| Stock dividend | 499,080 | 1 | 4,128 | - | (4,947 | ) | - | (818 | ) | - | (818 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | 8,701 | 8,701 | - | 8,701 | |||||||||||||||||||||||||||
| Net income | - | - | - | - | 10,691 | - | 10,691 | (72 | ) | 10,619 | ||||||||||||||||||||||||||
| Balance at March 31, 2018 | 35,340,219 | 4 | 129,479 | 1,367 | 27,769 | (19,950 | ) | 138,669 | 1,345 | 140,014 | ||||||||||||||||||||||||||
| Issuance of common stock | 1,238,095 | - | 14,500 | - | - | - | 14,500 | - | 14,500 | |||||||||||||||||||||||||||
| Stock dividend | 463,355 | - | 4,396 | - | (5,082 | ) | - | (686 | ) | - | (686 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (6,139 | ) | (6,139 | ) | - | (6,139 | ) | ||||||||||||||||||||||||
| Net income | - | - | - | - | (3,658 | ) | - | (3,658 | ) | (212 | ) | (3,870 | ) | |||||||||||||||||||||||
| Balance at June 30, 2018 | 37,041,669 | 4 | 148,375 | 1,367 | 19,029 | (26,089 | ) | 142,686 | 1,133 | 143,819 | ||||||||||||||||||||||||||
| Stock dividend | 492,747 | - | 4,544 | - | (5,255 | ) | - | (711 | ) | - | (711 | ) | ||||||||||||||||||||||||
| Foreign currency translation | - | - | - | - | - | (1,998 | ) | (1,998 | ) | - | (1,998 | ) | ||||||||||||||||||||||||
| Net income | - | - | - | - | 6,297 | - | 6,297 | (145 | ) | 6,152 | ||||||||||||||||||||||||||
| Balance at September 30, 2018 | 37,534,416 | 4 | 152,919 | 1,367 | 20,071 | (28,087 | ) | 146,274 | 988 | 147,262 | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
Tecnoglass Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Amounts in thousands, except share and per share data)
Note 1. General
Business Description
Tecnoglass Inc., a Cayman Islands exempted company (the “Company”, “Tecnoglass,” “TGI,” “we, “us” or “our”) manufactures hi-specification, architectural glass and windows for the global residential and commercial construction industries. Currently the Company offers design, production, marketing, and installation of architectural systems for buildings of high, medium and low elevation size. Products include windows and doors in glass and aluminum, office partitions and interior divisions, floating facades and commercial window showcases. The Company exports most of its production to foreign countries, selling to customers in North, Central and South America.
The Company manufactures both glass and aluminum products. Its glass products include tempered glass, laminated glass, thermo-acoustic glass, curved glass, silk-screened glass, acoustic glass and digital print glass. Its Alutions plant produces mill finished, anodized, painted aluminum profiles and rods, tubes, bars and plates. Alutions’ operations include extrusion, smelting, painting and anodizing processes, and exporting, importing and marketing aluminum products.
The Company also designs, manufactures, markets and installs architectural systems for high, medium and low-rise construction, glass and aluminum windows and doors, office dividers and interiors, floating facades and commercial display windows.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting purposes. The results reported in these unaudited condensed consolidated financial statements are not necessarily indicative of results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by US GAAP.
The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of the Company’s financial statements. Actual results may differ from these estimates under different assumptions and conditions. Estimates inherent in the preparation of these unaudited condensed consolidated financial statements relate to the collectability of account receivables, the valuation of inventories, estimated earnings on uncompleted contracts, useful lives and potential impairment of long-lived assets. Changes in estimates are reflected in the periods during which they become known. Actual amounts may differ from these estimates and could differ materially. These financial statements reflect all adjustments that in the opinion of management are necessary for a fair statement of the financial position, results of operations and cash flows for the period presented, and are of a normal, recurring nature.
| 7 |
The Company has one operating segment, Architectural Glass and Windows, which is also its reporting segment, comprising the design, manufacturing, distribution, marketing and installation of high-specification architectural glass and window product sold to the construction industry.
Principles of Consolidation
These unaudited condensed consolidated financial statements consolidate TGI, its subsidiaries Tecnoglass S.A.S (“TG”), C.I. Energía Solar S.A.S E.S. Windows (“ES”), ES Windows LLC (“ESW LLC”), Tecnoglass LLC (“Tecno LLC”), Tecno RE LLC (“Tecno RE”), GM&P Consulting and Glazing Contractors (“GM&P”), Componenti USA LLC (“Componenti”) and ES Metals SAS (“ES Metals”), which are entities in which we have a controlling financial interest because we hold a majority voting interest. To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model. All significant intercompany accounts and transactions are eliminated in consolidation, including unrealized intercompany profits and losses. The equity method of accounting is used for investments in affiliates and other joint ventures over which the Company has significant influence but does not have effective control.
Derivative Financial Instruments
The Company recognizes all derivative financial instruments as either assets or liabilities at fair value on the consolidated balance sheet. The changes in fair value of derivative instruments that are designated and qualify as cash flow hedges, the unrealized gains or losses on the derivatives are recorded in the consolidated statement of comprehensive income. Amounts in Accumulated other comprehensive loss on the consolidated balance sheet are reclassified into the consolidated statement of income in the same period or periods during which the hedged transactions are settled.
Recently Issued Accounting Pronouncements
In June 2016, FASB issued Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326). This ASU represents a significant change in the allowance for credit losses accounting model by requiring immediate recognition of management’s estimates of current expected credit losses. Under the prior model, losses were recognized only as they were incurred, which FASB has noted delayed recognition of expected losses that might not yet have met the threshold of being probable. The new model is applicable to all financial instruments that are not accounted for at fair value through net income, thereby bringing consistency in accounting treatment across different types of financial instruments and requiring consideration of a broader range of variables when forming loss estimates. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, (with early application permitted). The FASB has announced that it will issue an update during the fourth quarter of 2019 that will postpone the effective date further into the future. During 2019, the FASB issued ASU 2019-04 and ASU 2019-05 with Codification Improvements to Topic 326, Financial Instruments – Credit Losses. The Company is currently evaluating the potential effect of this ASU on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments under ASU 2017-12 refine and expand hedge accounting requirements for both financial (e.g., interest rate) and commodity risks. Its provisions create more transparency around how economic results are presented, both on the face of the financial statements and in the footnotes. It also makes certain targeted improvements to simplify the application of hedge accounting guidance. ASU 2017-12 became effective for us in the first quarter of 2019. During the quarter ended September 30, 2019, we entered into foreign currency non-delivery forward and collar contracts which we have designated as cash flow hedges and are accounting for as derivative financial instruments to which we are applying the provisions of ASU 2017-12. Prior to the quarter ended September 30, 2019 we did not have any hedging derivatives and therefore prior periods will not be affected by this pronouncement.
| 8 |
New Accounting Standards Implemented
In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued ASU 2016-02 to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under ASU 2016-02, a lessee will recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-to-use asset representing its right to use the underlying asset for the lease term. ASU 2016-02 retains a distinction between finance leases (i.e. capital leases under current GAAP) and operating leases. The classification criteria for distinguishing between finance leases and operating leases will be substantially similar to the classification criteria for distinguishing between capital leases and operating leases under current GAAP. The amendments of this ASU are effective for reporting periods beginning after December 15, 2018, which for the Company is the fiscal year beginning January 1, 2019.
The Company did not adjust the comparative periods presented as the FASB provided entities the option to instead apply the provisions of the new leases guidance using the modified retrospective application approach. The new standard provided a number of optional practical expedients in transition. We elected the ‘package of practical expedients’, w hich allowed the company to not reassess our prior conclusions about lease identification, lease classification and direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualified, primarily for certain equipment leases that are month-to-month leases. This means, for those leases, we did not recognize right-of-use assets or lease liabilities. We also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets.
We have identified and analyzed our lease portfolio and evaluated the new reporting and disclosure requirements of the new guidance, and our lease-related processes and internal controls. The adoption of this standard had no material impact to the Company’s financial statements, as, under prior guidance, we had recognized capital leases which correspond to the right-of-use asset and lease liability described under the new guidance. This standard does not have a significant impact on our liquidity or on our debt covenant compliance under our current agreements.
As of January 1, 2019, the Company had $378 finance lease right-of-use assets related to computing equipment and a lease liability for $380 on its Condensed Consolidated Balance Sheet. As of September 30, 2019, the Company had $449 finance lease right-of-use assets related to computing equipment and a lease liability for $559 on its Condensed Consolidated Balance Sheet. The lease agreements include terms to extend the lease, however the Company does not intend to extend its current leases. The weighted average remaining lease term approximates 2.8 years. The right-of-use assets are depreciated and interest expense from the lease liability are recorded on our Condensed Consolidated Statement of Operations.
Additionally, as of September 30, 2019 the Company had a commitment for $66 under operating leases related to short term apartment leases, installation equipment and computing equipment which expire during the current year that have not been capitalized due to their short-term nature. Rental expense from these leases is recognized on our Condensed Consolidated Income Statement as incurred. Finance lease costs, including amortization of the right-of-use assets and interest expense, short term lease cost, and related cashflows have not been material as of September 30, 2019.
Leases Accounting Policy
We determine if an arrangement is a lease at inception. We include finance lease right-of-use assets as part of property and equipment and the lease liability as part of our current portion of long-term debt and long-term debt on our Condensed Consolidated Balance Sheet. Leases considered short-term are not capitalized, given our election not to recognize right-of-use assets and lease liabilities arising from short-term leases, but instead considered operating leases and the resulting rental expense is recognized on our Condensed Consolidated Statement of Operations as incurred.
Finance lease right-of-use assets and lease liabilities are recognized based on the present value of the future lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
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Note 3. – Long-term Investments
Saint-Gobain Joint Venture
On January 11, 2019, we entered into a joint venture agreement with Saint-Gobain, a world leader in the production of float glass, a key component of our manufacturing process, whereby we acquired a 25.8% minority ownership interest in Vidrio Andino Holdings S.A.S (“Vidrio Andino”), a Colombia-based subsidiary of Compagnie de Saint-Gobain S.A. (“Saint-Gobain”). The purchase price for our interest in this entity was $45 million, of which $34.1 was paid in cash, and $10.9 million is to be paid with a piece of land near our existing facility in Barranquilla. The land will be contributed on our behalf by our Chief Executive Officer and Chief Operating Officer, José M. Daes and Christian T. Daes in exchange for cash or shares of the Company and subject to an external valuation to support an arm´s length transaction. The land will serve the purpose of developing a second float glass plant nearby our existing manufacturing facilities which we expect to carry significant efficiencies for us once it becomes operative. Vidrio Andino’s float glass plant located in the outskirts of Bogota, Colombia, has been one of our main suppliers of raw glass. We believe this transaction will solidify our vertical integration strategy by acquiring an interest in the first stage of our production chain, while securing ample glass supply for our expected production needs.
On May 3, 2019, we consummated the joint venture agreement acquiring a 25.8% minority ownership interest in Vidrio Andino with a cash payment of $34.1 million, and the land still to be contributed by January 2020, as per the agreement. As of that date the Company recorded the investment within Long-term assets on the Company’s Condensed Consolidated Balance Sheet for $45.0 million and a liability for $10.9 million within current liabilities on the Company’s Condensed Consolidated Balance to be settled with the contribution of the aforementioned piece of land. Since the date of the acquisition, we have recognized the proportional share of Vidrio Andino’s net income using the equity method on the Condensed Consolidated Statement of Operations and Other Comprehensive Income as the Company is deemed to have significant influence, but does not have effective control of Vidrio Andino.
Establishment of a new subsidiary
In April 2019, ESMetals, a Colombian entity in which the Company has 70% equity interest began operations. ESMetals serves as a metalwork contractor to supply the Company with steel accessories used in the assembly of certain architectural systems as part of our vertical integration strategy. When the company owns a majority (but less than 100%) of a subsidiary’s stock, the Company includes in its Consolidated Financial Statements the non-controlling interest in the subsidiary. The non-controlling interest in the Condensed Consolidated Statements of Operations and Other Comprehensive Income is equal to the non-controlling interests’ proportionate share of the subsidiary’s net income and, as included in Shareholders’ Equity on the Condensed Consolidated Balance Sheet, is equal to the non-controlling interests’ proportionate share of the subsidiary’s net assets. In determining the fair value we used the income approach and the market approach which was performed by third party valuation specialists under management.
Note 4. - Inventories, net
| September 30, 2019 | December 31, 2018 | |||||||
| Raw materials | $ | 44,009 | $ | 43,744 | ||||
| Work in process | 24,390 | 25,957 | ||||||
| Finished goods | 5,405 | 14,251 | ||||||
| Stores and spares | 7,557 | 7,437 | ||||||
| Packing material | 860 | 540 | ||||||
| 82,221 | 91,929 | |||||||
| Less: Inventory allowance | (81 | ) | (80 | ) | ||||
| $ | 82,140 | $ | 91,849 | |||||
Note 5. – Revenues, Contract Assets and Contract Liabilities
Disaggregation of Total Net Sales
The Company disaggregates its sales with customers by revenue recognition method for its only segment, as the Company believes these factors affect the nature, amount, timing, and uncertainty of the Company’s revenue and cash flows.
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Fixed price contracts | $ | 37,352 | $ | 39,703 | $ | 126,249 | $ | 119,733 | ||||||||
| Product sales | 71,118 | 57,289 | 203,272 | 153,388 | ||||||||||||
| Total Revenues | $ | 108,470 | $ | 96,992 | $ | 329,521 | $ | 273,121 | ||||||||
The following table presents geographical information about revenues.
| Three months ended | Nine months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Colombia | $ | 13,037 | $ | 12,138 | $ | 38,190 | $ | 49,519 | ||||||||
| United States | 92,848 | 82,223 | 284,208 | 215,068 | ||||||||||||
| Panama | 668 | 1,253 | 2,344 | 3,110 | ||||||||||||
| Other | 1,917 | 1,378 | 4,779 | 5,424 | ||||||||||||
| Total Revenues | $ | 108,470 | $ | 96,992 | $ | 329,521 | $ | 273,121 | ||||||||
| 10 |
Contract Assets and Liabilities
Contract assets represent accumulated incurred costs and earned profits on contracts with customers that have been recorded as sales, but have not been billed to customers and are classified as current and a portion of the amounts billed on certain fixed price contracts that are withheld by the customer as a retainage until a final good receipt of the complete project to the customers satisfaction. Contract liabilities consist of advance payments and billings in excess of costs incurred and deferred revenue, and represent amounts received in excess of sales recognized on contracts. The Company classifies advance payments and billings in excess of costs incurred as current, and deferred revenue as current or non-current based on the expected timing of sales recognition. Contract assets and contract liabilities are determined on a contract by contract basis at the end of each reporting period. The non-current portion of contract liabilities is included in other liabilities in the Company’s consolidated balance sheets.
The table below presents the components of net contract assets (liabilities).
| September 30, 2019 | December 31, 2018 | |||||||
| Contract assets — current | $ | 43,384 | $ | 46,018 | ||||
| Contract assets — non-current | 9,104 | 6,986 | ||||||
| Contract liabilities — current | (12,750 | ) | (16,789 | ) | ||||
| Contract liabilities — non-current | (177 | ) | (1,436 | ) | ||||
| Net contract assets | $ | 39,561 | $ | 34,779 | ||||
The components of contract assets are presented in the table below.
| September 30, 2019 | December 31, 2018 | |||||||
| Unbilled contract receivables, gross | $ | 22,813 | $ | 21,703 | ||||
| Retainage | 29,675 | 31,301 | ||||||
| Total contract assets | 52,488 | 53,004 | ||||||
| Less: current portion | 43,384 | 46,018 | ||||||
| Contract Assets – non-current | $ | 9,104 | $ | 6,986 | ||||
The components of contract liabilities are presented in the table below.
| September 30, 2019 | December 31, 2018 | |||||||
| Billings in excess of costs | $ | 3,358 | 4,393 | |||||
| Advances from customers on uncompleted contracts | 9,569 | 13,832 | ||||||
| Total contract liabilties | 12,927 | 18,225 | ||||||
| Less: current portion | 12,750 | 16,789 | ||||||
| Contract liabilities – non-current | $ | 177 | 1,436 | |||||
During the three months and nine months ended September 30, 2019, the Company recognized $162 and $4,203 of sales related to its contract liabilities at January 1, 2019, respectively. During the three and nine months ended September 30, 2018, the Company recognized $1,903 and $6,381 of sales related to its contract liabilities at January 1, 2018, respectively.
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Remaining Performance Obligations
As of September 30, 2019, the Company had $269.1 million of remaining performance obligations, which represents the transaction price of firm orders minus sales recognized from inception to date. Remaining performance obligations exclude unexercised contract options, verbal commitments and potential orders under basic ordering agreements. The Company expects to recognize 100% of sales relating to existing performance obligations within three years, of which $92.8 million are expected to be recognized during the year ending December 31, 2019, $136.8 million during the year ending December 31, 2020 and $39.6 million thereafter.
Note 6. Intangible Assets
Intangible assets include Miami-Dade County Notices of Acceptances (NOA’s), which are certificates issued for approved products and required to market hurricane- resistant glass in Florida. Also, it includes the intangibles acquired from the acquisition of GM&P.
| September 30, 2019 | ||||||||||||
| Gross |
Acc.
Amort. |
Net | ||||||||||
| Trade Names | $ | 980 | $ | (506 | ) | $ | 474 | |||||
| Notice of Acceptances (NOAs), product designs and other intellectual property | 10,778 | (6,046 | ) | 4,732 | ||||||||
| Non-compete Agreement | 165 | (85 | ) | 80 | ||||||||
| Customer Relationships | 4,140 | (2,291 | ) | 1,849 | ||||||||
| Total | $ | 16,063 | $ | (8,928 | ) | $ | 7,135 | |||||
| December 31, 2018 | ||||||||||||
| Gross |
Acc.
Amort. |
Net | ||||||||||
| Trade Names | $ | 980 | $ | (359 | ) | $ | 621 | |||||
| Notice of Acceptances (NOAs), product designs and other intellectual property | 10,881 | (5,373 | ) | 5,508 | ||||||||
| Non-compete Agreement | 165 | (60 | ) | 105 | ||||||||
| Contract Backlog | 3,090 | (2,832 | ) | 258 | ||||||||
| Customer Relationships | 4,140 | (1,626 | ) | 2,514 | ||||||||
| Total | $ | 19,256 | $ | (10,250 | ) | $ | 9,006 | |||||
The weighted average amortization period is 5.4 years.
During the nine months ended September 30, 2019 and 2018, the amortization expense amounted to $2,088 and $2,732, respectively, and was included within the general and administration expenses in our Condensed Consolidated Statement of Operations. Similarly, amortization expense for the three months ended September 30, 2019 and 2018 amounted to $603 and $956, respectively.
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The estimated aggregate amortization expense for each of the five succeeding years as of September 30, 2019 is as follows:
| Year ending | (in thousands) | |||
| 2019 | $ | 575 | ||
| 2020 | 2,163 | |||
| 2021 | 2,131 | |||
| 2022 | 1,257 | |||
| 2023 | 823 | |||
| Thereafter | 186 | |||
| $ | 7,135 | |||
Note 7. Debt
The Company’s debt is comprised of the following:
| September 30, 2019 | December 31, 2018 | |||||||
| Revolving lines of credit | $ | 13,559 | $ | 19,146 | ||||
| Finance lease | 559 | 380 | ||||||
| Unsecured senior note | 210,000 | 210,000 | ||||||
| Other loans | 15,758 | 17,804 | ||||||
| Syndicated loan | 28,000 | - | ||||||
| Less: Deferred cost of financing | (3,932 | ) | (5,015 | ) | ||||
| Total obligations under borrowing arrangements | 263,944 | 242,315 | ||||||
| Less: Current portion of long-term debt and other current borrowings | 16,168 | 21,606 | ||||||
| Long-term debt | $ | 247,776 | $ | 220,709 | ||||
As of September 30, 2019 and December 31, 2018, the Company had $263,495 and $242,106 of debt denominated in US Dollars with the remaining amounts denominated in Colombian Pesos.
The Company had $7,140 and $5,037 of property, plant and equipment pledged as collateral for various lines of credit as of September 30, 2019 and December 31, 2018, respectively.
On May 2, 2019, the Company closed a $30 million five-year term debt facility with Banco de Crédito del Perú and Banco Sabadell which bears interest at Libor +2.95%. Proceeds from this long-term debt facility were used towards refinancing short-term debt and partially supporting expected capital expenditure needs for capacity expansion and the automatization of some of our processes. This facility also contains a covenant requiring that the company maintain certain leverage and fixed charge coverage ratios measured biannually at December and June, with which the Company is in compliance.
As of September 30, 2019, the Company was obligated under various finance leases under which the aggregate present value of the minimum lease payments amounted to $559. Differences between finance lease obligations and the value of property, plant and equipment under finance lease arises from differences between the maturities of finance lease obligations and the useful lives of the underlying assets.
Maturities of long-term debt and other current borrowings are as follows as of September 30, 2019:
| 2020 | $ | 16,359 | ||
| 2021 | 5,378 | |||
| 2022 | 220,340 | |||
| 2023 | 11,760 | |||
| 2024 | 10,245 | |||
| Thereafter | 3,793 | |||
| Total | $ | 267,875 |
The Company’s loans have maturities ranging from a few weeks to 10 years. Our credit facilities bear interest at a weighted average of rate 7.35%.
Note 8. Hedging Activity and Fair Value Measurements
Hedging Activity
During the quarter ended September 30, 2019 we entered into several foreign currency non-delivery forward and collar contracts to hedge the fluctuations in the exchange rate between the Colombian Peso and the U.S. Dollar. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted Colombian Peso denominated costs and expenses.
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Guidance under the Financial Instruments Topic 825 of the Codification requires us to record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position, in determining fair value. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings.
As of September 30, 2019, the fair value of foreign currency non-delivery forward and collar contracts was in a net liability position of $1,390. We had 20 outstanding forward and collar contracts to exchange 44 million U.S. Dollars to Colombian Pesos through August 2020. We assessed the risk of non-performance of the Company to these contracts and determined it was insignificant and, therefore, did not record any adjustment to fair value as of September 30, 2019.
We assess the effectiveness of our foreign currency non-delivery forward and collar contracts by comparing the change in the fair value of the forward contract to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our foreign currency non-delivery forward and collar contracts is reported as a component of accumulated other comprehensive loss and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. The amount of losses, net, recognized in the “accumulated other comprehensive loss” line item in the accompanying condensed consolidated balance sheet as of September 30, 2019, that we expect will be reclassified to earnings within the next eleven months, is $1,390.
The fair value of our foreign currency hedges are classified in the accompanying consolidated balance sheets as of September 30, 2019, are as follows:
| Derivative Assets | Derivative Liabilities | |||||||||||
| September 30, 2019 | September 30, 2019 | |||||||||||
| Derivatives designated as hedging instruments under Subtopic 815-20: | Balance Sheet Location |
Fair
Value |
Balance Sheet Location | Fair Value | ||||||||
| Derivative instruments: | ||||||||||||
| Non-Delivery forward and collar contracts | Other current assets | $ | 55 | Accrued liabilities | $ | (1,445 | ) | |||||
| Total derivative instruments | Total derivative assets | $ | 55 | Total derivative liabilities | $ | (1,445 | ) | |||||
The ending accumulated balance for the foreign currency non-delivery forward and collar contracts included in accumulated other comprehensive losses, net of tax, was $941 as of September 30, 2019, comprised of a derivative loss of $1,390 and an associated net tax benefit of $449.
The following table presents the gains (losses) on derivative financial instruments, and their classifications within the accompanying condensed consolidated financial statements, for the three and nine months ended September, 2019:
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||
| Amount of Gain or (Loss) |
Location of Gain or (Loss) Reclassified from Accumulated |
Amount of Gain or (Loss) Reclassified from |
||||||||||||||||
| Recognized in OCI (Loss) on |
OCI (Loss) into |
Accumulated | ||||||||||||||||
| Derivatives | Income | OCI (Loss) into Income | ||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Non-delivery Forwards and Collar Contracts | $ | (1,390 | ) | $ | - | General and administrative expense | $ | (28 | ) | $ | - | |||||||
| Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||
| Amount of Gain or (Loss) |
Location of Gain or (Loss) Reclassified from Accumulated |
Amount of Gain or (Loss) Reclassified from |
||||||||||||||||
| Recognized in OCI (Loss) on | OCI (Loss) into | Accumulated | ||||||||||||||||
| Derivatives | Income | OCI (Loss) into Income | ||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||
| September 30, | September 30, | September 30, | September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||||
| Non-delivery Forwards and Collar Contracts | $ | (1,390 | ) | $ | - | General and administrative expense | $ | (28 | ) | $ | - | |||||||
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Fair Value Measurements
The Company accounts for financial assets and liabilities in accordance with accounting standards that define fair value and establish a framework for measuring fair value. The hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and advances from customers approximate their fair value due to their relatively short-term maturities. The Company bases its fair value estimate for long term debt obligations on its internal valuation that all debt is floating rate debt based on current interest rates in Colombia.
As of September 30, 2019, financial instruments carried at amortized cost that do not approximate fair value consist of long-term debt. See Note 7 - Debt. The fair value of long-term debt was calculated based on an analysis of future cash flows discounted with our average cost of debt which is based on market rates, which are level 2 inputs.
The following table summarizes the fair value and carrying amounts of our long-term debt:
| September 30, 2019 | December 31, 2018 | |||||||
| Fair Value | 266,906 | 234,163 | ||||||
| Carrying Value | 247,776 | 220,709 | ||||||
Note 9. Income Taxes
The Company files income tax returns for TG, ES and ES Metals in the Republic of Colombia. On December 28, 2018, a tax reform was implemented in Colombia which decreased the corporate income tax rate to 33% for fiscal year 2019, 32% for fiscal year 2020, 31% for fiscal year 2021 and 30% for fiscal year 2022, in comparison with a tax rate of 37% for 2018.
GM&P, Componenti and ESW LLC are U.S. entities based in Florida subject to U.S. federal and state income taxes. The estimated combined state and federal income tax rate is estimated at a rate of 26.5% based on the recently enacted U.S. Tax Reform. Tecnoglass Inc. as well as all the other subsidiaries in the Cayman Islands do not currently have any tax obligations.
The components of income tax expense are as follows:
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Current income tax | ||||||||||||||||
| United States | $ | (146 | ) | $ | 528 | $ | (1,561 | ) | $ | 1,250 | ||||||
| Colombia | (4,411 | ) | (3,683 | ) | (12,169 | ) | (6,205 | ) | ||||||||
| (4,557 | ) | (3,155 | ) | (13,730 | ) | (4,955 | ) | |||||||||
| Deferred income Tax | ||||||||||||||||
| United States | 349 | (88 | ) | 1,475 | (1,249 | ) | ||||||||||
| Colombia | 4,474 | 982 | 3,665 | 17 | ||||||||||||
| 4,823 | 894 | 5,140 | (1,232 | ) | ||||||||||||
| Total income tax benefit (provision) | $ | 266 | $ | (2,261 | ) | $ | (8,590 | ) | $ | (6,187 | ) | |||||
| Effective tax rate | 17 | % | 27 | % | 39 | % | 37 | % | ||||||||
The Company’s weighted average statutory income tax rate is 33%. The Company’s effective income tax rate of 17% for the quarter ended September 30, 2019 differs from the weighted average statutory rate primarily as a result of a 17.3% point decrease related to permanent differences, a 10.8% decrease related to non-deductible expense, partially offset by unrealized foreign currency transaction losses which contribute to an increase of 12.1% points in the reconciliation of effective income tax rate to statutory rate.
No additional individual items contributed more than 5% points in the reconciliation of effective income tax rate to statutory tax rates during any of the periods presented.
| 15 |
Note 10. Related Parties
The following is a summary of assets, liabilities, and income and expense transactions with all related parties, shareholders, directors and managers:
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Sales to related parties | $ | 1,729 | $ | 1,667 | $ | 5,713 | $ | 3,804 | ||||||||
| Fees paid to directors and officers | $ | 836 | $ | 833 | $ | 2,658 | $ | 2,461 | ||||||||
| Payments to other related parties | $ | 964 | $ | 863 | $ | 2,797 | $ | 2,525 | ||||||||
| September 30, 2019 | December 31, 2018 | |||||||
| Current Assets: | ||||||||
| Due from VS | $ | 5,885 | $ | 6,229 | ||||
| Due from other related parties | 2,503 | 2,010 | ||||||
| $ | 8,388 | $ | 8,239 | |||||
| Liabilities: | ||||||||
| Due to related parties - current | $ | 5,099 | $ | 1,500 | ||||
| Due to related parties - long term | $ | 617 | $ | 600 | ||||
The Company also has a note payable which matures in 2022 related to the acquisition GM&P for $8,500 due to the former owner who holds shares of the Company and a management position within the Company.
Ventana Solar S.A. (“VS”), a Panama S ociedad anónima, is an importer and installer of the Company’s products in Panama. Family members of the Company’s CEO and COO and other related parties own 100% of the equity in VS. The Company’s sales to VS for the three months ended September 30, 2019 and 2018 were $631 and $853, respectively. The Company’s sales to VS for the nine months ended September 30, 2019 and 2018 were $1,156 and $2,067, respectively.
Payments to other related parties during three and nine months ended September 30, 2019 and 2018 include the following:
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Charitable contributions | $ | 354 | $ | 282 | $ | 959 | $ | 849 | ||||||||
| Sales commissions | $ | 357 | $ | 360 | $ | 1,119 | $ | 1,037 | ||||||||
Charitable contributions are donations made to the Company’s foundation, Fundación Tecnoglass-ESW.
| 16 |
Note 11. Shareholders’ Equity
Dividends
The Company originally authorized the payment of four regular quarterly dividends to holders of ordinary shares at a quarterly rate of $0.125 per share, with the first quarterly dividend being paid on November 1, 2016. The dividends were payable in cash or ordinary shares, at the option of the holders of ordinary shares. On May 11, 2017, the Company announced that commencing with the declared quarterly dividend for the third quarter of 2017 through any future dividends to be declared and paid through the second quarter of 2018, a 12% increase to $0.14 per share.
On November 5, 2019, the Company declared a regular quarterly dividend of $0.14 per share for the third quarter of 2019, which will be paid on December 20, 2019 to shareholders of record as of the close of business on November 29, 2019. The dividend will be paid in cash or ordinary shares, to be chosen at the option of holders of ordinary shares during an election period beginning December 2, 2019 and lasting until 5:00 P.M. Eastern Time on December 13, 2019. The value of the ordinary shares to be used to calculate the number of shares to be issued with respect to that portion of the dividend payable in ordinary shares shall be the average of the closing price of the Company’s ordinary shares on NASDAQ during the period from December 2, 2019 through December 13, 2019. If no choice is made during this election period, the dividend for this election period will be paid in ordinary shares of the Company.
The Company analyzed the accounting guidance under ASC 505 and determined that this guidance is not applicable since the dividend are shares of the same class in which each shareholder is given an election to receive cash or shares. As such, the Company analyzed the dividend under ASC 480 — Distinguishing Liabilities from Equity and concluded that the dividend should be accounted for as a liability since the dividend is a fixed monetary amount known at inception. A reclassification from dividend payable to additional paid-in capital was done for the stock dividend elections.
As a result, the Company issued 1,875,053 shares for the share dividends resulting in $14,169 being credited to Capital and paid $2,170 in cash during the nine months ended September 30, 2019.
Dividend declarations and the establishment of future record and payment dates are subject to the Board of Directors’ continuing determination that the dividend policy is in the best interests of the Company and its shareholders. The dividend policy may be changed or cancelled at the discretion of the Board of Directors at any time.
Follow-on Equity Offering
On March 25, 2019, the Company closed an underwritten follow-on public offering of 5,000,000 ordinary shares at a price to the public of $7.00 per share. As a result of this offering, the Company received a net amount of $33,050 after deducting underwriting and other related fees, which were credited to share capital and additional paid in capital. Additionally, the Company granted the underwriters a 30-day option to purchase up to an additional 750,000 ordinary shares at the public offering price, less the underwriting discount, which option was exercised on April 3, 2019 with respect to 551,423 ordinary shares.
Proceeds from the offering were subsequently used to complete the joint venture transaction with Saint-Gobain discussed in Note 3. Vidrio Andino Acquisition.
| 17 |
Earnings per Share
The following table sets forth the computation of the basic and diluted earnings per share for the nine months ended September 30, 2019 and 2018:
|
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Numerator for basic and diluted earnings per shares | ||||||||||||||||
| Net Income (loss) | $ | (1,319 | ) | $ | 6,152 | $ | 13,672 | $ | 12,901 | |||||||
| Denominator | ||||||||||||||||
| Denominator for basic earnings per ordinary share - weighted average shares outstanding | 45,519,472 | 40,294,762 | 43,793,163 | 39,301,161 | ||||||||||||
| Effect of dilutive securities and stock dividend | - | 593,235 | 593,235 | 593,235 | ||||||||||||
| Denominator for diluted earnings per ordinary share - weighted average shares outstanding | 45,519,472 | 40,887,997 | 44,386,398 | 39,894,396 | ||||||||||||
| Basic earnings (loss) per ordinary share | $ | (0.03 | ) | $ | 0.15 | $ | 0.31 | $ | 0.33 | |||||||
| Diluted earnings (loss) per ordinary share | $ | (0.03 | ) | $ | 0.15 | $ | 0.31 | $ | 0.32 | |||||||
The effect of dilutive securities includes the effect of 593,235 shares potentially issued in relation the dividends declared. For the three months ended September 30, 2019, the effect of dilutive securities is excluded from the calculation of diluted earnings per share because including them would be anti-dilutive given the net loss during the period .
Note 12. Commitments and Contingencies
Commitments
As of September 30, 2019, the Company had an outstanding obligation to purchase an aggregate of at least $21,795 of certain raw materials from a specific supplier before May 2026.
General Legal Matters
From time to time, the Company is involved in legal matters arising in the regular course of business. Some disputes are derived directly from our construction projects, related to supply and installation, and even though deemed ordinary, they may involve significant monetary damages. We are also subject to other type of litigations arising from employment practices, worker’s compensation, automobile claims and general liability. It is very difficult to predict precisely what the outcome of these litigations might be. However, with the information at our disposition as this time, there are no indications that such claims will result in a material adverse effect on the business, financial condition or results of operations of the Company.
Note 13. Subsequent Events
Management concluded that no additional subsequent events required disclosure other than those disclosed in these financial statements.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in our other Securities and Exchange Commission (“SEC”) filings. References to “we”, “us” or “our” are to Tecnoglass Inc. (formerly Andina Acquisition Corporation), except where the context requires otherwise. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report.
Overview
We are a vertically-integrated manufacturer, supplier and installer of architectural glass, windows and associated aluminum products for the global commercial and residential construction markets. With a focus on innovation, combined with providing highly specified products with the highest quality standards at competitive prices, we have developed a leadership position in each of our core markets. In the United States, which is our largest market, we were ranked as the second largest glass fabricator in 2019 by Glass Magazine. In addition, we believe we are the leading glass transformation company in Colombia. Based on our analysis of third-party industry sources we had an estimated market share of over 45% of the Colombian market in 2017. Our customers, which include developers, general contractors or installers for hotels, office buildings, shopping centers, airports, universities, hospitals and multi-family and residential buildings, look to us as a value-added partner based on our product development capabilities, our high-quality products and our unwavering commitment to exceptional service.
We have more than 30 years of experience in architectural glass and aluminum profile structure assembly, we transform a variety of glass products, including tempered safety, double thermo-acoustic and laminated glass. Our finished glass products are installed in a wide variety of buildings across a number of different applications, including floating facades, curtain walls, windows, doors, handrails, interior and bathroom spatial dividers. We also produce aluminum products such as profiles, rods, bars, plates and other hardware used in the manufacturing of windows.
Our products are manufactured in a 2.7 million square foot, state-of-the-art manufacturing complex in Barranquilla, Colombia that provides easy access to North, Central and South America, the Caribbean and the Pacific. Our products can be found on some of the most distinctive buildings in these regions including El Dorado Airport (Bogota), 50 United Nations Plaza (New York), Trump Plaza (Panama), Icon Bay (Miami), and Salesforce Tower (San Francisco). Our track record of successfully delivering high profile projects has earned us an increasing number of opportunities across the United States, evidenced by our expanding backlog and overall revenue growth.
Our structural competitive advantage is underpinned by our low-cost manufacturing footprint, vertically integrated business model and geographic location. Our integrated facilities in Colombia and distribution and services operations in Florida provide us with a significant cost advantage in both manufacturing and distribution, and we continue to invest in these operations to expand our operational capabilities. Our lower cost manufacturing footprint allows us to offer competitive prices for our customers, while also providing innovative, high quality and high value-added products, together with consistent and reliable service. We have historically generated high margin organic growth based on our position as a value-added solutions provider for our customers.
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We have a strong presence in the Florida market, which represents a substantial portion of our revenue stream and backlog. Our success in Florida has primarily been achieved through sustained organic growth, with further penetration now taking place into other highly populated areas of the United States. As part of our strategy to become a fully vertically integrated company, we have supplemented our organic growth with some recent acquisitions that have allowed us added control over our supply chain. In March 2017, we completed the acquisition of GM&P, a consulting and glazing installation business that was previously our largest installation customer. In 2016, we completed the acquisition of ESW, which gave us control over the distribution of products into the United States from our manufacturing facilities in Colombia. These acquisitions allowed for further vertical integration of our business and will act as a platform for our future expansion in the United States. Furthermore, on May 3, 2019, we consummated the joint venture agreement with Saint-Gobain, acquiring a 25.8% minority ownership interest in Vidrio Andino, a Colombia-based subsidiary of Saint-Gobain, solidifying our vertical integration strategy by acquiring an interest in the first stage of our production chain, while securing ample glass supply for our expected production needs.
The continued diversification of the group’s presence and product portfolio is a core component of our strategy. In particular, we are actively seeking to expand our presence in United States outside of Florida. We also launched a residential windows offering which, we believe, will help us expand our presence in the United States and generate additional organic growth. We believe that the quality of our products, coupled with our ability to price competitively given our structural advantages on cost, will allow us to generate further growth in the future.
RESULTS OF OPERATIONS
|
Three months ended Sept 30, |
Nine months ended Sept 30, |
|||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Operating Revenues | $ | 108,470 | $ | 96,992 | $ | 329,521 | $ | 273,121 | ||||||||
| Cost of sales | 72,729 | 62,299 | 223,051 | 187,038 | ||||||||||||
| Gross profit | 35,741 | 34,693 | 106,470 | 86,083 | ||||||||||||
| Operating expenses | (20,189 | ) | (19,426 | ) | (58,418 | ) | (53,204 | ) | ||||||||
| Operating income | 15,552 | 15,267 | 48,052 | 32,879 | ||||||||||||
| Non-operating income | 450 | 780 | 1,078 | 2,588 | ||||||||||||
| Foreign currency transactions (losses) gains | (12,006 | ) | (2,494 | ) | (9,921 | ) | (828 | ) | ||||||||
| Equity method income | 295 | - | 273 | - | ||||||||||||
| Interest Expense and deferred cost of financing | (5,876 | ) | (5,140 | ) | (17,220 | ) | (15,551 | ) | ||||||||
| Income tax Benefit (provision) | 266 | (2,261 | ) | (8,590 | ) | (6,187 | ) | |||||||||
| Net income | (1,319 | ) | 6,152 | 13,672 | 12,901 | |||||||||||
| (Income) loss attributable to non-controlling interest | 144 | 145 | (30 | ) | 429 | |||||||||||
| Income attributable to parent | $ | (1,175 | ) | $ | 6,297 | $ | 13,642 | $ | 13,330 | |||||||
Comparison of quarterly periods ended September 30, 2019 and 2018
Revenues
The Company’s operating revenues increased $11.5 million or 12% from $97.0 million to $108.5 million for the quarter ended September 30, 2019 compared with the quarter ended September 30, 2018.
The increase was driven by sales in the U.S. markets, which increased $10.6 million or 13% in the third quarter of 2019 compared to the same period of 2018. A portion of the Company’s sales growth in the American market have been driven by our Elite and Prestige lines aimed towards residential markets, in which we did not actively participate prior to 2017. U.S. revenues contributed 86% and 85% of total sales during the third quarter of 2019 and 2018, respectively. The increase in U.S revenues is aligned with our strategy to penetrate new geographical and end markets.
Sales in the Colombian market increased 7% year-over—year from $12.1 million to $13.0 million in the third quarter of 2018 and 2019, respectively. The moderate increase in the Colombian market sales could be indicative of a slow recovery the Company expects in the near and mid-term future following a two-year period of economic slowdown.
Gross profit
Gross profit increased $1.0 million, or 3% to $35.7 million during the three months ended September 30, 2019, compared with $34.7 million during the same period of 2018. Gross profit margins were compressed to 33.0% during the third quarter of 2019, from 35.8% during the second quarter of 2018 as a result of a different mix of sales between both periods. This effect was partially offset by diluting our fixed costs over higher sales.
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Expenses
Operating expenses increased $0.8 million, or 3.9%, from $19.4 million to $20.2 million for the quarters ended September 30, 2018 and 2019, respectively. This was primarily related to $0.9 million increase in sales commission related to a higher overall amount of sales during the quarter, primarily related to sales of our Elite and Prestige product lines aimed towards residential U.S. markets. Additionally, increases of a $0.5 million warranty cost to service a specific project without a comparable expense during prior period and a $0.3 million increase in accounts receivable provision were offset by lower shipping expense, which decreased $0.8 million, or 16% from $5.3 million to $4.5 million, despite nearly 12% higher sales, as a result of several initiatives undertaken by management to use transportation resources more efficiently.
Non-operating Income
During the three months ended September 30, 2019 and 2018, the Company recorded net non-operating income of $0.5 million and $0.8 million, respectively. Non-operating income is comprised primarily of income from rental properties and gains on sale of scrap materials.
Foreign currency transaction gains and losses
During the quarter ended September 30, 2019, the Company recorded a non-cash loss of $12.0 million associated with foreign currency transactions. Most of this impact is associated with the remeasurement of a net liability position of $126.3 million U.S. dollar denominated monetary assets and liabilities held by the Company’s subsidiaries with the Colombian peso as their functional currency during a period in which the Colombian peso depreciated by 8%. Comparatively, the Company recorded a net loss of $2.5 million during the three months ended September 30, 2018 while the Colombian peso depreciated 1.4% during the quarter.
Interest Expense
Interest expense and deferred cost of financing was $5.9 million and $5.1 million during the quarters ended September 30, 2019 and 2018, respectively. The 14% increase in interest expense is related to a relatively proportional increase of 12% in the Company’s total debt at September 30, 2019 compared with September 30, 2018 to support its ongoing growth.
As a result of the foregoing, the Company recorded a net loss for the three months ended September 30, 2019 of $1.4 million compared to net income of $6.2 million in the three months ended September 30, 2018.
Income Taxes
During the quarter ended September 30, 2019, the Company recorded an income tax benefit of $0.3 million related to a net loss before tax, largely associated with the large loss on foreign currency transactions during the period. The Company’s effective income tax rate of 17% for the quarter differs from the weighted average statutory rate of 32%, related to unrealized non-deductible expenses, (which given the net loss, decrease effective tax rate), and permanent differences, partially offset by foreign currency transaction losses. Comparable, the Company recorded an income tax provision of $2.2 million during the quarter ended September 30, 2019 which reflected an effective rate of 27%.
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Comparison of nine-month periods ended September 30, 2019 and 2018
Revenues
The Company’s operating revenues increased $56.4 million or 20.7% from $273.1 million to $329.5 million for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018.
The increase was driven by sales in the U.S. markets, which increased $69.1 million or 32.1% in the first nine months of 2019 compared to the same period of 2018. A portion of the Company’s sales growth in the American market have been driven by our Elite and Prestige lines aimed towards residential markets, in which we did not actively participate prior to 2017. U.S. revenues contributed 86.2% and 78.7% of total sales during the nine month periods of 2019 and 2018, respectively. The increase in U.S revenues is aligned with our strategy to penetrate new geographical end markets.
This growth more than offset a slowdown of sales in the Colombian market, which went from $49.5 million to $38.2 million in the nine month period of 2018 and 2019, respectively. The decrease in the Colombian market sales was mostly related to reduced activity in the construction industry, following a two-year period of economic slowdown, which we expect to undergo a slow recovery in the near and mid-term future.
Gross profit
Gross profit increased $20.4 million, or 23.7% to $106.5 million during the nine months ended September 30, 2019, compared with $86.1 million during the same period of 2018. Gross profit margins improved to 32.3% during the nine month period of 2019, from 31.5% during the nine month period of 2018. The margin enhancement is mainly related to fixed costs being diluted over higher sales.,
Expenses
Operating expenses increased $5.2 million, or 9.8%, from $53.2 million to $58.4 million for the nine months ended September 30, 2018 and 2019, respectively. The increase was related, in part, to $1.9 million higher sales commissions related to a higher overall amount of sales during the quarter, especially related to sales of our Elite and Prestige product lines aimed towards residential U.S. markets, a $1.3 million increase in provision of trade accounts receivable expense, which amounted to $1.0 million during the first nine months of 2019, compared with a net recovery of previously provisioned amounts for $0.2 million during 2018. Through the nine months ended September 30, 2019, the Company managed to maintain its shipping expense relatively stable despite increasing sales by 21% as a result of our efforts for efficient logistics favoring maritime freights and minimizing costlier land transportation.
Non-operating Income
During the nine months ended September 30, 2019 and 2018, the Company recorded a net non-operating income of $1.1 million and $2.6 million, respectively. Non-operating income is comprised primarily of income from rental properties and gains on sale of scrap materials.
Foreign currency transaction gains and losses
During the nine months ended September 30, 2019, the Company recorded a non-cash loss of $9.9 million associated to foreign currency transactions. Most of this impact is associated to the remeasurement of a net liability position of $126.3 million U.S. dollar denominated monetary assets and liabilities held by the Company’s subsidiaries with the Colombian peso as their functional currency during a period in which the Colombian peso depreciated 6.5%. Comparatively, the Company recorded a net loss of $0.8 million during the nine months ended September 30, 2018 while the Colombian peso appreciated 0.5%.
Interest Expense
Interest expense was $17.2 million and $15.6 million during the nine months ended September 30, 2019 and 2018, respectively. The 11% increase in interest expense is related to a proportional increase of 12% in the Company’s total debt at September 30, 2019 compared with September 30, 2018 to support its ongoing growth.
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As a result of the foregoing, the Company recorded net income for the nine months ended September 30, 2019 of $13.7 million compared to $12.9 million in the nine months ended September 30, 2018.
Income Taxes
During the nine months ended September 30, 2019 and 2018, the Company recorded an income provision of $8.6 and $6.2 million, respectively. The effective income tax rate for the nine months ended September 30, 2019 was 39%, up from 38% during the nine months ended September 30, 2018.
Liquidity
As of September 30, 2019, and December 31, 2018, we had cash and cash equivalents of approximately $41.7 million and $33.0 million, respectively. During the nine months ended September 30, 2019, the main source of cash were derived from our operations, an underwritten follow-on public offering of 5,551,423 ordinary shares, including the underwriters’ over-allotment option, for net proceeds of $36.5 million, and proceeds from a $30 million long-term syndicate loan facility further described below under “Cash Flow from Operations, Investing and Financing Activities”. While operating cashflow supported strong growth during the period, proceeds from the equity issuance were used to finance our joint venture with Saint-Gobain.
As of September 30, 2019, the Company had $62.5 million of borrowings available under several facilities with relationship banks, as most of the outstanding balances under such lines were repaid with the long-term syndicate loan facility issued in April of this year.
Capital Resources
On January 11, 2019, we entered into a joint venture agreement with Saint-Gobain, a world leader in the production of float glass, a key component of our manufacturing process, whereby we acquired a 25.8% minority ownership interest in Vidrio Andino Holdings S.A.S, a Colombia-based subsidiary of Saint-Gobain. The purchase price for our interest in this entity was $45 million, $34.1 million were paid in cash, and a $10.9 million lot of land near our facility in Barranquilla, which will be contributed on our behalf by our Chief Executive Officer and Chief Operating Officer, José M. Daes and Christian T. Daes with a third-party valuation to be conducted. Vidrio Andino’s float glass plant located in the outskirts of Bogota, Colombia, had been one of our main suppliers of raw glass. We believe this transaction solidifies our vertical integration strategy by acquiring an interest in the first stage of our production chain, while securing ample glass supply for our expected production needs. The acquisition was consummated on May 3, 2019, and under the joint venture agreement, Saint Gobain will retain a majority ownership position and will have control over the operations of Vidrio Andino Holdings SAS and as such, the transaction is being accounted for under the equity method.
The joint venture agreement also includes plans to build a new plant in Galapa, Colombia that will be located approximately 20 miles from our main manufacturing facility, in which we will also have a 25.8% interest. The new plant will be funded with proceeds from the original cash contribution made by the Company, operating cashflows from the Bogota plant, debt incurred at the joint venture level that will not consolidate into the Company and an additional contribution by us of approximately $12.5 million to be paid between 2020 and 2021.
Additionally, the Company is carrying out enhancements at its glass and aluminum facilities to increase production capacity and automate operations. The Company anticipates that these high return investments will speed up production processes in response to strong customer demand, especially for aluminum products. The Company expects to improve efficiency in its glass production by automating certain processes to increase capacity, while reducing material waste and overall lead times. In its aluminum operations, the Company intends to benefit from a 25% increase in capacity and favorable operating leverage with the addition of an aluminum furnace and a new extrusion line, along with working capital improvements through the automation of warehousing systems. The Company completed this aluminum capacity expansion in the middle of July of 2019 and expects the full implementation of its automation initiatives by the end of 2019, with a total anticipated investment of approximately $23 million with this funding being executed since the end of 2018 and expected to be completed by the first quarter of 2020 (as some payments are expected post completion based on certain performance conditions). The Company expects to continue funding these capital investments mainly with cash on hand.
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Cash Flow from Operations, Investing and Financing Activities
| Nine months ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| Cash Flow provided by (used in) Operating Activities | $ | 7,548 | $ | (9,474 | ) | |||
| Cash Flow used in Investing Activities | (54,301 | ) | (12,930 | ) | ||||
| Cash Flow provided from Financing Activities | 56,476 | 8,940 | ||||||
| Effect of exchange rates on cash and cash equivalents | (1,024 | ) | 492 | |||||
| Cash Balance - Beginning of Period | 33,040 | 40,923 | ||||||
| Cash Balance - End of Period | $ | 41,739 | $ | 27,951 | ||||
During the nine months ended September 30, 2019 operating activities generated $7.5 million, in contrast to a use of $9.5 million during the nine months ended September 30, 2018.
While growing sales 20.7% year-over-year during the first nine months of 2019, the Company was able to generate cashflow from operating activities through careful management of inventories and better supplier terms. The main source of operating cashflow during the first nine months of 2019 was trade accounts payable and accrued expenses, generating $16.5 million, compared with $4.7 million in 2018. Despite the aforementioned growth, inventory levels have remained relatively stable and even generated moderate $3.9 million as a result of our efforts to streamline our vertically integrated operation and speed up inventory turnover.
Main use of cash within operating activities was trade accounts receivable, which used $30.0 million during the nine-month period ended September 30, 2019 as the Company grew sales nearly 21% year over year. Despite the balance of receivables increasing as of September 30, 2019 relative to fiscal year end, Days Sales Outstanding ratio increased only slightly to 92 days as of September 30, 2019, up from 90 days as of December 31, 2018. Comparably, trade accounts receivable used $10.6 million during the first nine months of 2018. Contract assets and liabilities used $5.1 million during the nine months ended September 30, 2019, as per industry common practice, retainage receivables associated with installation work, are built up throughout the life of a project and released upon completion. Comparably, contract assets and liabilities used $5.5 million during the nine months ended September 30, 2018.
The main source of cash during the nine months ended September 30, 2019 came from Financing Activities, which generated $56.5 million. In March 2019, the Company closed an underwritten follow-on public offering of 5,551,423 ordinary shares, including the underwriters’ over-allotment option, for net proceeds of $36.5 million. Additionally, the Company generated proceeds of debt for $70.9 million, mostly related to a $30 million five year term facility, proceeds which were mostly used to repay then existing short-term debt the Company had accumulated to fund working capital required to support nine quarters with consecutive quarter-over-quarter sales growth. Net of repayments, we generated $23.7 million from debt while continuing the decrease of its leverage metrics given the Company´s continued growth and profitability.
The Company used $54.8 million and $12.9 million in investing activities during the nine months ended September 30, 2019 and 2018. Main use of cash in investing activities was a payment for the acquisition of 25.8% equity interest in Vidrio Andino Holding, a joint-venture with Saint-Gobain described above under Capital Resources. Additionally, during the first nine months of 2019, the company paid $19.9 million to acquire property plant and equipment, as part of our high return investment plan further described above in the Capital Resources section as well as some additional Capital Expenditure associated to maintaining our current capacity.
Off-Balance Sheet Arrangements
None
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
None
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We performed an evaluation required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended, under the supervision and with the participation of our management, including our Chief executive Officer and Chief Financial Officer, of Tecnoglass, Inc.´s design and operating effectiveness of the internal controls over financial reporting as of the end of the period covered by this Quarterly Report. Based on this evaluation, our Chief executive Officer and Chief Financial Officer concluded that, due to the material weakness described on our Annual Report on form 10-K for the year ended December 31, 2018 which continue to exist, our disclosure controls and procedures over financial reporting were not effective as of September 30, 2019. Notwithstanding the material weakness in our internal control over financial reporting referenced above, we believe the consolidated financial statements are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States of America for each of the periods presented herein.
We identified and disclosed a material weakness in the accounting for income taxes as of December 31, 2018, and have started to design and implement certain remediating controls gradually. We intend to continue our remediation plan to address the material weakness.
We currently have most of our enhanced review procedures and documentation standards in place and operating. Our main objective is to remediate this material weakness by the end of fiscal year 2019, in order to have enough opportunities to conclude, through our testing, that the enhanced monitoring and control activities are operating effectively as of year-end.
Changes in Internal Control over Financial Reporting
For the quarter ended September 30, 2019, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
General Legal Matters
From time to time, the Company is involved in legal matters arising in the ordinary course of business. While management believes that such matters are currently not material, there can be no assurance that matters arising in the ordinary course of business for which the Company is, or could be, involved in litigation, will not have a material adverse effect on its business, financial condition or results of operations.
| Exhibit No. | Description | |
| 31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
| 32 | Certification of Chief Executive Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 101 | Financial statements from the Quarterly Report on Form 10-Q of Tecnoglass Inc. for the quarter ended September 30, 2019, formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statement of Changes in Stockholders’ Equity, (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Unaudited Condensed Consolidated Financial Statements, as blocks of text and in detail. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
| 25 |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| TECNOGLASS INC. | ||
| By: | /s/ Jose M. Daes | |
| Jose M. Daes | ||
| Chief Executive Officer | ||
| (Principal executive officer) | ||
| By: | /s/ Santiago Giraldo | |
| Santiago Giraldo | ||
| Chief Financial Officer | ||
| (Principal financial and accounting officer) | ||
| Date: November 8, 2019 | ||
| 26 |