| • | Our Mexico segment includes (1) the manufacturing of wind blades at our Newton, Iowa plant, (2) the manufacturing of precision molding and assembly systems used to manufacture wind blades at our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which we also conduct at our Rhode Island facility, (4) wind blade inspection and repair services in North America, (5) our advanced engineering center in Kolding, Denmark, which provides technical and engineering resources to our manufacturing facilities, (6) our engineering center in Berlin, Germany which we purchased in July 2019 and (7) our corporate headquarters, the costs of which are included in general and administrative expenses. Our Asia segment includes (1) the manufacturing of wind blades at our facilities in Dafeng, China and Yangzhou, China, the latter of which commenced operations in March 2019, (2) the manufacturing of precision molding and assembly systems at our Taicang Port, China facility and (3) wind blade inspection and repair services.
| •
| Our Mexico segment manufactures wind blades from three facilities in Juárez, Mexico and a facility in Matamoros, Mexico, at which we commenced operations in July 2018. In November 2018, we entered into a new lease agreement with a third party for a new(2) the manufacturing of precision molding and assembly systems manufacturing facility inand composite solutions for the transportation industry at our fourth Juárez, Mexico facility and we commenced operations(3) wind blade inspection and repair services.
|
| • | Our EMEA segment manufactures wind blades at this facilityour two facilities in March 2019. This segmentIzmir, Turkey and also performs wind blade inspection and repair services. |
Our EMEAI segment manufactures wind blades from two facilities in Izmir, Turkey and also performs wind blade inspection and repair services. In February 2019, we entered into a new lease agreement with a third party for a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. This segment also performs wind blade inspection and repair services.
| • | Our India segment manufactures wind blades at our new manufacturing facility in Chennai, India, which commenced operations in the first quarter of 2020. |
For additional information regarding our operating segments and geographic areas, see Note 1819 – Segment Reporting of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. Business Strategy Our long-term success will be driven by our business strategy. The key elements of our business strategy are as follows: | • | Capitalize on the long-term, global trends of decarbonization of the electric sector and the electrification of vehicles. We believe we are well-positioned to participate and benefit from the continued global growth of renewable energy, and in particular, wind energy. Global demand for renewable energy has increased significantly in recent years and we expect that this trend will continue and potentially accelerate in the coming years due to a multitude of factors, including: increased cost competitiveness of wind energy compared to fossil fuel generated electricity; increased demand from corporations and utility providers for renewable energy; recent international policy initiatives designed to promote the growth of renewable energy; and the Biden administration’s proposed plans to promote renewable energy growth in the United States. We believe our global footprint of manufacturing facilities will allow us to capitalize on the continued global growth of wind energy in the coming years. |
Grow our existing relationships and develop new relationships with leading industry OEMs. We plan to continue growing and expanding our relationships with existing customers who, according to data from Wood Mackenzie (WoodMac), represented approximately 55% of the global onshore wind energy market, approximately 87% of that market excluding China, and 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2018, based on megawatts (MWs) of energy capacity installed, as well as developing new relationships with other leading industry OEMs. We expect to be presented with opportunities to expand our existing relationships and develop new relationships with industry OEMs as they seekSimilarly, we believe we are well-positioned to capitalize on the benefitsprojected growth of outsourced wind blade manufacturing while maintaining high quality customizationelectric vehicles. As the global vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. We believe vehicle manufacturers and dedicated capacity. General Electric International, Inc.vehicle owners will also benefit from the lower cost of total ownership due to the durability and its affiliates (GE Wind) agreedthe non-corrosive properties of composites compared to transitionmetallic materials along with the ability to scale production with lower production investment costs. As a larger blade modelresult, we expect there will be an increased demand for composites products for electric vehicles. In addition, we believe there is a potential demand in our Newton, Iowa plant in early 2019 andother strategic markets for composites as to eliminate its option to terminate their supply agreement at this location prior to its December 2020 expiration. In December 2018, we entered into a multiyear supply agreement with Vestas to supply wind blades from a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. In the first quarter of 2019, GE Wind executed a joint development agreement to cooperatively develop advanced blade technology for future wind turbines. In August 2019, we reached an agreement with Nordex SE (Nordex) to transition multiple existing lines at one of our Izmir, Turkey locations to longer blades and at the same time extended the contract by two years through 2022. replace aluminum or other more expensive composite materials such as carbon.
54
| • | Grow our existing relationships and develop new relationships with leading industry OEMs. We plan to continue growing and expanding our relationships with existing customers who, according to data from BloombergNEF (Bloomberg), represented approximately 52% of the global onshore wind energy market, approximately 88% of that market excluding China, and 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2019, based on megawatts (MWs) of energy capacity installed, as well as developing new relationships with other leading industry OEMs. We expect to be presented with opportunities to expand our existing relationships and develop new relationships with industry OEMs as they seek to capitalize on the benefits of outsourced wind blade manufacturing while maintaining high quality customization and dedicated capacity. In July 2020, General Electric International, Inc. and its affiliates (GE Wind) agreed to extend our existing supply agreement in one of our Mexico plants by two years to 2022, and our existing supply agreement in our Newton Iowa plant by one year through 2021 with an option to extend through 2022, and added one additional wind blade manufacturing line in Mexico to provide blades for GE Wind’s turbine technologies in North America. In July 2020, we entered into a supply agreement with Nordex SE (Nordex) for two additional manufacturing lines in our Chennai, India facility, where we plan to start production in the first quarter of 2021. In August 2020, we reached an agreement with Vestas to extend our supply agreement at one of our Izmir, Turkey plants by one year through 2022. |
| • | Leverage our footprint in large and growing wind markets, capitalize on the continuing outsourcing trend, evaluate building wind turbine blades for the growing offshore wind market and evaluate strategic acquisitions. As the wind energy market continues to expand globally and many wind turbine OEMs continue to shift towards increased outsourcing of wind blade manufacturing, we believe we are well-positioned with our global footprint. We utilize our strengths in composites technology and manufacturing, combined with our collaborative dedicated supplier model to provide our customers with an efficient solution for their expansion in large and growing onshore wind markets. Our quality, reliability and total delivered cost reduce sourcing riskWe also are evaluating opportunities to manufacture wind blades for our customers.the growing offshore wind market. In addition, our demonstrated ability to enter into new markets and the strength of our manufacturing capabilities afford us the optionality to build new factories or grow through strategic acquisitions. |
| • | Continue to drive down costs of wind energy. We continue to work with our customers on larger size wind blade models that maximize the capture of wind energy and drive down the levelized cost of energy (LCOE). We also continue to utilize our advanced technology, regional manufacturing facilities strategically located to cost effectively serve large and growing wind markets and ability to source materials globally at competitive costs to deliver high-performing, composite wind blades. Our collaborative engineering approach and our advanced precision molding and assembly systems allow us to integrate our customer’s design requirements with cost-efficient, replicable and scalable manufacturing processes. This collaborative engineering approach with our customers also allows us to reduce manufacturing cycle times, new line and factory start up times and new blade model transition times. We also continue to work with our customers to drive down the cost of materials and production, the benefit of which we typically share with our customers contractually in a manner that reduces LCOE for customers, further strengthens our customer relationships and improves our margins. |
| • | Expand our field service inspection and repair business. Although sales from our field service inspection and repair business currently represent a very small percentage of our total revenue, we plan to expand our field service inspection and repair business by leveraging our existing wind blade manufacturing and composites expertise and global footprint. We believe there is an increasing demand and growing market for experienced wind blade inspection and repair services worldwide as the number of wind turbines installed worldwide continues to grow and the fleet of existing wind turbines continues to age. We also expect that the operating margins at our field service inspection and repair business will be higher than the operating margins of our wind blade manufacturing business. |
5
Expand our field service inspection and repair business. Although sales from our field service inspection and repair business currently represent a very small percentage of our total revenue, we plan to expand our field service inspection and repair business by leveraging our existing wind blade manufacturing and composites expertise. We believe there is an increasing demand and growing market for experienced wind blade inspection and repair services worldwide as the number of wind turbines installed worldwide continues to grow and the fleet of existing wind turbines continues to age.
Expand our transportation business and expand into other strategic markets. We leverage our advanced composite technology and history of innovation to supply high strength, lightweight and durable composite products to the transportation market. As the vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. As a result, we believe there is an increasing demand for composites products for electric vehicles. In addition, we believe there is a potential demand in other strategic markets for composites as to replace aluminum or other more expensive composite materials such as carbon.
Focus on continuing innovation. We have a history of innovation in advanced composite technologies and production techniques and use several proprietary technologies related to wind blade manufacturing. With this culture of innovation and a collaborative “design for manufacturability” approach, we continue to address increasing physical dimensions, demanding technical specifications and strict quality control requirements for our customers’ most advanced wind blades. We also invest in ongoing simplification and selective automation of production processes for increased efficiency and precision. In addition, we plan to leverage our history of composite industry-first innovations to grow our business in the transportation market, in which we believe there is a demand for high precision, structural composites manufacturing as well as high speed, high volume manufacturing of structural composite components, particularly in the transportation market.
| • | Focus on continuing innovation. We have a history of innovation in advanced composite technologies and production techniques and use several proprietary technologies related to wind blade manufacturing. With this culture of innovation and a collaborative “design for manufacturability” approach, we continue to address increasing physical dimensions, demanding technical specifications and strict quality control requirements for our customers’ most advanced wind blades. We also invest in ongoing simplification and selective automation of production processes for increased efficiency and precision. In addition, we plan to leverage our history of composite industry-first innovations to grow our business in the transportation market, in which we believe there is a demand for high precision, structural composites manufacturing as well as high speed, high volume manufacturing of structural composite components, particularly in the transportation market. |
Wind Blade Manufacturing Operations and Process We have developed significant expertise in advanced composite technology and use high performance composite materials, precision molding and assembly systems including modular tooling, and advanced process technology, as well as sophisticated measurement, inspection, testing and quality assurance tools, allowing us to produce over 55,00065,000 wind blades since 2001 with an excellenta strong, long-term field performance record in a market where reliability 6
is critical to our customers’ success. We manufacture or have manufactured wind blades ranging from 30 meters to over 70approximately 80 meters across our global facilities and have the capability to manufacture wind blades of greater lengths as required by existing or new customers. In combination with our advanced technologies, we seek to create manufacturing processes that are replicable and scalable in our manufacturing facilities located worldwide, regardless of cultural or language barriers. Using continuous improvement principles, we can customize each manufacturing step, from raw materials to finished products. This also allows us to systematically design for the entire manufacturing process so that we can achieve better quality control and increase production efficiencies. We believe that our focus on simplifying and, where feasible, automating production processes is critical to manufacturing high-precision, lightweight and durable products at a reasonable cost to our customers. We produce high unit volumes of near-aerospace grade products at industrial costs. Raw Materials The key raw materials for the wind blades we manufacture include highly advanced fiberglass fabrics, select carbon reinforcements, foam, balsa wood, resin, adhesives for assembly of molded components, gel coat or paint for preparation of cosmetic surfaces and attachment hardware including steel components. Most of these materials are available in multiple geographic regions and in reasonably close proximity to our manufacturing facilities. Our agreements for the supply of raw materials are designed to guarantee volumes that we believe will be required to fulfill our customers’ wind blade commitments. A portion of our raw materials are subject to price volatility, such as the resins used in our manufacturing processes. Although the majority of materials incorporated into our products are available from a number of sources, certain materials are available only from a relatively limited number of suppliers. We seek multiple suppliers for our raw materials and continually evaluate potential new supplier relationships. Precision Molding and Assembly Systems Over the last decade, we have produced hundreds of precision molding and assembly systems, ranging from 30 meters to over 70approximately 80 meters in length, to support our global operations. We began these operations in our tooling technology center in Warren, Rhode Island. In 2013, we expandedWe also manufacture our precision molding and assembly systemsystems production capabilities toat a facility in Taicang City, China, which was recently moved to Taicang Port, China, which serves customers around the globe. While capable of cost-effectively delivering precision molding and assembly systems across all of our facilities, our Rhode Island tooling technology center primarily serves the North American market. We currently haveIn 2020, we transitioned most of our North American precision molding and assembly system production capabilities from Warren, Rhode Island to a new facility in Juárez, Mexico, which can serve customers globally. We expect this transition to be completed during 2020. Our precision molding and assembly systems have been used to build tens of thousands of wind blades worldwide. Our tooling solutions include precision wind blade patterns, precision molding and assembly systems, including modular tooling techniques. We believe that our technological and production expertise are key factors in 6
our continued competitiveness, as we address continually increasing physical dimensions, demanding technical specifications, and strict quality control requirements for wind blades. Wind Blade Production Process Production of wind blades requires adherence to the unique specifications of each of our customers, who design their wind turbines and wind blades to optimize performance, reliability and total delivered cost. With our culture of innovation and a collaborative “design for manufacturability” approach, we have the capability and expertise to manufacture wind blades of different designs, utilizing fiberglass, carbon or other advanced composite materials to meet unique customer specifications. We also have the flexibility to quickly transition our manufacturing facilities to produce different wind blade models and sizes using our precision molding and assembly systems, including modular tooling techniques. We have developed a highly dependable method for making high-quality wind blades. In conjunction with our continuous improvement principles, we design our proprietary manufacturing processes to be replicable, scalable and transferable to each of our advanced manufacturing facilities worldwide. As a result, we can repeatedly move a product from its design phase to volume production while maintaining quality, even in developing regions of the 7
world. Similarly, we have developed the manual portions of our manufacturing processes based on proven technologies and production methods that can be learned and implemented rapidly by line personnel. We focus on consistency and quality control across our facilities, using hands-on training methods and employing repeatable manufacturing processes. We use an advanced form of vacuum-assisted resin transfer tooling process to pull liquid resin into a dry lay-up, resulting in light, strong, and reliable composite structures. In our manufacturing process, fiber reinforcements and core materials are laid up in a mold while dry, followed by a vacuum bag that is placed over the layup and sealed to the mold. The wind blade component is then placed under vacuum. The resin is introduced into the wind blade component via resin inlet ports and then distributed through the reinforcement and core materials via a flow medium and a series of channels, saturating the wind blade component. The vacuum removes air and gases during processing, thereby eliminating voids. Pressure differentials drive resin uniformly throughout the wind blade component, providing a consistent laminate. By using a variety of reinforcement and core materials, the structural characteristics of the wind blade can be highly engineered to suit the custom specifications of our customers. Although only occasionally required by our customers, we are also capable of employing additional composite fabrication processes, such as pre-impregnated laminates, in addition to our vacuum infusion process. 8
Wind Blade Long-Term Supply Agreements Our current wind blade customers, which include Vestas, GE Wind, Nordex, Siemens Gamesa Renewable Energy S.A. (Siemens Gamesa) and ENERCON GmbH (ENERCON), are some of the world’s largest wind turbine manufacturers. According to data from WoodMac,Bloomberg, our customers represented approximately 55%52% of the global onshore wind energy market, approximately 87%88% of that market excluding China, and 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2018,2019, based on MWs of energy capacity installed. In our collaborative dedicated supplier model, our customers are incentivized to maximize the volume of wind blades purchased through lower pricing at higher purchase volumes. As of February 27, 2020,24, 2021, our existing wind blade supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.7$2.8 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $5.0$4.6 billion through the end of 2023,2024, which we believe provides us with significant future revenue visibility and helps to insulate us from potential short-term fluctuations or legislative changes in any one market. Our supply agreements generally contain liquidated damages provisions in the event of late delivery, however, we generally do not bear the responsibility for transporting the wind blades we manufacture to our customers. Our long-term supply agreements with our customers generally encourage our customers to maximize the volume of wind blades they purchase from us, since purchasing less than a specified amount typically triggers higher pricing, as well as provide downside protection for us through minimum annual volume commitments. Some of our long-term supply agreements also provide for annual sales price reductions reflecting assumptions regarding increases in our manufacturing efficiency and productivity. We work to continue to drive down the cost of materials and production through innovation and global sourcing, a portion of the benefit of which we share with our 7
customers contractually, further strengthening our deep customer relationships. Wind blade pricing is based on annual commitments of volume as established in the customer’s contract, with orders less than committed volume resulting in additional costs per wind blade to customers. Orders in excess of annual commitments may but generally do not result in discounts to customers from the contracted price for the committed volume. Customers may utilize early payment discounts, which are reported as a reduction of revenue at the time the discount is taken. Vestas In 2014, we entered into a new supply agreement with Vestas to supply wind blades from a new manufacturing facility in Dafeng, China. Based on the success of this manufacturing arrangement, we expanded our relationship with Vestas through additional supply agreements for ato manufacture wind blades at our manufacturing facilityfacilities in Turkey, Matamoros, Mexico and Yangzhou, China. Additionally, in 2018, we entered into a supply agreement with Vestas to supply wind blades from a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. In August 2020, we reached an agreement with Vestas to extend our supply agreement at our Turkey facility by one year through 2022. Each of the supply agreements with Vestas provide for a minimum number of wind blade sets to be purchased by Vestas each year during the term, the schedule for which is established at the outset of the agreement. In return, we commit to dedicate a specific number of manufacturing lines to Vestas for each of the years under the supply agreements. Additionally, we create some of the model-specific tooling for Vestas. If either party commits a material breach of the supply agreement, the non-breaching party may terminate the supply agreement if the breach is not remedied or if the parties have not mutually agreed to plan for cure within 30 days after notice of breach has been given. GE Wind We have entered into multiple supply agreements with GE Wind to manufacture wind blades from two manufacturing facilities in Juárez, Mexico and our Newton, Iowa manufacturing facility. Each of the supply agreements with GE Wind provide for a minimum number of wind blade sets to be purchased by GE Wind each year during the term, the schedule for which is established at the outset of the agreement. In return, we commit to dedicate a specific number of manufacturing lines to GE Wind for each of the years under the supply agreements. In August 2018, GE Wind agreed to extend our existing supply agreement for one of our Mexico manufacturing facilities by two years to 2022 and increased the number of wind blade manufacturing lines in that facility from three to five. In addition, GE Wind agreed to transition to a larger blade model in our Newton, Iowa plant in early 2019 and to eliminate its option to terminate theirits supply agreement at this location prior to its December 2020 expiration. In July 2020, GE Wind agreed to extend our existing supply agreement in one of our Mexico plants by two years to 2022 and our existing supply agreement in our Newton Iowa plant by one year to 2021 with an option to extend through 2022 and added one additional wind blade manufacturing line in Mexico to provide blades for GE Wind’s turbine technologies in North America in 2021. Unless otherwise terminated or renewed, our supply agreements with GE Wind are in effect until the end of 20202021 for one of our Mexico manufacturing facilities and our Iowa manufacturing facility and until the end of 2022 for our othertwo Mexico facility. GE Wind may terminate the Mexico supply agreements with no advance notice 9
and paying us termination fees as set forth in the applicable agreement.facilities. In addition, either party may terminate these supply agreements upon a material breach by the other party which goes uncured for 30 days after written notice has been provided.
In 2017, General Electric Company (GE) completed its acquisition of LM Wind Power (LM), our largest competitor. We expect that GE Wind will utilize LM for a substantial percentage of its wind blade production in the future and may reduce the volumes of wind blades it purchases from us or not extend any of our supply agreements beyond 2022, which may materially harm our business, financial condition and results of operations. See “Risk Factors—Risks Related to Our Wind Blade Business—GE’s acquisition of LM Wind Power, our largest competitor, may materially harm our business, financial condition and results of operations and may cause the price of our common stock to decline” included in Part I, Item 1A of this Annual Report on Form 10-K for further discuss on the GE’s acquisition of LM and its potential effects on us.
See Note 4 – Related Party Transactions of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding our related party transactions with GE Wind for the year ended December 31, 2017 when GE Wind was a stockholder of the Company.
Other Long-Term Supply Agreements We have entered into other long-term supply agreements in China, Mexico, Turkey and TurkeyIndia with Nordex, Siemens Gamesa and ENERCON. With respect to these supply agreements, we agree to dedicate capacity for a set number of wind blades for each calendar year during the term of the agreement in exchange for commitments to purchase minimum annual volumes of wind blade sets. Unless otherwise terminated, these supply agreements generally remain in effect for a period of five years and either party may terminate their respective supply agreements upon a material breach by the other party which goes uncured. Some of these supply agreements contain provisions that allow for our customers to purchase less volume in later years of these supply agreements, reduce the number of dedicated manufacturing lines or to terminate the supply agreement upon notice for reasons such as our failure to deliver the contracted wind blade volumes or our failure to meet certain mutually agreed upon cost reduction targets. See “Risk Factors—Risks Related to Our Wind Blade Business—Our Some of our long-term supply agreements with our customers are subject to early termination on short notice and volume reductions at the discretion of our failure to perform our obligations under such agreements,customers, and any early termination of a significant numberor reduced volumes of wind blades purchased under these agreements 8
would materially harm our business”business, financial condition and results of operations” included in Part I, Item 1A of this Annual Report on Form 10-K. Research and Development We have a long history of developing composite products as well as the development of new and advanced materials, tooling, manufacturing processes and inspection methods. Our knowledge and experience of composite materials and manufacturing originates with our predecessor company, Tillotson Pearson Inc., a leading manufacturer of high-performance recreational sail and powerboats along with a wide range of composite structures used in other industrial applications. Leveraging our knowledge and experience, we realized the opportunity to specialize in wind energy and other industrial end-markets where there was a demand for high precision composite manufacturing capabilities. We conduct extensive research and development in close collaboration with our customers on the design, development and deployment of innovative manufacturing processes, including automation, advanced materials and sophisticated product quality inspection tools. We have partnered with the U.S. Department of Energy (DOE),DOE, government laboratories, universities and our customers to innovate through cost sharing Advanced Manufacturing Innovation Initiative programs. In 2015,2021, we receivedwill be collaborating with the University of Maine pursuant to a $3.0 million awardgrant from the U.S. DOE’s Office of Energy Efficiency &and Renewable Energy to leaddevelop a team of industry and academic participants to design, develop and demonstrate an ultra-light composite vehicle doorrapid, low-cost additive manufacturing solution (3D printing) for high volume manufacturing production in conjunction with other industry and university participants.fabricating large, segmented wind blade molds. In February 2018, we entered into an agreement with Navistar to design and develop an all composite Class 8 tractor cab. This collaborative development project was entered into in connection with Navistar’s recent award under the DOE’s Super Truck II investment program, which is designed to promote fuel efficiency in commercial vehicles. IncorporatingWe believe incorporating composite materials into a Class 8 tractor cab offers multiple potential performance and efficiency advantages compared to traditional metals in terms of weight savings, reduced part counts, and non-corrosion. In the first quarter of 2019, we executed a joint development agreement with GE Wind to cooperatively develop advanced blade technology for future wind turbines. 10
We employ a highly experienced workforce of engineers in various facets of our business, from discrete research and development projects, to the ongoing, real-time development and implementation of incremental manufacturing and material improvements. Our research and development effort places a priority on improving quality through process and procedure improvement, in addition to reducing cost through specification changes and sourcing of more cost-effective suppliers. Other areas of emphasis include composite design, in-house fabrication of precision molding and assembly systems, prototyping, testing, optimization and volume production capabilities. We also encourage our employees to invent and develop new technologies to maintain our competitiveness in the marketplace. In addition to our internal research and development activities, from time to time, we also conduct research and development activities pursuant to funded development arrangements with our customers and other third parties, and intend to continue to seek opportunities for product development programs that could create recurring revenue and increase our overall profitability over the long term. In July 2019, we acquired certain intellectual property and hired a team of engineering resources from the EUROS group, based in Berlin, Germany. This team of approximately 20 technical experts focuses on blade design, tooling, materials and process technology development, which will strengthenstrengthened our technical capabilities in support of our global operations and growth. In 2017,addition, we established an advanced engineering center in Kolding, Denmark which provides technical and engineering resources to our manufacturing facilities and our customers. 9
Competition The wind blade market is highly concentrated, competitive and subject to evolving customer needs and expectations. In 2017, GE Wind, our largest customer at the time, completed its acquisition of LM Wind Power (LM), our largest competitor. We also compete primarily with other independent wind blade manufacturers such as Sinoma Science & Technology Co. Ltd., Shanghai Aeolon Wind Energy Technology Development (Group) Co., Ltd., Aeris Industria E Comercio De Equipamentos Para Geracao De Energia S.A. and ZhongFu Lianzhong Composites Group Co., Ltd., as well as regional wind blade suppliers in geographic areas where our current or prospective manufacturing facilities are located. We also compete with, and in a number of cases supplement, vertically integrated wind turbine OEMs that manufacture their wind blades. We believe that a number of other established companies are manufacturing wind blades that will compete directly with our offerings, and some of our competitors noted above, may have significant financial and institutional resources. The principal competitive factors in the wind blade market include reliability, total delivered cost, manufacturing capability, product quality, engineering capability and timely completion of wind blades. We believe we compete favorably with our competitors on the basis of the foregoing factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of manufacturing capability, timely completion and product quality. Transportation Products We seek to create additional recurring revenue opportunities through the supply of other composite structures outside the wind energy market. We believe transportation products, including buses, trucks, electric vehicles and high performancehigh-performance automotive products, are ideally suited for our advanced composite technology because of the benefits derived from weight reduction, corrosion resistance, strength and durability. These benefits should allow us to develop structural composite solutions to assist our customers in developing electric vehicles, including light, medium and heavy dutyheavy-duty trucks, buses and automobiles with clean propulsion systems or in meeting new and developing fuel economy standards. In addition, by producing a range of composite structures, we are able to leverage the materials and manufacturing process technology and expertise developed through one project to maximize production quality, improve performance and minimize costs across our other manufacturing efforts, including our wind blade business. Our projects for customers in the transportation market have historically generated project-related revenues for a specific duration. We intend to seek collaborations with additional customers in these markets that will provide recurring revenue and business opportunities for us, in addition to the opportunities provided by our existing customers and relationships, and contribute to our overall profitability over the long term. 11
Our facilities in Warren, Rhode Island and Juárez, Mexico manufacture products for customers in the transportation market using a similar proprietary and replicable manufacturing processes that we use to produce wind blades. Our projects for customers in the transportation market include, or have included, the supply of all-composite bodies for electric buses and automated people mover systems for airports. We will ceaseceased manufacturing composite bus bodies from our Newton, Iowa facility in the first quarter of 2020. In 2019, we made a capital investment of approximately $11.5 million to develop a highly automated manufacturing line for the electric vehicle market within our Warren, Rhode Island facility, and we are currently in the process of commissioning this line. We expect this investment will enable us to further develop our technology, create defensible product and process IP and demonstrate our capability to manufacture composite components cost effectively at automotive volume rates. Our current principal competitors in the transportation market include suppliers of conventional steel and aluminum products and non-structural automotive fiberglass and other advanced composites-based manufacturers for transportation applications. 10
Intellectual Property We have a variety of intellectual property rights, including patents issued, filed and applied-for in a number of jurisdictions, including the United States, Germany, the European Union and China, trademarks and copyrights, but we believe that our continued success and competitive position depend, in large part, on our proprietary materials, tooling, process and inspection technologies and our ability to innovate. Accordingly, we take measures to protect the confidentiality and control the disclosure of our proprietary technology. We rely primarily on a combination of patents, know-how and trade secrets to establish and protect our proprietary rights and preserve our competitive position. We also seek to protect our proprietary technology, in part, by confidentiality agreements with our customers, employees, consultants and other contractors. Trade secrets, however, are difficult to protect. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our customers, employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Backlog As of December 31, 20192020 and 2018,2019, our backlog for wind blades and related products totaled $1,038.9$1,197.7 million and $514.8$1,038.9 million, respectively. Our backlog includes purchase orders issued in connection with our long-term supply agreements. We generally record a purchase order into backlog when the following requirements have been met: a signed long-term supply agreement or other contractual agreement has been executed with our customer, a purchase order has been issued by our customer and we expect to ship wind blades to or produce the related products for such customer in satisfaction of any purchase order within 12 months. Backlog as of any particular date should not be relied upon as indicative of our revenue for any future period. Regulation Wind Energy Our operations are subject to various foreign, federal, state and local regulations related to environmental protection, health and safety, labor relationships, general business practices and other matters. These regulations are administered by various foreign, federal, state and local environmental agencies and authorities, including the EPA,Environmental Protection Agency (EPA), the Occupational Safety and Health Administration of the U.S. Department of Labor and comparable agencies in China, Mexico, Turkey, India and individual U.S. states. In addition, our manufacturing operations in China, Mexico, Turkey and India are subject to those countries’ wage and price controls, currency exchange control regulations, investment and tax laws, laws restricting our ability to repatriate profits, trade restrictions and laws that may restrict foreign investment in certain industries. Some of these laws have only been recently adopted or are subject to further rulemaking or interpretation, and their impact on our operations, including the cost of complying with these laws, is uncertain. We believe that our operations currently comply, in all material respects, with applicable laws and regulations. Further, as a U.S. corporation, we are subject to The Foreign Corrupt Practices Act of 1977 (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. In addition, our business has been and will continue to be affected by subsidization of the wind turbine industry with its influence declining over time as wind energy reaches grid parity with traditional sources of energy. In the United States, the federal government has encouraged capital investment in renewable energy primarily 12
through tax incentives. Production tax credits for new renewable energy projects were first established in 1992. The Production Tax Credit for Renewable Energy (PTC) provided the owner of a wind turbine placed in operation before January 1, 2015 with a 10-year credit against its U.S. federal income tax obligations based on the amount of electricity generated by the wind turbine. The PTC was extended in 2015 for wind power projects through December 31, 2019, and was to be phased down over the term of the PTC extension. Specifically, the PTC was kept at the same rate in effect at the end of 2014 for wind power projects that either commenced construction or met certain safe harbor requirements by the end of 2016, and thereafter was to be reduced by 20% per year in 2017, 2018 and 2019, respectively. In December 2019, Congress extended the PTC through the end of 2020 and increased the rate from 40% to 60% for projects that either 11
commenced construction or met certain safe harbor requirements by the end of 2020 and are commissioned by the end of 2024. In June 2019,December 2020, Congress extended the EPA issuedPTC through the Affordable Clean Energy Rule, which replacedend of 2021, continuing the Clean Power Plan, which was designedrate of 60% for projects that either commenced construction or met certain safe harbor requirements by the end of 2021 and are commissioned by the end of 2025. In January 2021, the Biden administration announced several executive orders to promote renewable energy. The Clean Power Plan, which was established by the EPA in 2015, set national standards for states to reduce carbon emissions from power plants. Specifically, the Clean Power Plan required states to reduce carbon emissions from power plants 32% below 2005 levels by 2030. In general, the Affordable Clean Energy Rule, provides for efficiency improvements at power plants and directs individual States to choose how they want to regulate power plant emissions. Unlike the Clean Power Plan, the Affordable Clean Energy Rule does not set specific standards or limits for carbon emissions. At the state level, as of December 31, 2019, 292020, 30 states, the District of Columbia and Puerto Rico have implemented renewable portfolio standard (RPS) programs that generally require that, by a specified date, a certain percentage of a utility’s electricity supplied to consumers within such state is to be from renewable sources (ranging from 10% to 100% and from between the present and 2045)2050). In addition, there are also increasing regulatory efforts globally to promote renewable power. In December 2020, the European Union (EU) agreed to reduce EU greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Similarly, in December 2020, China implementedannounced its 13th 5-Year Plan with a goal of 15% total primaryto reach carbon neutrality by 2060, and in September 2019, India targeted to increase its renewable energy fromcapacity to 450 gigawatts by 2030 and to 40% non-fossil fuel sources and targeting 210 gigawatts (GWs) of grid-connected wind capacity by 2020 according to its National Development and Reform Commission, and employs preferential feed-in tariff schemes, in addition to local tax-based incentives. Mexico has established strict targets, aiming for 35% renewable energy by 2024 and 50% by 2050, according to WoodMac, which it is facilitating through tax incentives. Large European Union members have renewable energy targets for 2020 of between 10% and 49% of all energy use derived from renewable energy sources, according to the European Commission. 2030. Additionally, Turkey enacted Law No. 5346 in 2005, which was recently amended and extended in January 2021, to promote renewable-based electricity generation within their domestic electricity market by introducingthrough feed-in- tariffs and purchase obligations for distribution companies requiring purchases from certified renewable energy producers. The World Bank also provided Turkey with an aggregate of $600 million of loan proceeds to encourage investors to construct generation plants with renewable energy resources. EmployeesHuman Capital
As of December 31, 2019,2020, we employed over 13,30014,900 full-time employees, approximately 1,300 of whom were located in the United States, 2,9002,000 in China, 5,5006,000 in Mexico, 3,3004,100 in Turkey and 3001,500 in India. Certain of our employees in Turkey and at our manufacturing facility in Matamoros, Mexico are represented by a labor union. We believe that our relations with our employees are generally good. 13
In January 2019, thousandsOur human capital strategy focuses on creating an exceptional employee experience and ensuring that we foster a learning culture where our employees want to grow with us. Our primary focus areas of workers employedour human capital strategy are as follows:
Culture We believe our unique culture is a key strategic advantage for us. Our associates are highly engaged and committed to the company, their teams, and the jobs they perform based on our most recent employee engagement surveys. This strong employee engagement is due in dozenspart to a strong sense of purpose given our role in the broader renewable energy supply chain. We believe strong employee engagement translates into a strong quality focus and orientation. It is through the efforts of our nearly 15,000 employees at year-end 2020 that we have been able to continue to achieve high levels of performance. When we select new persons to join our team, we ensure that the individuals have high levels of commitment and adaptability in addition to the skills needed for the role. Our employees embrace our core values of safety, operational excellence, commitment, integrity and leadership. Our team members bring our values to life by applying their diverse backgrounds and skillsets to the jobs they are performing, demonstrating high discretionary effort, and embracing our values in their day-to-day lives. Safety Safety is our most important and first core value. We strongly believe that all accidents are preventable and that every associate should return at the end of their shift to their families in the same healthy condition in which they showed up for work. To help drive these beliefs it is our goal to continuously improve our zero-harm culture and implement a global behavior-based safety program resulting in zero unsafe behaviors. Our 13 manufacturing facilities have safety management systems in Matamoros, Mexico, wentplace that cover their associates and activities. We ensure the safety of our associates to support our zero-harm culture in a variety of ways, starting with safety education. Safety education is the foundation for our other safety measures. Associates receive regular training on strike. In environmental, health and safety (EHS) related topics. This training includes but is not limited to: | • | general awareness EHS training |
12
| • | hazard-specific training as required for the job or task |
| • | fire hazard and prevention training |
| • | hazardous material training |
| • | equipment-specific safety training |
| • | safety incident and corrective action training |
Diversity, Equity and Inclusion We value diversity in all forms, especially diversity of thought, and aspire to create an environment that recognizes and celebrates the benefits that come with a diverse workforce. We know that diversity of our employee population makes us better and strive to continue to improve and act with intention in these workers, who were represented by severalareas. As a global business, we have an incredible opportunity to benefit from the diversity we have in our company. We can and will do more to maximize the positive impact that diversity, equity, inclusion, and a feeling of belonging can bring. We believe that this and the rest of our vision statement for diversity, equity and inclusion is a solid representation of what we believe in, are committed to, and how we will hold associates and leaders accountable. We recognize that one of our greatest areas of opportunity is to increase the representation of women and overall racial and ethnic diversity at all levels of leadership as we add more talent to our leadership levels. Talent We market open jobs across multiple platforms such as our website, LinkedIn, internal postings and local job boards to ensure that our candidate pool is as diverse as possible. We promote having diversity on the interviewing and selection panel to ensure different labor unions, demanded an increase in their wagepoints of view are considered as part of the final selection process. We enjoy high levels of retention across all of our geographies. Our overall turnover rate andhas continued to decline over the past three years on a global basis. We facilitate an annual bonus. In February 2019, our manufacturing production employeestalent review process in Matamoros, Mexico, who are represented byall regions and functional teams to promote the internal development and promotion of internal talent. We have enjoyed high participation in employee surveys, high engagement levels against industry normative data, and also facilitated a labor union, went on strike also demanding an increaseCOVID and diversity equity and inclusion survey in their hourly wage rate and the payment of an annual bonus, even though our collective bargaining agreement did not provide for such incentives. During this strike, our Matamoros manufacturing facility stopped production from February 15, 2019 until March 2, 2019. In March 2019, we reached an agreement with the labor union to end the strike and we reopened our Matamoros manufacturing facility on March 3, 2019. In the first quarter of 2020, we amended our Matamoros collective bargaining agreement to adjust the salaries and bonuses payable to our associates for calendar year 2020 that are covered by this agreement. 2020. Environmental, Health and Safety We are subject to various environmental, health and safety laws, regulations and permit requirements in the jurisdictions in which we operate governing, among other things, health, safety, pollution and protection of the environment and natural resources, the handling and use of hazardous substances, the generation, storage, treatment and disposal of wastes, and the cleanup of any contaminated sites. We are not aware of any pending environmental compliance or remediation matters that are reasonably likely to have a material adverse effect on our business, financial position or results of operations. However, failure by us to comply with applicable environmental and other requirements could result in fines, penalties, enforcement actions, third party claims, remediation actions, and could negatively impact our reputation with customers. We have adopted environmental, health and safety policies outlining our commitment to environmental responsibility and accountability. These policies apply to the company as a whole, and our vendors and suppliers and are available on our website. We have a company-wide focus on safety and have implemented a number of measures to promote workplace safety. Customers are increasingly focused on safety records in their sourcing decisions due to increased regulations to report all incidents that occur at their sites and the costs associated with such incidents. Available Information Our website address is www.tpicomposites.com. All of our filings with the Securities and Exchange Commission (SEC), including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership and amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on our website is neither a part of, nor incorporated by reference into, this Annual 13
Report on Form 10-K. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov. Our investor relations website address is www.tpicomposites.com/investors https://ir.tpicomposites.com/websites/tpicomposites/English/0/investor-relations.htmland includes key information about our corporate governance initiatives, including our Nominating and Corporate Governance Committee charter, charters of the Audit and Compensation committees and our Code of Business Conduct & Ethics. Information about our Executive Officers The following table sets forth certain information regarding our Executive Officers as of February 27, 2020:24, 2021: Name | Age | | Position | Steven C. LockardWilliam E. Siwek
| 58 | | President, Chief Executive Officer and Director | William E. Siwek
| 57
| | President
| Bryan R. Schumaker | 4445
| | Chief Financial Officer | Ramesh Gopalakrishnan | 5253
| | Chief Operating Officer, Wind | James M. Hilderhoff | 54 | | Chief Commercial Officer | Thomas J. Castle | 4849
| | Senior Vice President—Operations, Strategic Markets | Steven G. Fishbach | 5051
| | General Counsel and Secretary |
14
Steven C. Lockard. Mr. Lockard became our President and Chief Executive Officer in 2004 and has served as a member of our board of directors since 2004. In May 2019, he relinquished the title of President to Mr. Siwek. Prior to joining us in 1999, Mr. Lockard was Vice President of Satloc, Inc., a supplier of precision GPS equipment, from 1997 to 1999. Prior to that, Mr. Lockard was Vice President of marketing and business development and a founding officer of ADFlex Solutions, Inc., a NASDAQ-listed international manufacturer of interconnect products for the electronics industry, from 1993 to 1997. Prior to that, Mr. Lockard held several marketing and management positions including Business Unit Manager, Corporate Market Development Manager and Marketing/Applications Engineer at Rogers Corporation from 1982 to 1993. Mr. Lockard currently serves as a member of the Board of Directors for the American Wind Energy Association and previously served as its Chairman from May 2018 to May 2019. Mr. Lockard holds a B.S. degree in Electrical Engineering from Arizona State University.
William E. Siwek. Mr. Siwek joined us in August 2013 as our Chief Financial Officer. In May 2019, Mr. Siwek was named our President and ceased serving as our Chief Financial Officer. In May 2020, Mr. Siwek assumed the role of Chief Executive Officer and was elected to the Board of Directors. Prior to joining us, Mr. Siwek previously served as the Chief Financial Officer for T.W. Lewis Company, an Arizona-based real estate investment company, from September 2012 to September 2013. From May 2010 until September 2012, he was an independent consultant assisting companies in the real estate, construction, insurance and renewable energy industries. Prior to that, Mr. Siwek was Executive Vice President and Chief Financial Officer of Talisker Mountain, Inc., from January 2009 to April 2010. Prior to that, he was President and Chief Financial Officer of the Lyle Anderson Company from December 2002 to December 2008. Prior to that, Mr. Siwek spent 18 years, from September 1984 to May 2002, with Arthur Andersen where he became a Partner in both Audit and Business Consulting Divisions. Mr. Siwek also serves on the Board of Directors of the American Clean Power Association, a renewable energy industry trade group, which commenced operations in January 2021. Mr. Siwek holds B.S. degrees in Accounting and Economics from University of Redlands and is a Certified Public Accountant. Bryan R. Schumaker. Mr. Schumaker joined us in May 2019 as our Chief Financial Officer. Prior to joining us, Mr. Schumaker served as the Chief Accounting Officer of First Solar, Inc. from July 2015 to May 2019 and the Chief Financial Officer of 8point3 Energy Partners, a publicly-traded limited partnership formed by First Solar and Sunpower Corporation to own, operate and acquire solar energy generation projects from July 2016 to July 2018. Mr. Schumaker also served as Assistant Corporate Controller of First Solar from April 2008 to December 2011 and Vice President, Corporate Controller from December 2011 to July 2015. Prior to working at First Solar, Mr. Schumaker worked for Swift Transportation from January 2003 to April 2008 in multiple roles, including Vice President, Corporate Controller. Prior to that, Mr. Schumaker worked for KPMG, LLP as a Supervising Senior for the Assurance Practice and for a BDO Alliance Firm as a Senior Audit Associate. Mr. Schumaker holds a B.B.A. degree in Accounting from the University of New Mexico. Mr. Schumaker also serves on the Board of Directors of the Arizona Manufacturing Extension Partnership. Ramesh Gopalakrishnan. Mr. Gopalakrishnan joined us in September 2016 as Vice President, Technology, Transfer and Launch, and was promoted to Senior Vice President, Technology and Industrialization in August 2017 and Senior Vice President, Global Quality, Technology and Latin American Operations in February 2019. In May 2019, Mr. Gopalakrishnan was named our Chief Operating Officer – Wind. Prior to joining us, Mr. Gopalakrishnan served as Executive Vice President, Manufacturing for Senvion GmbH from May 2015 to August 2016 and Senior Vice President, Global Blades from February 2013 to April 2015. Prior to joining Senvion GmbH, Mr. Gopalakrishnan served as the Chief Executive Officer of Suzlon Energy Composites from February 2011 to January 2014, where he oversaw blade and mold factories in the United States, China and India and engineering centers in Europe. Prior to joining Suzlon Energy Composites, Mr. Gopalakrishnan served in various operations, supply chain and engineering roles at Halliburton Company and General Electric Company. Mr. Gopalakrishnan 14
holds a B.S. in Mechanical Engineering from the Indian Institute of Technology and a M.S. and Ph.D in Mechanical Engineering from the State University of New York at Stony Brook. James M. Hilderhoff. Mr. Hilderhoff joined us in August 2020 as our Chief Commercial Officer. Prior to joining us, Mr. Hilderhoff served as the Chief Commercial Officer – North America for Wabtec Corporation, a publicly-traded leading global provider of equipment, systems, digital solutions, and value-added services for the freight and transit rail sectors, from February 2019 to July 2020. Prior to Wabtec Corporation's merger with General Electric Company's transportation business in February 2019, Mr. Hilderhoff served in sales, service, operations and marketing roles in various businesses of General Electric Company for over thirty years, including GE's transportation and power businesses. Mr. Hilderhoff served as General Manager, Global Sales and Marketing of GE's transportation business from January 2016 to February 2019, and also served as General Manager, Americas Services Operation for GE's transportation business from 2010 to December 2015. Mr. Hilderhoff holds an M.B.A. in Business Administration from the University of Pennsylvania, Wharton School of Business and a B.S. degree in Engineering Science from Pennsylvania State University. Thomas J. Castle. Mr. Castle joined us in November 2015 as our Senior Vice President—North American Wind Operations and Global Operational Excellence. In February 2019, Mr. Castle was named our Senior Vice President—U.S. and Transportation Operations. In May 2019, Mr. Castle was named our Senior Vice President – Operations, Strategic Markets. Prior to joining us, Mr. Castle was with Honeywell Aerospace from 2007 to 2015. Mr. Castle served as the Vice President of Integrated Supply Chain, Americas Electronics Operations Center from 2014 to 2015. From 2012 to 2014, he was the Global Vice President of the Honeywell Operating System for Aerospace. Prior to that, Mr. Castle held various positions at the Americas Services Organization from 2007 to 2012. From 1996 to 2007, Mr. Castle was with GE Aviation in roles of increasing responsibility, most recently as the Managing Director of a manufacturing facility in Thailand from 2005 to 2007. Mr. Castle holds a B.S. degree in Aeronautics from St. Louis University. 15
Steven G. Fishbach. Mr. Fishbach has served as our General Counsel since January 2015. Prior to joining us, Mr. Fishbach served as Deputy General Counsel of Global Cash Access Holdings, Inc. from 2011 to 2015 and Associate General Counsel from 2009 to 2011. Prior to that, Mr. Fishbach served in various senior roles in the legal department of Fidelity National Information Services, Inc./eFunds Corporation from 2005 to 2008. Mr. Fishbach also practiced corporate and securities law at Squire Sanders (now Squire Patton Boggs) from 2000 to 2005. Mr. Fishbach holds a B.A. degree in American Studies from Georgetown University and a J.D. degree from William & Mary Law School. 1615
Item 1A. RiskRisk Factors You should carefully consider the following risk factors. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition, growth prospects and cash flows could suffer significantly. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K. Risks Related to Our Wind Blade Business A significant portion of our business is derived from a small number of customers, and two wind blade customers in particular, therefore any loss of or reduction in purchase orders, failure of these customers to fulfill their obligations or our failure to secure long-term supply agreement renewals from these customers could materially harm our business. Substantially all of our revenues are derived from four wind blade customers. Two customers, Vestas and GE Wind, accounted for 49.7% and 23.4%, respectively, of our total net sales for the year ended December 31, 2020, and 46.1% and 25.7%, respectively, of our total net sales for the year ended December 31, 2019, and 32.0% and 31.7%, respectively, of our total net sales for the year ended December 31, 2018, and 27.9% and 44.6%, respectively, of our total net sales for the year ended December 31, 2017.2018. In addition, two customers, Nordex and Siemens Gamesa accounted for 15.3% and 4.7%, respectively, of our net sales for the year ended December 31, 2020, 16.1% and 5.1%, respectively, of our net sales for the year ended December 31, 2019, and 19.0% and 11.2%, respectively, of our net sales for the year ended December 31, 2018, and 16.0% and 9.7%, respectively, of our net sales for the year ended December 31, 2017.2018. Accordingly, we are substantially dependent on continued business from our current wind blade customers, and Vestas and GE Wind in particular. If one or more of our wind blade customers were to reduce or delay wind blade orders, file for bankruptcy or become insolvent, fail to pay amounts due or satisfactorily perform their respective contractual obligations with us or otherwise terminate or fail to renew their long-term supply agreements with us, our business, financial condition and results of operations could be materially harmed. Defects in materials and workmanship or wind blade failures could harm our reputation, expose us to product warranty or other liability claims, decrease demand for wind blades we manufacture, or materially harm existing or prospective customer relationships.relationships, and our reserves for warranty expenses might not be sufficient to cover all future costs. Defects in the wind blades we manufacture whether caused by a design, engineering, materials, manufacturing or component failure or deficiencies in our manufacturing processes, are unpredictable and an inherent risk in manufacturing technically advanced products.products that involve a significant amount of manual labor and processes. Defects may arise from multiple causes, including design, engineering, materials, manufacturing and components failures as well as deficiencies in our manufacturing processes. Under our supply agreements, we warranty the materials and workmanship of the wind blades while our customers are responsible for the fitness of use and design of the wind blades. We have in the past, experienced wind blade testing failures and defects at some of our facilities during the startup manufacturing phase of new products, and we may experience failures or defects in the future. WeWind blades that we have manufactured have also experienced wind blade failuresfailed in the field. Any such customer qualification and wind blade testing failures or other product defects in the future could materially harm our existing and prospective customer relationships. Specifically, negative publicity about the quality of the wind blades we manufacture or defects in the wind blades supplied to our customers could result in a reduction in wind blade orders, increased warranty claims, product liability claims and other damages or termination of our long-term supply agreements or business relationships with current or new customers. In addition, we have recently started wind blade production at a new facility in Yangzhou, China in March 2019 and have commenced operations at a new facility in Chennai, India in the first quarter of 2020 which may expose us to greater risk of warranty claims as these facilities ramp up to serial production levels. We may determine that resolving potential warranty claims through a negotiated settlement may be in the best interest of the business and long-term customer relationships. Wind blades may also fail due to lightning strikes or other extreme weather, which could also result in negative publicity regarding our wind blades and wind energy in general. In addition, product defects may require costly repairs or replacement components, a change in our manufacturing processes or recall of previously manufactured wind blades, which could result in significant expense and materially harm our existing or prospective customer relationships. Further, defects or product liability claims, with or without merit, may result in negative publicity that could harm our future sales and our reputation in the industry. Any of the foregoing could materially harm our business, operating results and financial condition.
17We provide warranties for all of the wind blades and precision molding and assembly systems we produce, including parts and labor, for periods that typically range from two to five years depending on the product sold. Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, shipping and handling and de-installation and re-installation costs at customers’ sites. Our assumptions could be materially different from the actual performance of our products and these remediation expenses in the future. The expenses associated with wind blade repair and remediation activities can be substantial and may include changes to our manufacturing processes. If our estimates prove materially incorrect, we could incur warranty expenses that exceed our reserves and be required to make material unplanned cash expenditures, which could materially harm our business, operating results and financial condition.
16
We operate in an industry characterized by changing customer demands and associated transition costs, which could materially harm our business. The wind energy industry is competitive and is characterized by evolving customer demands. As a result, we must adapt quickly to customer requests for changes to wind blade specifications, which increases our costs and can provide periods of reduced revenue and margins. For instance, during 20192020 and into 2020,2021, we have undertaken and will undertake model transitions at several of our facilities for various customer demands. In 2019,2020, we had 10several manufacturing lines in transition which adversely impacted our revenue and profitability. We currently expect to have manufacturing lines in transition during 20202021 which could adversely affect our revenue and profitability in 2020.2021. We are generally able totypically share transition costs with the customer in connection with these changing customer demands, but any sharing is usually the subject of negotiation and the amount is not always contractually defined. If we do not receive transition payments from our customers sufficient to cover our transition costs or lost margins, our business, financial condition, and results of operations could be materially harmed. We have experienced, and could in the future experience, quality or operational issues in connection with plant construction or expansion, wind blade model transitions and wind blade manufacturing, which could result in losses and cause delays in our ability to complete our projects and may therefore materially harm our business, financial condition and results of operations. We dedicate most of the capacity of our current wind blade manufacturing facilities to existing customers and, as a result, we may need to build additional manufacturing capacity or facilities to serve the needs of new customers or expanded needs of existing customers. Since the third quarter of 2016, we have commenced operations at four new manufacturing facilities in Mexico, one in Turkey, one in Yangzhou, China and one in Chennai, India and one in Iowa.India. The construction of new plants and the expansion of existing plants involves significant time, cost and other risks. We generally expect our plants to generate losses in their first 12 to 2418 months of operations related to production startup costs. Additionally, numerous factors can contribute, and have in the past contributed, to delays or difficulties in the startup of, or the adoption of our manufacturing lines to produce larger wind blade models, which we refer to as model transitions, in our manufacturing facilities. These factors include permitting, construction or renovation delays, defects or issues with product tooling, the engineering and fabrication of specialized equipment, the modification of our general production know-how and customer-specific manufacturing processes to address the specific wind blades to be tested and built, changing and evolving customer specifications and expectations and the hiring and training of plant personnel. If our production or the delivery by any third-party suppliers of any custom equipment is delayed, the construction or renovation of the facility, or the addition of a production line would be delayed. Any delays or difficulties in plant startup or expansion may result in cost overruns, production delays, contractual penalties, loss of revenues, reduced margins and impairment of customer relationships, which could materially harm our business, financial condition and results of operations. For example, in 2019, we experienced construction and startup delays with respect to our new manufacturing facility in Yangzhou, China. These delays resulted in us paying liquidated damages of $7.8 million to one of our customers payable in installment payments in 2019 and 2020. Some of our long-term supply agreements with our customers are subject to early termination and volume reductions at the discretion of our failure to perform our obligationscustomers, and any early termination of or reduced volumes of wind blades purchased under these agreements or the termination of these agreements wouldcould materially harm our business, financial condition and results of operation. operations. Our current long-term supply agreements expire between the end of the third quarter of 20202021 and the end of 2023.2024. Some of our long-term supply agreements contain provisions that allow for the early termination of these agreements upon the customer providing us with advance written notice and paying an early termination fee. Additionally, our long-term supply agreements contain provisions allowing our customers to terminate these agreements upon our failure to deliver the contracted wind blade volumes or our failure to meet certain mutually agreed upon cost reductions or a force majeure event that impacts our supply agreements for a contractually specified period of time. Our customers may not continue to maintain long-term supply agreements with us in the future. If one or more of our customers terminate, or reduce the number of lines or fail to renew their long-term supply agreements with us, it would materially harm our business, financial condition and results of operations. 18
Our long-term supply agreements and our backlog are subject to reduction within contractual parameters and we may not realize all of the expected revenue.
Our current long-term wind blade supply agreements generally establish annual purchase requirements on which we rely for our future production and financial forecasts. However, the timing and volume of purchases, within certain parameters, may be subject to change by our customers. In addition, theThe amount of the annual purchase requirements typically decline in the later years of our long-term supply agreements. In some instances,Our customers may not continue to maintain long-term supply agreements with us in the future. For example, Vestas has notified us that it does not intend to renew our Dafeng, China supply agreement, which expires at the end of 2021. If one or more of our customers have the contractual right to require us toterminate, or reduce the number of manufacturing lines committedand volumes of wind blades purchased, or fail to them and correspondingly reducerenew their minimum annual purchase requirements. Additionally, our minimum annual purchase commitments could potentially understate the forecasted net sales that we are likely to generate in a given period or periods if all of our long-term supply agreements remain in placewith us, it would materially harm our business, financial condition and pricing remains materially unchanged. Such minimum annual purchase requirements could also potentially overstate the forecasted net sales that we are likely to generate in a given period or periods if one or moreresults of our long-term supply agreements were to be terminated by our customers for any reason or due to market conditions our plants are underutilized. As a result, we may not realize the forecasted net sales we expect under our long-term supply agreements or pursuant to our backlog, which we define as the value of purchase orders received less the revenue recognized to date on those purchase orders. In addition, fulfillment of our backlog may not result in profits.operations.
17
Many of our long-term supply agreements contain liquidated damages provisions, which may require us to make unanticipated payments to our customers. Many of our long-term supply agreements contain liquidated damages provisions in the event that we fail to perform our obligations thereunder in a timely manner or in accordance with the agreed terms, conditions and standards. Our liquidated damages provisions generally require us to make a payment to the customer if we fail to deliver a product or service on time. For example, we experienced construction and startup delays with respect to our new manufacturing facility in Yangzhou, China and a work stoppage in Matamoros, Mexico during 2019. These delays resulted in us paying liquidated damages of $20.5 million to one of our customers payable in installment payments in 2019 and 2020. We generally try to limit our exposure under any individual long-term supply agreement to a maximum penalty. Nevertheless, if we incur liquidated damages, they may materially harm our business, operating results and financial condition. Our wind turbine OEM customers are facing increasing competition and pricing pressure due to the increasing prevalence of auction-based tenders in wind energy markets, and correspondingly our margins and results of operations may be adversely affected. Many governments are shifting from feed-in tariffs, which typically provide producers of wind energy with favorable prices for wind generated electricity, to unsubsidized, auction-based tenders as a means of promoting the development and growth of renewable energy sources such as wind energy. As a result of this shift, our wind turbine OEM customers are experiencing intense pricing pressure with respect to the sale of their turbines. As a result of this pricing pressure, we will be required to further reduce the costs we incur to manufacture wind blades to remain competitive. We typically share the benefit of cost reductions related to manufacturing wind blades with our customers pursuant to the terms of our long-term supply agreements. If these pricing pressures continue, we may choose to reduce our margins or pass on a greater percentage of the savings to our OEM customers obtained from manufacturing cost reductions than required under our supply agreements to remain competitive, each of which may materially harm our business, financial condition and results of operations. Although a majority of our manufacturing facilities are located outside the United States, our business is still heavily dependent upon the demand for wind energy in the United States and any downturn in demand for wind energy in the United States could materially harm our business. We have developed a global footprint to serve the growing wind energy market worldwide and have wind blade manufacturing facilities in the United States, China, Mexico, Turkey and India. Although a majority of our manufacturing facilities are located outside of the United States, historically more than half of the wind blades that we produced were deployed in wind farms located within the United States. Our Iowa and Mexico manufacturing facilities manufacture wind blades that are generally deployed within the United States. In addition, we exportmany of our wind blades are exported from our China, Turkey and TurkeyIndia manufacturing facilities to the United States and wind blades that will be produced at our India manufacturing facility could be exported by our customers to the United States as well.States. In addition, tariffs imposed by the current administration on components of wind turbines from China, including wind blades, in 2018 and 2019 could also havehas had a negative impact on demand for our wind blades manufactured in our 19
Chinese manufacturing facilities. Consequently, demand for wind energy and our wind blade sales in the United States could be adversely affected by a variety of reasons and factors, and any downturn in demand for wind energy and our wind blade sales in the United States could materially harm our business. We could experience shortages of raw materials or components critical to our manufacturing needs, which may hinder our ability to perform under our supply agreements. We rely upon third parties for raw materials, such as fiberglass, carbon, resins, foam core and balsa wood, and various components for the wind blades we manufacture. Some of these raw materials and components may only be purchased from a limited number of suppliers. For example, balsa wood is only grown and produced in a limited number of geographies and is only available from a limited number of suppliers. Additionally, our ability to purchase the appropriate quantities of raw materials is constrained by our customers’ transitioning wind blade designs and specifications. As a result, we maintain relatively low inventory and acquire raw materials and components as needed. Due to significant international demand for these raw materials from many industries, we may be unable to acquire sufficient quantities or secure a stable supply for our manufacturing needs. For example, in 2019, we experienced shortages in the supply of balsa wood and other core materials which adversely impacted our results of operations.materials. If shortages or delays occur, we may be unable to provide our products to our customers on time, or at all. In some instances, our customers directly control the purchase of certain key raw materials and components and if they are unable to procure and provide us with such raw materials and components, it could cause delays and disruptions with respect to our business and operations. In 2020, we procured approximately 25% of our raw materials from China so any weather events, strikes, other force majeure events or geopolitical developments impacting China could disrupt our supply chain. In addition, a disruption in any aspect of our global supply chain caused by transportation delays, customs 18
delays, cost issues or other factors could result in a shortage of raw materials or components critical to our manufacturing needs. For example, in 2020 and 2021, we have experienced several delays in receipt of certain raw materials used to make our products primarily due to COVID-19 outbreaks amongst port workers at certain ports in the United States. Any supply shortages, delays in the shipment of materials or components from third party suppliers, or changes in the terms on which they are available could disrupt or materially harm our business, operating results and financial condition. The concentration of customers in our wind business could enable one or more of our customers to attempt to substantially influence our policies, business and affairs going forward, or adversely affect our business, financial condition or results of operations if one or more of our customers experience financial difficulties, become insolvent or file for bankruptcy.
Our dependence on five wind blade customers for substantially all of our revenues could encourage these customers to attempt to impose new or additional requirements on us that reduce the profitability of our long-term supply agreements with them or otherwise influence our policies, choice of and arrangements with raw material suppliers and other aspects of our business. Our customers could also attempt to influence the outcome of a corporate transaction if the transaction benefits a customer’s competitor or is otherwise perceived as not advantageous to a customer, which could have the effect of delaying, deterring, or preventing a transaction that could benefit us. In addition, consolidation of some of our customers may result in increased customer concentration and the potential loss of customers. For example, Nordex completed its acquisition of Acciona in 2016 and Gamesa completed the merger of Siemens’ Wind Power with Gamesa in 2017. Although we are not constrained by any exclusivity agreements with any of our existing wind blade customers, they may resist our development of new customer relationships, which could affect our relationships with them or our ability to secure new customers.
In addition, if one or more of our customers experience financial difficulties, demand for the wind blades we manufacture could decline significantly. In such a circumstance, we could also be at risk of collecting accounts receivable amounts owed from such customers as well as realizing the value of inventory balances for such customers. Similarly, if one or more of our customers becomes insolvent or files for bankruptcy, the demand for the wind blades we manufacture from the affected customers could be eliminated altogether. For example, in 2019, Senvion GmbH entered into a provisional self-administration procedure concerning its assets as ordered by the Local Court of Hamburg, Germany pursuant to the Insolvency Act in Germany. As a result of this event, we reevaluated the outstanding accounts receivables due from Senvion, the revenue recognized under our supply agreement with Senvion as well as the property, plant and equipment at our Taicang Port, China facility where we manufactured blades for Senvion. As a result of that reevaluation, we revised our estimate of consideration to be received under that contract, which reduced the revenue recorded in the year ended December 31, 2019 by $7.8 million. We also revised the useful life of the property, plant and equipment which was being used to fulfill the Senvion supply agreement which does not have an alternative use. The reevaluation and the lost production from Senvion had an adverse impact on our results of operations for the year ended December 31, 2019. If any of our
20
other customers experience financial difficulties, they also may seek pricing concessions, extended payment terms, reduced minimum purchase commitments and other changes to the key terms of our supply agreements that could adversely affect our business, financial condition and results of operations.
Demand for the wind blades we manufacture may fluctuate for a variety of reasons, including the growth of the wind industry, and decreases in demand could materially harm our business and may not be sufficient to support our growth strategy. Our revenues, business prospects and growth strategy heavily depend on the continued growth of the wind industry and our customers’ continuing demand for wind blades. Customer demand could decrease from anticipated levels due to numerous factors outside of our control that may affect the development of the wind energy market generally, portions of the market or individual wind project developments, including: general economic conditions;
| • | general economic conditions; |
the general availability and demand for electricity;
| • | the general availability and demand for electricity; |
wind energy market volatility;
| • | wind energy market volatility; |
cost-effectiveness, availability and reliability of alternative sources of energy and competing methods of producing electricity, including solar and non-renewable sources such as natural gas;
| • | cost-effectiveness, availability and reliability of alternative sources of energy and competing methods of producing electricity, including solar and non-renewable sources such as natural gas; |
foreign, federal and state governmental tariffs, subsidies and tax or regulatory policies;
| • | foreign, federal and state governmental tariffs, subsidies and tax or regulatory policies; |
delays or cancellations of government tenders or auctions for wind energy projects;
| • | delays or cancellations of government tenders or auctions for wind energy projects; |
the availability of financing for wind development projects;
| • | the availability of financing for wind development projects; |
the development of electrical transmission infrastructure and the ability to implement a proper grid connection for wind development projects;
| • | the development of electrical transmission infrastructure and the ability to implement a proper grid connection for wind development projects; |
foreign, federal and state laws and regulations regarding avian protection plans, noise or turbine setback requirements and other environmental laws and regulations;
| • | foreign, federal and state laws and regulations regarding avian protection plans, noise or turbine setback requirements and other environmental laws and regulations; |
administrative and legal challenges to proposed wind development projects; and
| • | our customers’ cost of transporting wind blades from our manufacturing facilities to wind farms; |
| • | increases in the price or lack of availability of raw materials used to produce our wind blades; |
public perception and localized community responses to wind energy projects.
| • | administrative and legal challenges to proposed wind development projects; and |
| • | public perception and localized community responses to wind energy projects. |
In addition to factors affecting the wind energy market generally, our customers’ demand may also fluctuate based on other factors beyond our control. Any decline in customer demand below anticipated levels could materially harm our revenues and operating results and could delay or impede our growth strategy. Changes in customers’ business focus and strategy could materially harm our business and results of operations.
Changes in our customers’ business focus could significantly reduce their demand for wind blades. For instance, GE, the parent corporation of GE Wind, is a highly diversified company that operates in a number of different industries and could decide to devote more resources to operations outside of wind energy or cease selling wind turbines altogether. In addition, we expect that GE Wind will utilize LM for a substantial percentage of its wind blade production in the future. If any of our customers change their business focus, including a strategic shift to insource a material portion of its wind blade production requirements, it could materially harm our business and results of operations.
We have experienced in the past, and our future wind blade production could be affected by, operating problems at our facilities, which may materially harm our operating results and financial condition. Our wind blade manufacturing processes and production capacity have in the past been, and could in the future be, disrupted by a variety of issues, including: production outages to conduct maintenance activities that cannot be performed safely during operations;
| • | production outages to conduct maintenance activities that cannot be performed safely during operations; |
prolonged power failures or reductions;
21
| • | prolonged power failures or reductions; |
| • | breakdowns, failures or substandard performance of machinery and equipment; |
| • | our inability to comply with material environmental requirements or permits; |
19
our inability to comply with material environmental requirements or permits;
| • | inadequate transportation infrastructure, including problems with railroad tracks, bridges, tunnels or roads; |
inadequate transportation infrastructure, including problems with railroad tracks, bridges, tunnels or roads;
| • | supply shortages of key raw materials and components; |
supply shortages of key raw materials and components;
| • | damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the COVID-19 pandemic; and |
damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the coronavirus; and
labor unrest or shortages in skilled labor.
| • | labor unrest or shortages in skilled labor. |
For example, we announced in the first quarter of 2020 that we were shutting down our Newton, Iowa transportation facility due to operational challenges primarily relating to our inability to hire enough skilled personnel to manufacture our transportation products at this facility. In addition, theThe cost of repeated or prolonged interruptions, reductions in production capacity, or the repair or replacement of complex and sophisticated tooling and equipment may be considerable and could result in damages under or the termination of our long-term supply agreements or penalties for regulatory non-compliance, any of which could materially harm our business, operating results and financial condition.
We operate a substantial portion of our business in international markets and we may be unable to effectively manage a variety of currency, legal, regulatory, economic, social and political risks associated with our global operations and those in developing markets. We currently operate manufacturing facilities in the United States, China, Mexico, and Turkey, and we commenced operations at our manufacturing facility in Chennai, India in the first quarter of 2020.India. Since the third quarter of 2016, we have commenced operations at four new manufacturing facilities in Mexico, one in Turkey, one in Yangzhou, China and one in Chennai, India and one in Iowa.India. For the years ended December 31, 2020, 2019 and 2018, approximately 89%, 88% and 2017, approximately 88%, 84% and 80%, respectively, of our net sales were derived from our international operations and we expect that a substantial portion of our projected revenue growth will be derived from those operations. Our overall success depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. The global nature of our operations is subject to a variety of risks, including: difficulties in staffing and managing multiple international locations;
| • | difficulties in staffing and managing multiple international locations; |
increased exposure to foreign currency exchange rate risk or currency exchange controls imposed by foreign countries;
the risk of import, export and transportation regulations and tariffs on foreign trade and investment, including boycotts and embargoes;
taxation and revenue policies or other restrictions, including royalty and tax increases, retroactive tax claims and the imposition of unexpected taxes;
the imposition of, or rapid or unexpected adverse changes in, foreign laws, regulatory requirements or trade policies;
restrictions on repatriation of earnings or capital or transfers of funds into or out of foreign countries;
limited protection for intellectual property rights in some jurisdictions;
inability to obtain adequate insurance;
difficulty administering internal controls and legal and compliance practices in countries with different cultural norms and business practices;
the possibility of being subjected to the jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States;
22
| • | increased exposure to foreign currency exchange rate risk or currency exchange controls imposed by foreign countries; |
| • | the risk of import, export and transportation regulations and tariffs on foreign trade and investment, including boycotts and embargoes; |
| • | taxation and revenue policies or other restrictions, including royalty and tax increases, retroactive tax claims and the imposition of unexpected taxes; |
| • | the imposition of, or rapid or unexpected adverse changes in, foreign laws, regulatory requirements or trade policies; |
| • | restrictions on repatriation of earnings or capital or transfers of funds into or out of foreign countries; |
| • | limited protection for intellectual property rights in some jurisdictions; |
| • | inability to obtain adequate insurance; |
| • | difficulty administering internal controls and legal and compliance practices in countries with different cultural norms and business practices; |
| • | the possibility of being subjected to the jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States; |
| • | the misinterpretation of local contractual terms, renegotiation or modification of existing long-term supply agreements and enforcement of contractual terms in disputes before local courts; |
the inability to maintain or enforce legal rights and remedies at a reasonable cost or at all; and
| • | the inability to maintain or enforce legal rights and remedies at a reasonable cost or at all; and |
the potential for political unrest, expropriation, nationalization, revolution, war or acts of terrorism in countries in which we operate.
| • | the potential for political unrest, expropriation, nationalization, revolution, war or acts of terrorism in countries in which we operate. |
In particular, our operations in China are subject to a variety of specific risks, which may adversely affect our business, including:20
the imposition by the United States of tariffs on certain wind turbine components, including wind turbine blades, being imported into the United States;
the deterioration of the diplomatic and political relationships between the United States and China resulting from such factors as the opposition of the United States to censorship and other policies of the Chinese government, China’s growing trade surpluses with the United States and the introduction by the United States of trade restrictions that would impact Chinese imports and any retaliatory measures that could ensue;
the uncertainty of the Chinese legal regime generally, and in particular in protecting intellectual property and contractual rights, in securing future land use rights, and the recent adoption of new labor, environmental and tax laws, the impacts of which are not yet fully understood; and
various restrictions on our ability to repatriate profits from China to other jurisdictions. See “Risk Factors—Risks Related to our Business as a Whole—We may have difficulty making distributions and repatriating earnings from our Chinese manufacturing operations, which may also occur in some of our other locations.”
We also operate in developing markets, which have, in the past, experienced, and may in the future experience, social and political unrest. For example, Turkey has experienced problems with domestic terrorist and ethnic separatist groups and attempted military coups. The issue of civil rights for Kurdish citizens remains a potential source of political instability, which may be exacerbated by continuing instability in the Middle East.
In addition, the locations of our manufacturing facilities in Juárez, Mexico and Matamoros, Mexico are, and have been in the past, subject to violence related to drug trafficking, including kidnappings and killings as well as labor unrest. These factors and events could negatively impact our ability to hire and retain personnel, especially senior U.S. managers, to continue to work at these facilities, or disrupt our operation in other ways, which could materially harm our business.
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. We may be unsuccessful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business or conduct operations. Our failure to manage these risks successfully could materially harm our business, operating results and financial condition. We may not achieve the long-term growth we anticipate if wind turbine OEMs do not continue to shift from in-house production of wind blades to outsourced wind blade suppliers and if we do not expand our customer relationships and add new customers. Many wind turbine OEMs rely on in-house production of wind blades for some or all of their wind turbines. Our growth strategy depends in large part on the continued expansion of our relationships with our current wind blade customers, and the addition of new key customers. All of our customers possess the financial, engineering and technical capabilities to produce their own wind blades and many source wind blades from multiple suppliers. Our existing customers may not expand their wind energy operations or, if they do, they may not choose us to supply them with new or additional quantities of wind blades. Our collaborative dedicated supplier model for the manufacture of wind blades is a significant departure from traditional vertically integrated methods. As is typical for rapidly evolving industries, customer demand for new business models is highly uncertain. Although we have 23
entered into long-term supply agreements with customers that also produce wind blades for their wind turbines in-house, we may not be able to maintain these customer relationships or enter into similar arrangements with new customers that produce wind blades in-house in the future. In addition, although GE Wind historically outsourced all of their wind blade production requirements prior to its acquisition of LM, we expect that GE Wind will continue to utilize LM for a substantial percentage of its wind blade production in the future. Our business and growth strategies depend in large part on the continuation of the trend toward outsourcing manufacturing. If that trend does not continue or we are unsuccessful in persuading wind turbine OEMs to shift from in-house production to the outsourcing of their wind blade manufacturing, we may not achieve the long-term growth we anticipate and our market share could be limited. A drop in the price of energy sources other than wind energy, or our inability to deliver wind blades that compete with the price of other energy sources, may materially harm our business, financial condition and results of operations. We believe that the decision to purchase wind energy is, to a significant degree, driven by the relative cost of electricity generated by wind turbines compared to the applicable price of electricity from the utility grid and the cost of traditional (i.e. thermal) and other renewable energy sources. Decreases in the prices of electricity from the relevant utility gridtraditional or from renewable energy sources other than wind energy, such as solar, would harm the market for wind energy. In particular, a drop in natural gas prices could lessen the appeal of wind-generated electricity. Technological advancements or the construction of a significant number of power generation plants, including nuclear, coal, natural gas or power plants utilizing other renewable energy technologies, government support for other forms of renewable energy or construction of additional electric transmission and distribution lines could reduce the price of electricity produced by competing methods, thereby making the purchase of wind energy less attractive. For example, in 2017, the current President signed an executive order that is intended to promote the domestic coal industry, which may make the cost of electricity generated from coal more cost competitive. The ability of energy conservation technologies, public initiatives and government incentives to reduce electricity consumption or support other forms of renewable energy could also lead to a reduction in the price of electricity, which would undermine the attractiveness of wind energy and thus wind turbines, and, ultimately wind blades. If prices for electricity generated by wind turbines are not competitive, our business, financial condition and results of operations may be materially harmed. If any precision molding and assembly systems needed for our manufacturing process contains a defect or is not fabricated and delivered in a timely manner, our ongoing manufacturing operations, business, financial condition and results of operation may be materially harmed.
We custom fabricate many of the precision molding and assembly systems used in our facilities. Our customers also have the option of using third-party manufacturers to produce their custom tooling. If any piece of equipment fails, is determined to produce nonconforming or defective products or is not fabricated and delivered in a timely manner, whether produced by us or a third party, our wind blade production could be interrupted and we could be subject to contractual penalties, warranty claims, loss of revenues and damage to our customer relationships, among other consequences.
The long sales cycle involved in attracting new customers may make the timing of our revenue difficult to predict and may cause our operating results to fluctuate.
The complexity, expense and long-term nature of our supply agreements generally require a lengthy customer education, evaluation and approval process. It can take us from several months to years to identify and attract new customers, if we are successful at all. This long sales cycle for attracting and retaining new customers subjects us to a number of significant risks that may materially harm our business, results of operations and financial condition over which we have limited control, including fluctuations in our quarterly operating results. In addition, we may incur substantial expenses and devote significant management effort to develop potential relationships that do not result in agreements or revenue and may prevent us from pursuing other opportunities.
24
We encounter intense competition for limited customers from other wind blade manufacturers, as well as in-house production by wind turbine OEMs, which may make it difficult to enter into long-term supply agreements, keep existing customers and potentially get new customers. We face significant competition from other wind blade manufacturers, and this competition may intensify in the future. The wind turbine market is characterized by a relatively small number of large OEMs. The competitive environment in the wind energy industry may become more challenging in the years ahead, particularly in the event of further consolidation in the industry, which could lead to us having even fewer customers. In addition, a significant percentage of wind turbine OEMs, including all of our current customers, produce some of their own 21
wind blades in-house. As a result, we compete for business from a limited number of customers that outsource the production of wind blades. We also compete with a number of wind blade manufacturers in China, who are growing in terms of their technical capability and aspire to expand outside of China. Some of our competitors have more experience in the wind energy industry, as well as greater financial, technical or human resources than we do, which may limit our ability to compete effectively with them and maintain or improve our market share. Additionally, our long-term supply agreements dedicate capacity at our facilities to our customers, which may also limit our ability to compete if our facilities cannot accommodate additional capacity. If we are unable to compete effectively for the limited number of customers that outsource production of wind blades, our ability to enter into long-term supply agreements with potential new and existing customers may be materially harmed. We could be affected by increasing competition from new and existing industry participants and industry consolidation.
The markets in which we operate are increasingly competitive and any failure on our part to compete effectively on an ongoing basis could materially harm our business, results of operations or financial condition. The key factors affecting competition in the wind energy industry are the capacity and quality of products, technology, price, the ability to fulfill local market requirements and the scope, cost and location of manufacturing facilities.
Competition in the wind energy industry has intensified in recent years as a result of a number of factors, including international expansion by existing industry participants exploiting new markets, particularly as political will around the issues of global warming and the environment become more prominent to the political agenda in those new markets. There has also been increasing pressure from Asian manufacturers improving the quality and reliability of their technologies, and considering moving out of their local markets and into international cross border transactions. Western wind turbine OEMs have now started using Asian manufacturers for a portion of their wind blades. Market entry by certain large industrial groups, including those previously unconnected to the wind energy market, through acquisitions and license agreements and numerous greenfield establishments in certain markets, also poses a competition risk.
The competitive environment in the wind energy industry may become more challenging in the years ahead, particularly in the event of greater consolidation in the industry, leading to greater market power and “economies of scale” by such market players which translate into being able to offer greater “cost of energy” savings to wind power plant customers. For example, GE completed its acquisition of LM in 2017 and also acquired Alstom S.A.’s power business in 2015; Nordex completed its acquisition of Acciona in 2016 and Gamesa merged with Siemens’ Wind Power in 2017. These transactions or further consolidation in the wind energy industry may have an adverse impact on our business in the future, including, without limitation, reduced demand for our products and services, product innovation, changes in pricing and similar factors, including any competitor’s attempt to duplicate our collaborative dedicated supplier model. Such events could materially harm our business, results of operations, financial condition or prospects.
Significant increases in the prices of raw materials or components that cannot be reflected in the price of our products could negatively affect our operating margins.
The prices of our raw materials and components are subject to price fluctuations resulting from volatility of supply and demand in world markets. Under our long-term supply agreements, our customers generally commit to purchase minimum annual volumes and prices for wind blades are generally set as of the date of our supply agreements and adjusted quarterly, for the cost of raw material and our operating expenses in certain cases. As a result, the competitive nature of the wind blade market and our long-term supply agreements with our customers may delay or prevent us from passing cost increases in raw materials and components on to our customers. Significant increases in the price of raw materials or components used in our manufactured wind blades that cannot
25
be reflected in the price of our products, could negatively affect our operating margins and materially harm our business, operating results or financial condition.
GE’s acquisition of LM Wind Power, our largest competitor, may materially harm our business, financial condition and results of operations and may cause the price of our common stock to decline.
In 2017, GE completed its acquisition of LM Wind Power, our largest competitor. By the end of 2016, we had entered into five supply agreements with GE Wind providing for the supply of wind blades from our Iowa, Mexico, Turkey and our Taicang Port, China facilities. In 2016, we entered into (i) an amended and restated supply agreement for the continued supply of wind blades from our Iowa facility through December 31, 2020, (ii) an amendment to our existing supply agreement for the continued supply of wind blades from our original Juárez, Mexico facility through December 31, 2020 and (iii) a new supply agreement with GE Wind for the supply of incremental wind blades from our second manufacturing facility in Juárez, Mexico through December 31, 2020. GE Wind elected not to renew or extend the Turkey and Taicang Port, China supply agreements, which both expired on December 31, 2017. We expect that GE Wind will utilize LM for a substantial percentage of its wind blade production in the future. As such, GE Wind may not continue to purchase wind blades from us at similar volumes or on as favorable terms in the future. In August 2018, GE Wind did agree to extend our existing supply agreement in one of our Mexico plants by two years to 2022 and increased the number of wind blade manufacturing lines in that facility from three to five. In addition, GE Wind has agreed to transition to a larger blade model in our Newton, Iowa plant in early 2019 and to eliminate its option to terminate their supply agreement at this location prior to its December 2020 expiration. Unless otherwise terminated or renewed, our supply agreements with GE Wind are in effect until the end of 2020 for our Iowa and one of our Mexico facilities and until the end of 2022 for our other Mexico facility. GE Wind may terminate the Mexico supply agreements with no advance notice and paying us termination fees as set forth in the applicable agreement. In addition, either party may terminate these supply agreements upon a material breach by the other party which goes uncured for 30 days after written notice has been provided. If GE Wind elects to utilize LM or another supplier for more of its wind blade production, reduce the volumes of wind blades it purchases from us or terminates any of our supply agreements, it may materially harm our business, financial condition and results of operations.
Certain of our long-term supply agreements are highly dependent upon a limited number of suppliers of raw materials.
Our ability to perform under certain of our long-term supply agreements is currently, and may continue to be in the future, highly dependent on a limited number of suppliers of raw materials. For instance, our agreements with certain customers require us or our customers to purchase raw materials from a single supplier unless additional suppliers are evaluated and found to satisfy the requirements set out in those agreements. In 2015, for example, our ability to supply wind blades to one of our customers was constrained because our customer, who under our agreement was required to procure a sufficient supply of a specific type of material, was unable to procure the material from a single source supplier. Should any of these suppliers of raw materials experience production delays or shortages, have their operations interrupted or otherwise cease or curtail their operations, this may disrupt or materially harm our business, operating results and financial condition.
Significant increases in the cost of transporting the wind blades we manufacture could negatively affect the demand for our products.
A significant portion of our customers’ costs relate to the costs necessary to transport the wind blades we manufacture to their customers’ wind farms. Demand for our products could be negatively affected if the costs our customers bear to transport the wind blades we manufacture materially increase.
The nature of our manufacturing processes and unanticipated changes to those processes could significantly reduce our manufacturing yields and product reliability, which could materially harm our business, operating results and financial condition.
The manufacturing of our wind blades involves highly complex and precise processes which may be dictated by our customers’ requests requiring production in highly controlled environments. Changes in our manufacturing processes or that are required by our customers could affect product reliability. Furthermore, many
26
of our processes are manual to facilitate production flexibility and compliance with customer requirements. A manually dependent manufacturing process can limit capacity and increase production costs. In some cases, existing manufacturing techniques may be insufficient to achieve the volume or cost targets of our customers. For example, our manufacturing processes may at times require a quantity of raw materials greater than the quantity for which we have contracted, making it difficult for us to achieve the targeted cost levels negotiated with our customers. In order to achieve targeted volume and cost levels, we may need to increase the quantity of raw materials for which we contract or develop new manufacturing processes and techniques. While we continue to devote substantial efforts to the improvement of our manufacturing techniques and processes, we may not achieve manufacturing volumes and cost levels in our manufacturing activities that will fully satisfy customer demands, which could materially harm our business, operating results and financial condition.
Our reserves for warranty expenses might not be sufficient to cover all future costs.
We provide warranties for all of the wind blades and precision molding and assembly systems we produce, including parts and labor, for periods that typically range from two to five years depending on the product sold. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, or if we are required to cover remediation expenses or other potential remedies, in addition to our regular warranty coverage we may need to repair or replace the wind blade (which could include significant transportation, installation and erection costs) at our sole expense. Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, shipping and handling and de-installation and re-installation costs at customers’ sites. Our assumptions could be materially different from the actual performance of our products and these remediation expenses in the future. The expenses associated with wind blade repair and remediation activities can be substantial and may include changes to our manufacturing processes. If our estimates prove materially incorrect, we could incur warranty expenses that exceed our reserves and be required to make material unplanned cash expenditures, which could materially harm our business, operating results and financial condition.
We may not be able to meet our customers’ future wind blade supply demands, which may hinder our customer relationships and reputation.
Historically, our existing customers’ demand and MW capacity goals have mirrored the anticipated growth of the wind energy industry. Given the importance of wind energy capture, turbine reliability and cost to power producers, the size, quality and performance of wind blades have become highly strategic to our OEM customers. If we are unable to maintain future manufacturing capacity at levels that meet our customers’ increasing demands, including with respect to volume, technical specifications, or commercial terms, our existing customers may seek relationships with, or give priority to, other wind blade manufacturers or may use or develop their own internal manufacturing capabilities to meet their increased demand, which could materially harm our business, operating results and financial condition. In addition, our reputation could be materially harmed if we are unable to satisfy the requirements of our customers.
We rely on our research and development efforts to remain competitive, and we may fail to develop on a timely basis new wind blade manufacturing technologies that are commercially attractive or permit us to keep up with customer demands. The market for wind blades is subject to evolving customer needs and expectations. Our research and development is invested in developing faster and more efficient manufacturing processes in order to build the new wind blades designed by our customers that more effectively capture wind energy and are adaptable to new growth segments of the wind energy market. Research and development activities are inherently uncertain and the results of our in-house research and development may not be successful. In addition, our competition may adopt more advanced technologies or develop wind blades that are more effective or commercially attractive. We believe that our future success will depend in large part upon our ability to be at the forefront of technological innovation in the wind energy industry and to rapidly and cost-effectively adapt our wind blade manufacturing processes to keep pace with changing technologies, new wind blade design and changing customer needs. If we are unable to do so, our business, operating results, financial condition and reputation could be materially harmed. 27
We depend on third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services, and failures of those third parties to perform their obligations may in turn impede our ability to perform our obligations.
We contract with third parties for certain services relating to the design, construction and maintenance of various components of our production facilities and other systems. If these third parties fail to comply with their obligations:
we may experience delays in the completion of new facilities or expansion of existing facilities;
the facilities may not operate as intended;
we may be required to recognize impairment charges; or
we could experience production delays, which could cause us to miss our production capacity targets and breach our long-term supply agreements, which could damage our relationships with our customers and subject us to contractual penalties and contract termination.
Any of these events could have a material adverse effect on our business, operating results or financial condition. Our customers also contract with third parties for the transportation of the products we manufacture. In particular, a significant portion of the goods we manufacture are transported to different countries, which requires customized shipping cradles, sophisticated warehousing, logistics and other resources. If our customers fail to contract with third parties for certain construction, maintenance, engineering, transportation, warehousing and logistics services, or there are any disruptions, delays or failures in these services, this could have a material adverse effect on our business, operating results or financial condition.
Various legislation, regulations and incentives that are expected to support the growth of wind energy in the United States and around the world may not be extended or may be discontinued, phased out or changed, or may not be successfully implemented, which could materially harm wind energy programs and materially decrease demand for the wind blades we manufacture. The U.S. wind energy industry ishas been dependent in part upon governmental support through certain incentives including federal tax incentives and state RPS programs and may not be economically viable absent such incentives.if a large number of these incentives are not continued. Government-sponsored tax incentive programs including the PTC, and to a lesser extent, the Investment Tax Credit (ITC), are expected to continue to support the U.S. growth of wind energy. The PTC provided the owner of a wind turbine placed in operation before January 1, 2015 with a tenand ITC were recently extended for an additional year credit against its U.S. federal income tax obligations based on the amount of electricity generated by the wind turbine. The PTC was extended in 2015 for wind power projects through December 31, 2019, and was phased down over the term of the PTC extension. Specifically, the PTC was kept at the same rate in effect at the end of 2014 for wind power projects that either commenced construction or met certain safe harbor requirements by the end of 2016, and thereafter was reduced by 20% per year in 2017, 2018 and 2019, respectively. In December 2019, Congress extended the PTC through the end of 2020 and increased the rate from 40% to 60% for projects that commenced construction or met certain safe harbor requirements by the end of 2020 and2021. In addition, there are commissioned by the end of 2024.
In June 2019, the EPA issued the Affordable Clean Energy Rule, which replaced the Clean Power Plan, which was designedalso increasing regulatory efforts globally to promote renewable energy. The Clean Power Plan, which was established by the EPA in 2015, set national standards for states to reduce carbon emissions from power plants. Specifically, the Clean Power Plan required states to reduce carbon emissions from power plants 32% below 2005 levels by 2030. In general, the Affordable Clean Energy Rule, provides for efficiency improvements at power plants and directs individual States to choose how they want to regulate power plant emissions. Unlike the Clean Power Plan, the Affordable Clean Energy Rule, does not set specific standards or limits for carbon emissions.
In addition, many state governments have adopted measures designed to promote wind energy. For example, according to the American Wind Energy Association (AWEA), at the state level, as of December 31, 2019, 29 states, as well as the District of Columbia and Puerto Rico, have implemented RPS programs that mandate that a specific percentage of electricity sales in a state come from renewable energy within a specified period. However, some RPS programs have been challenged and all of them may not continue going forward. These programs have spurred significant growth in the wind energy industry in the United States and a corresponding increase in the
28
demand for our manufactured wind blades. However, although the U.S. government and several state governments have adopted these various programs that are expected to help drive the growth of wind energy, they may approve new or additional programs that might hinder the wind energy industry and therefore negatively impact our business, operating results or financial condition.
China implemented its 13th 5-Year Plan with a goal of 15% energy from non-fossil fuel sources and targeting 210 GWs of grid-connected wind capacity by 2020, according to its National Development and Reform Commission, and employs preferential feed-in tariff schemes, in addition to local tax-based incentives. Mexico has established strict targets, aiming for 35% renewable energy by 2024 and 50% by 2050, according to WoodMac, which it is facilitating through tax incentives. Large European Union members have renewable energy targets for 2020 of between 10% and 49% of all energy use derived from renewable energy sources, according to the European Commission. Turkey enacted Law No. 5346 in 2005 to promote renewable-based electricity generation within its domestic electricity market by introducing tariffs and purchase obligations for distribution companies requiring purchases from certified renewable energy producers. The World Bank also provided to Turkey an aggregate of $600 million of loan proceeds to encourage investors to construct generation plants with renewable energy resources. These programs have spurred significant growth in the wind energy industry internationally and a corresponding increase in the demand for our manufactured wind blades. However, although foreign governments have adopted various programs that are expected to drive the growth of wind energy, they may approve new or additional programs going forward that might hinder the wind energy industry and therefore negatively impact our business as a result. For example, foreign governments may decide to reduce or eliminate these economic incentives for political, financial or other reasons. They may also favor other forms of energy, including current and new sources of energy such as solar, nuclear and hydropower. Foreign governments may also cancel or delay scheduled tender offers or auctions for wind energy projects. For example, the Mexican government recently canceled the country’s fourth energy tender which was in the final stages to contract a minimum 5% of national power by 2021.power.
Because of the long lead times necessary to develop wind energy projects, any uncertainty or delay in adopting, extending or renewing thesethe PTC, ITC or other incentives promoting wind energy beyond their current or future expiration dates could negatively impact potential wind energy installations and result in industry volatility. There can be no assurance that the PTC, the ITC, tender offers, auctions or other governmental programs or subsidies for renewable energy will remain in effect in their present form or at all, and the elimination, reduction, or modification of these programs or subsidies could materially harm wind energy programs in the United States and international markets and materially decrease demand for the wind blades we manufacture and, in turn, materially harm our business, operating results and financial condition. We may not be able to obtain, or agree on acceptable terms and conditions for, government tax credits, grants, loans and other incentives for which we have in the past applied or may in the future apply, which may materially harm our business, operating results and financial condition.
We have in the past and may in the future rely, in part, on tax credits, grants, loans and other incentives under U.S. and foreign governmental programs to support the construction of new plants and expansion of existing manufacturing facilities. We may not be successful in obtaining these tax credits, grants, loans and other incentives, and the tax and other incentives that have already been approved may not be continued in the future. Our ability to obtain funds or incentives from government sources is subject to the availability of funds under applicable governmental programs and approval of our applications to participate in these programs. The application process for these funds and other incentives is and will be highly competitive. We may not be able to satisfy the requirements and milestones imposed by the granting authority as conditions to receipt of the funds or other incentives, the timing of the receipt of the funds may not meet our needs, and, even if obtained, we may be unable to successfully execute on our business plan. Moreover, not all of the terms and conditions associated with these incentive funds have been disclosed to us, and once disclosed, there may be terms and conditions with which we are unable to comply or that are commercially unacceptable to us. Further, participation in certain programs may require us to notify the federal government of certain intellectual property we develop and comply with applicable regulations in order to protect our interests in that intellectual property. In addition, these federal governmental programs may require us to spend a portion of our own funds for every incentive dollar we receive or are permitted to borrow from the government and may impose time limits during which we must use the funds awarded to us that we may be unable to achieve. If we are unable to obtain or comply with the terms of these tax credits, grants, loans or other incentives, our business, operating results and financial condition may be harmed.
29
Adverse weather conditions could impact the wind energy industry in some regions and could materially harm our business, operating results and financial condition.
Our business may be subject to fluctuations in sales volumes due to adverse weather conditions that could delay the erection of wind turbines, the installation of wind blades and the ability of wind turbines to generate electricity efficiently. Moreover, any remediation efforts we could be required to undertake pursuant to wind blade warranties could be delayed or otherwise adversely impacted by poor weather. Although our customer base and manufacturing footprint is geographically diversified, enduring weather patterns or seasonal variations may impact the expansion of the wind energy industry in certain regions. A resulting reduction or delay in demand for the wind blades we manufacture for our customers could materially harm our business, operating results and financial condition.
Our long-term growth and success is dependent upon retaining our senior management and attracting and retaining qualified personnel. Our growth and success depends to a significant extent on our ability to attract and retain highly qualified research and development, management, manufacturing and other key personnel including engineers in our various locations. In addition, we rely heavily on our management team, including Steven C. Lockard, our Chief Executive Officer; William E. Siwek, our President;President and Chief Executive Officer; Ramesh Gopalakrishnan, our Chief Operating Officer - Wind; Bryan Schumaker, our Chief Financial Officer; and other senior management. Although we have executed an employment agreement with each of these executives, these executives and other senior management can resign with little or no notice to us. The inability to recruit and retain key personnel or the unexpected loss of key personnel may materially harm our business, operating results and financial condition. Hiring those persons may be especially difficult because of the 22
specialized nature of our business and our international operations. If we cannot attract and retain qualified personnel, or if we lose the services of Messrs. Lockard, Siwek, Gopalakrishnan, or Schumaker, other key members of senior management or other key personnel, and we do not have adequate succession plans in place, our ability to successfully execute our business plan, market and develop our products and serve our customers could be materially and adversely affected. In addition, because of our reliance on our management team, our future success depends, in part, on its ability to identify and develop talent to succeed its senior management. The retention of key personnel and appropriate senior management succession planning will continue to be critical to the successful implementation of our future strategies. Risks Related to our Transportation Business Our efforts to expand our transportation business and enter into other strategic markets may not be successful. While our primary focus has been to manufacture composite wind blades, our strategy is to expand our transportation business and to enter into other strategic markets. In 2018, we expanded our relationship with Proterra and began supplying bus bodies from a new manufacturing facility in Newton, Iowa in addition to our manufacturing facility in Warren, Rhode Island. We experienced startup challenges and incurred significant losses in connection with the supply of bus bodies to Proterra from our Newton, Iowa manufacturing facility. As result, we are planning to closeclosed our Newton, Iowa bus body manufacturing facility in the first quarter of 2020, and plan to consolidateconsolidated our bus body manufacturing operation into our Warren, Rhode Island manufacturing facility.facility and a manufacturing facility in Juárez, Mexico. The expansion of our transportation business and our entry into other strategic markets will require improved execution in terms of our start up activity and ongoing manufacturing performance as well as significant levels of investment. There can be no assurance that our transportation business or other strategic markets will develop as anticipated or that we will have success in any such markets, and if we do not, we may be unable to recover our investment, which could adversely impact our business, financial condition and results of operations, including potentially impairing the value of our goodwill.operations. We may incur material losses and costs as a result of product liability and warranty claims, litigation and other disputes and claims. We are exposed to warranty and product liability claims if our transportation products fail to perform as expected. We may in the future be required to participate in a recall of these products or the vehicles incorporating our products. If public safety concerns are raised, we may have to participate in a recall even if our products are ultimately found not to be defective. Vehicle manufacturers have experienced increasing recall campaigns in recent years. Our customers may look to us for contribution when faced with recalls and product liability claims. If our 30
customers demand higher warranty-related cost recoveries, or if our transportation products fail to perform as expected, our business, financial condition and results of operations could materially suffer. We may also be exposed to product liability claims, warranty claims and damage to our reputation if our transportation products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury or property damage. Recalls may also cause us to lose additional business from our customers. Material product defect issues may subject us to recalls of those products and restrictions on bidding on new customer programs.
Risks Related to Our Business as a Whole Our facilities orbusiness, operations couldand financial condition during the year ended December 31, 2020 were adversely affected by the COVID-19 pandemic and we cannot estimate the duration of the COVID-19 pandemic and our business may be adversely affected by health epidemics such asin the Coronavirus or other events outsidefuture if the COVID-19 pandemic persists. The COVID-19 pandemic adversely affected our business and operations during the year ended December 31, 2020. During the first quarter of our control. We may be impacted by health epidemics, such as the Coronavirus, or other events outside of our control, such as wars or natural disasters. For example, as a result of the recent Coronavirus quarantine and movement restrictions being imposed in China, we do not expect2020, our China manufacturing facilities to be back at fullwere adversely impacted by the COVID-19 pandemic in the form of reduced production untillevels and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. During the second quarter of 2020, and we may not be able to produceall of our manufacturing facilities with the numberexception of wind blade sets in our China manufacturing facilities thatand our Rhode Island manufacturing facility were required to temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. By the end of the second quarter of 2020, most of our manufacturing facilities had returned to operating at or near normal production levels. We may be required to reinstate temporary production suspensions or volume reductions at our other manufacturing facilities to the extent there is a resurgence of COVID-19 cases in the regions where we originally projected for calendar year 2020.operate or there is an outbreak of positive COVID-19 cases in any of our manufacturing facilities. In addition, although we currently have not experienced any significant disruptions in our global supply chain due to the COVID-19 pandemic, our global supply chain may in the future be adversely affected byif the Coronavirus epidemic, other health epidemics, wars, natural disasters or other events outside our control. If the Coronavirus epidemic or other events outside of our control persist for an extended period of time, they may have an adverse impact on our business, financial condition and results of operations. COVID-19 pandemic persists.
23
We may not be able to manage our future growth effectively, which may materially harm our business, operating results and financial condition.
We expect to continue to expand our business to meet our current and expected future contractual obligations and to satisfy anticipated increased demand for our products. To manage our anticipated expansion, we believe we must scale our internal infrastructure, including establishing additional facilities, improve our operational systems and procedures and manufacturing capabilities, continue to enhance our compliance and quality assurance systems, train and manage our growing employee base, and retain and add to our current executives and management personnel. Rapid expansion of our operations could place a significant strain on our senior management team, support teams, manufacturing lines, information technology platforms and other resources. Difficulties in effectively managing the budgeting, forecasting and other process control issues presented by any rapid expansion could materially harm our business, prospects, results of operations or financial condition. Our inability to implement operational improvements, generate and sustain increased revenue and manage and control our cost of goods sold and operating expenses could impede our future growth and materially harm our business, operating results and financial condition.
Our financial position, revenue, operating results, profitability and cash flows are difficult to predict and may vary from quarter to quarter, which could cause our share price to decline significantly. Our quarterly revenue, operating results, profitability and cash flows have varied in the past and are likely to vary significantly from quarter to quarter in the future. For example, our quarterly results have ranged from an operating profitincome of $21.0$29.0 million for the three months ended September 30, 20172020 to an operating loss of $11.7$15.4 million for the three months ended March 31, 2019.2020. The factors that are likely to cause these variations include: operating and startup costs of new manufacturing facilities;
| • | operating and startup costs of new manufacturing facilities; |
wind blade model transitions;
differing quantities of wind blade production;
unanticipated contract or project delays or terminations;
changes in the costs of raw materials or disruptions in raw material supply;
31
| • | wind blade model transitions; |
| • | differing quantities of wind blade production; |
| • | unanticipated contract or project delays or terminations; |
| • | changes in the costs of raw materials or disruptions in raw material supply; |
| • | scrap of defective products; |
payment of liquidated damages to our customers for late deliveries of our products;
| • | payment of liquidated damages to our customers for late deliveries of our products; |
availability of qualified personnel;
| • | availability of qualified personnel; |
costs incurred in the expansion of our existing manufacturing capacity;
| • | costs incurred in the expansion of our existing manufacturing capacity; |
volume reduction requests from our customers pursuant to our customer agreements;
| • | volume reduction requests from our customers pursuant to our customer agreements; |
damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the coronavirus;
| • | damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the COVID-19 pandemic; |
general economic conditions; and
| • | changes in our effective tax rate; |
| • | general economic conditions; and |
the complexity of the financial assumptions we must use for forecasting our revenue, profitability and operating results under ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and the impact that unanticipated blade transitions have on those estimates.
| • | the complexity of the financial assumptions we must use for forecasting our revenue, profitability and operating results under the revenue recognition standard and the impact that unanticipated blade transitions have on those estimates. |
As a result, our revenue, operating results, profitability and cash flows for a particular period are difficult to predict and may decline in comparison to corresponding prior periods regardless of the strength of our business. It is also possible that in some future periods our revenue, operating results and profitability may not meet the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time, and our business, operating results and financial condition would be materially harmed. The fluctuation of foreign currency exchange rates could materially harm our financial results. Since we conduct a significant portion of our operations internationally, our business is subject to foreign currency risks, including currency exchange rate fluctuations. The exchange rates are affected by, among other things, changes in political and economic conditions. For example, an increase in our Turkey sales and operations will result in a larger portion of our net sales and expenditures being denominated in the Euro and Turkish Lira. Significant fluctuations in the exchange rate between the Turkish Lira and the U.S. dollar, the Turkish Lira and the Euro or the Euro and the U.S. dollar may adversely affect our revenue, expenses, as well as the value of our assets and liabilities. Similarly, an increase in our sales within China may result in a larger portion of our net sales and expenditures being denominated in Chinese Renminbi. The Chinese government controls the procedures by which the Chinese Renminbi is converted into other currencies, and conversion of the Chinese Renminbi generally requires government consent. As a result, the Chinese Renminbi may not be freely convertible into other currencies at all times. If the Chinese government institutes changes in currency conversion procedures, or imposes restrictions on currency conversion, those actions may materially harm our business, liquidity, financial condition and operating results. In addition, significant fluctuations in the exchange rate between the Chinese Renminbi and U.S. dollars may adversely affect our revenues, expenses as well as the value of our assets and liabilities. However, in Mexico, since all of our net sales and some of our expenditures are denominated in U.S. dollars, an increase in our Mexico sales and operations will result in a larger portion of our cost of goods sold being denominated in the Mexican Peso. Significant fluctuations in the exchange rate between the Mexican Peso and the U.S. dollar may adversely affect our expenses, as well as the value of our assets and liabilities. To the extent our future revenues and expenses are generated outside of the United States in currencies other than the U.S. dollar, including the Euro, the Turkish Lira, the Chinese Renminbi, Mexican Peso or India Rupee, among others, we will be subject to increased risks relating to foreign currency exchange rate fluctuations which could materially harm our business, financial condition and operating results. 24
Our manufacturing operations and future growth are dependent upon the availability of capital, which may be insufficient to support our capital expenditures. 32
Our current wind blade manufacturing activities and future growth will require substantial capital investment. For the years ended December 31, 20192020 and 2018,2019, our capital expenditures were $80.3$65.8 million and $74.7$80.2 million, respectively, including assets acquired under finance leases in 2020 and 2019 and 2018 of $5.8$0.2 million and $22.0$5.8 million, respectively. We have recently entered into lease agreements with third parties to lease new manufacturing facilities in China, India and Mexico. Major projects expected to be undertaken include purchasing equipment for our new manufacturing facility in Chennai, India and the continued investment in our Turkey, Mexico, China and ChinaIowa facilities. Our ability to grow our business is predicated upon us making significant additional capital investments to expand our existing manufacturing facilities and build and operate new manufacturing facilities in existing and new markets. We generally estimate that the startup of a new six-linemulti-line manufacturing facility requires cash for net operating expenses and working capital of between $20 million to $25 million and additional capital expenditures primarily for machinery and equipment of between $30$40 million to $35$50 million. In addition, we estimate our annual maintenance capital expenditures to be between $1 million to $2$3 million per facility. We may not have the capital to undertake these capital investments. In addition, our capital expenditures may be significantly higher if our estimates of future capital investments are incorrect and may increase substantially if we are required to undertake actions to comply with new regulatory requirements or compete with new technologies. The cost of some projects may also be affected by foreign exchange rates if any raw materials or other goods must be paid for in foreign currency. We cannot assure you that we will be able to raise funds on favorable terms, if at all, or that future financings would not be dilutive to holders of our capital stock. We also cannot assure you that completed capital expenditures will yield the anticipated results. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants, or other restrictions on our business that could impair our operational flexibility, and would require us to fund additional interest expense. If we are unable to obtain sufficient capital at a reasonable cost or at all, we may not be able to expand production sufficiently to take advantage of changes in the marketplace or may be required to delay, reduce or eliminate some or all of our current operations, which could materially harm our business, operating results and financial condition. As a U.S. corporation with international operations, we are subject to the U.S. Foreign Corrupt Practices Act of 1977, which could impact our ability to compete in certain jurisdictions. As a U.S. corporation, we are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. We have manufacturing facilities in China, Mexico, Turkey and India, countries with a fairly high risk of corruption. Those facilities are subject to routine government oversight. In addition, a number of our raw materials and components suppliers are state-owned, particularly in China. Moreover, due to our need to import raw materials across international borders, we also routinely have interactions, directly or indirectly, with customs officials. In many foreign countries, under local custom, businesses engage in practices that may be prohibited by the FCPA or other similar laws and regulations. Additionally, we continue to hire employees around the world as we continue to expand. Although we have implemented certain procedures and controls designed to ensure compliance with the FCPA and similar laws, there can be no guarantee that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, have not taken and will not take actions that violate our policies and the FCPA, which could subject us to fines, penalties, disgorgement, and loss of business, harm our reputation and impact our ability to compete in certain jurisdictions. In addition, these laws are complex and far-reaching in nature, and, as a result, we may be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Moreover, our competitors may not be subject to the FCPA or comparable legislation, which could provide them with a competitive advantage in some jurisdictions. 33
We may have difficulty making distributions and repatriating earnings from our Chinese manufacturing operations, which may also occur in some of our other locations.
A material portion of our business is conducted in China. As of December 31, 2019, our China operations had unrestricted cash of $9.7 million, most of which will be used to fund our future operations in China. Our ability to repatriate funds from China to the United States is subject to a number of restrictions imposed by the Chinese government. We repatriate funds through several technology license contracts and corporate/administrative service agreements. We are compensated quarterly based on agreed upon royalty rates for such intellectual property licenses and quarterly fees for those services. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of the People’s Republic of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.5 million) of registered capital is contributed to a surplus reserve, our Chinese operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, we can pay dividends equal to 100% of after-tax profit assuming other conditions are met. At December 31, 2019, the amount of the surplus reserve fund was $6.6 million. Any inability to make distributions, repatriate earnings or otherwise access funds from our manufacturing operations in China, if and when needed for use outside of China, could materially harm our liquidity and our business.
Effective internal controls are necessary for us to provide reliable financial reports and effectively address fraud risks. We maintain a system of internal controls to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory 25
environments and to expend significant resources to establish and maintain a system of internal controls that will be adequate to satisfy the reporting obligations of a public company. The effectiveness of our internal controls depends in part on the cooperation of senior managers worldwide. Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Any failure to maintain that system, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business, and lead to our becoming subject to litigation, sanctions or investigations by The NASDAQ Global Market (NASDAQ), the SEC or other regulatory governmental agencies and bodies. Furthermore, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price. The state of financial markets and the economy may materially harm our sources of liquidity and capital.
There has been significant recent turmoil and volatility in worldwide financial markets. These conditions have resulted in a disruption in the liquidity of financial markets, and could directly impact us to the extent we need to access capital markets to raise funds to support our business and overall liquidity position. This situation could affect the cost of such funds or our ability to raise such funds. If we were unable to access any of these funding sources when needed, it could materially harm our business, operating results and financial condition.
Our ability to use our net operating loss carry forwards may be subject to limitation and may result in increased future tax liability.
Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code), contain rules that limit the ability of a company that undergoes an “ownership change” to utilize its net operating loss and tax credit carry forwards and certain built-in losses recognized in years after the “ownership change”. An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitation on the use of pre-ownership change net operating losses (NOLs), credits and certain other tax attributes to offset taxable income earned after the ownership change. The annual limitation is equal to the product of the
34
applicable long-term tax exempt rate and the value of our common stock immediately before the ownership change. This annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized built-in gains and losses for the year. In addition, Section 383 generally limits the amount of tax liability in any post-ownership change year that can be reduced by pre-ownership change tax credit carryforwards. This could result in increased U.S. federal income tax liability for us if we generate taxable income in a future period. Limitations on the use of NOLs and other tax attributes could also increase our state tax liability. The use of our tax attributes will also be limited to the extent that we do not generate positive taxable income in future tax periods. As a result of these limitations, we may be unable to offset future taxable income (if any) with losses, or our tax liability with credits, before such losses and credits expire. Accordingly, these limitations may increase our federal income tax liability.
We experienced an “ownership change” in June 2018, and it remains possible that future transactions may cause us to undergo one or more ownership changes. As of December 31, 2019, we have U.S. federal NOLs of approximately $20.9 million and state NOLs of approximately $158.0 million. The pre-ownership change NOLs existing at the date of change of $47.7 million are subject to annual limitation. We do not believe that the Section 382 and 383 annual limitation will materially impact our ability to utilize the tax attributes that existed as of the date of the ownership change.
We have U.S. federal and state NOLs. In general, NOLs in one country cannot be used to offset income in any other country and NOLs in one state cannot be used to offset income in any other state. Accordingly, we may be subject to tax in certain jurisdictions even if we have unused NOLs in other jurisdictions. Also, each jurisdiction in which we operate may have its own limitations on our ability to utilize NOLs or tax credit carryovers generated in that jurisdiction. These limitations may increase our federal, state, and/or foreign income tax liability.
Our senior, secured current revolving credit facility contains, and any future loan agreements we may enter into may contain, operating and financial covenants that may restrict our business and financing activities.
As of December 31, 2019, we had a $150.0 million revolving credit facility (the Credit Facility) with JPMorgan Chase Bank, N.A. Wells Fargo Bank, N.A., Capital One, N.A. and Bank of America N.A., consisting of a $125.0 million revolving credit facility and a $25.0 million letter of credit sub-facility. As of December 31, 2019, the aggregate outstanding balance under the Credit Facility was $112.4 million. The Credit Facility is secured by substantially all of our assets. In addition, from time to time, we enter into various loan, working capital and accounts receivable financing facilities to finance the construction and ongoing operations of our advanced manufacturing facilities and other capital expenditures. The Credit Facility contains various financial covenants and restrictions on our and our operating subsidiaries’ excess cash flows and ability to make capital expenditures, incur additional indebtedness and pay dividends or make distributions on, or repurchase, our stock. The operating and financial restrictions and covenants of the Credit Facility, as well as our other existing and any future financing agreements that we may enter into, may restrict our ability to finance our operations, engage in business activities or expand or fully pursue our business strategies. Our ability to comply with these covenants may be affected by events beyond our control, and we may not be able to maintain appropriate minimum leverage ratio and fixed charge coverage ratio requirements in the future. A breach of any of these covenants could result in a default under the applicable loan facility, which could cause all of the outstanding indebtedness under such facility to become immediately due and payable by us and/or enable the lender to terminate all commitments to extend further credit. In addition, if we were unable to repay the outstanding indebtedness upon a default, our lenders could proceed against the assets pledged as collateral to secure that indebtedness.
In February 2020, we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement was increased from $150.0 million to $205.0 million. All other material terms and conditions of the Credit Agreement remained the same. We did not make any draw downs on the revolving credit facility in connection with the execution of the Incremental Facility Agreement.
35
Our indebtedness may adversely affect our business, results of operations and financial condition. Our indebtedness could adversely affect our business, results of operations and financial condition by, among other things: requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;
| • | requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes; |
limiting our ability to borrow additional amounts to fund debt service requirements, working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;
| • | limiting our ability to borrow additional amounts to fund debt service requirements, working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes; |
making us more vulnerable to adverse changes in general economic, industry and regulatory conditions and in our business by limiting our flexibility in planning for, and making it more difficult to react quickly to, changing conditions;
| • | making us more vulnerable to adverse changes in general economic, industry and regulatory conditions and in our business by limiting our flexibility in planning for, and making it more difficult to react quickly to, changing conditions; |
placing us at a competitive disadvantage compared with those of our competitors that have less debt and lower debt service requirements;
| • | placing us at a competitive disadvantage compared with those of our competitors that have less debt and lower debt service requirements; |
making us more vulnerable to increases in interest rates since some of our indebtedness is subject to variable rates of interest; and
| • | requiring us to potentially incur additional expenses to amend our London Interbank Offered Rate (LIBOR)-indexed loans to a new reference rate due to the planned phase out of the use of LIBOR; |
| • | making us more vulnerable to increases in interest rates since some of our indebtedness is subject to variable rates of interest; and |
making it more difficult for us to satisfy our financial obligations.
| • | making it more difficult for us to satisfy our financial obligations. |
In addition, we may not be able to generate sufficient cash flow from our operations to repay our outstanding indebtedness when it becomes due and to meet our other cash needs or to comply with the financial covenants set forth therein. If we are not able to pay our debts as they become due, we could be in default of the Credit Facilityunder our senior secured credit facility or other indebtedness. We might also be required to pursue one or more alternative strategies to repay indebtedness, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell assets, it may negatively affect our ability to generate revenues. The elimination of LIBOR could adversely affect our business, results of operations or financial condition.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced plans to phase out the use of LIBOR by the end of 2021. Although the impact is uncertain at this time, the elimination of LIBOR could have an adverse impact on our business, results of operations, or financial condition. We may incur significant expenses to amend our LIBOR-indexed loans and other applicable financial or contractual obligations, including our revolving credit facility, to a new reference rate, which may differ significantly from LIBOR. Accordingly, the use of an alternative rate could result in increased costs, including increased interest expense on our revolving credit facility, and increased borrowing costs in the future. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and we are unable to predict the effect of any such alternatives on our business, results of operations or financial condition.
Much of our intellectual property consists of trade secrets and know-how that is very difficult to protect. If we experience loss of protection for our trade secrets or know-how, our business would be substantially harmed. We have a variety of intellectual property rights, including patents, trademarks and copyrights, but much of our most important intellectual property rights consist of trade secrets and know-how and effective intellectual property protection may be unavailable, limited or outside the scope of the intellectual property rights we pursue in the United States and in foreign countries such as China where we operate. Although we strive to protect our intellectual property rights, there is always a risk that our trade secrets or know-how will be compromised or that a competitor could lawfully reverse-engineer our technology or independently develop similar or more efficient technology. We have confidentiality agreements with each of our customers, suppliers, key employees and 26
independent contractors in place to protect our intellectual property rights, but it is possible that a customer, supplier, employee or contractor might breach the agreement, intentionally or unintentionally. For example, we believe a key former employee may have shared some of our intellectual property with a competitor in China and 36
this former employee or the competitor may use this intellectual property to compete with us in the future. It is also possible that our confidentiality agreements with customers, suppliers, employees and contractors will not be effective in preserving the confidential nature of our intellectual property rights. The patents we own could be challenged, invalidated, narrowed or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Once our patents expire, or if they are invalidated, narrowed or circumvented, our competitors may be able to utilize the inventions protected by our patents. Additionally, the existence of our intellectual property rights does not guarantee that we will be successful in any attempt to enforce these rights against third parties in the event of infringement, misappropriation or other misuse, which may materially and adversely affect our business. Because our ability to effectively compete in our industry depends upon our ability to protect our proprietary technology, we might lose business to competitors and our business, revenue, operating results and prospects could be materially harmed if we suffer loss of trade secret and know-how protection or breach of our confidentiality agreements. If the transfer pricing arrangements we have among our subsidiaries are determined to be inappropriate in one or more jurisdictions, our tax liability may increase.
In many countries, including the United States, we are subject to transfer pricing and other tax regulations designed to ensure that appropriate levels of income are reported as earned in each jurisdiction in which we operate. These regulations require that any international transaction involving associated enterprises be on substantially the same basis as a transaction between unrelated companies dealing at arms’ length and that contemporaneous documentation be maintained to support the transfer prices. We have transfer pricing arrangements among our subsidiaries in relation to various aspects of our business. We consider the transactions among our subsidiaries to be substantially on arm’s-length terms. If, however, a tax authority in any jurisdiction reviews any of our tax returns and determines that the transfer prices and terms we have applied are not appropriate, or that other income of our affiliates should be taxed in that jurisdiction, we may incur increased tax liability, including accrued interest and penalties, which would cause our tax provision to increase, possibly materially. In addition, if the jurisdiction from which the income is reallocated does not agree with the reallocation, both jurisdictions could tax the same income, resulting in double taxation. If tax authorities were to allocate income to a higher tax jurisdiction, subject our income to double taxation, or assess interest and penalties, it would increase our consolidated tax liability, which could materially harm our business, operating results and financial condition.
37
Our insurance coverage may not cover all risks we face and insurance premiums may increase, which may hinder our ability to maintain sufficient coverage to cover losses we may incur.
We are exposed to risks inherent in the manufacturing of wind blades and other composite structures as well as the construction of our facilities, such as natural disasters, breakdowns and manufacturing defects that could harm persons and damage property. We maintain insurance coverage with licensed insurance carriers that limits our aggregate exposure to certain types of catastrophic losses. In addition, we self-insure for a portion of our claims exposure resulting from workers’ compensation and certain events of general liability. We accrue currently for estimated incurred losses and expenses, and periodically evaluate and adjust our claims accrued liability amount to reflect our experience. However, our insurance coverage may not be sufficient to cover the full amount of potential losses. In addition, there are some types of losses such as from warranty, hurricanes, terrorism, wars, or earthquakes where insurance is limited and/or not economically justifiable. If we were to sustain a serious uninsured loss or a loss exceeding the limits of our insurance policies, the resulting costs could have a material adverse effect on our business prospects, results of operations and financial condition. Further, our insurance policies provide for our premiums to be adjusted annually. If the premiums we pay for our policies increase significantly, we may be unable to maintain the same level of coverage we currently carry, or we will incur significantly greater costs to maintain the same level of coverage, including through higher deductibles.
We may be subject to significant liabilities and costs relating to environmental and health and safety requirements. We are subject to various environmental, health and safety laws, regulations and permit requirements in the jurisdictions in which we operate governing, among other things, health, safety, pollution and protection of the environment and natural resources, the handling and use of hazardous substances, the generation, storage, treatment and disposal of wastes, and the cleanup of any contaminated sites. In June 2018, Iowa OSHA,Iowa’s Occupational Safety and Health Administration, a division of the Iowa Department of Labor, issued a citation and notification of penalty to us alleging that certain of our workplace practices and conditions at our Newton, Iowa wind blade manufacturing facility had violated the Iowa Occupational Safety and Health Act. Specifically, the citation cited us for multiple alleged violations and proposed that we pay an aggregate penalty of $0.2 million. In March 2019, we entered into a settlement agreement with the Iowa Department of Labor pursuant to which we agreed to make a settlement payment of $0.1 million and to implement certain safety enhancements at our Newton, Iowa manufacturing facility to fully resolve this matter. We have incurred, and expect to continue to incur, capital and operating expenditures to comply with such laws, regulations and permit requirements. While we believe that we currently are in material compliance with all such laws, regulations and permit requirements, any noncompliance may subject us to a range of enforcement measures, including the imposition of monetary fines and penalties, other civil or criminal sanctions, remedial obligations, and the issuance of compliance requirements restricting our operations. In addition, the future adoption of more stringent laws, regulations and permit requirements may require us to make additional capital and operating expenditures. Under certain environmental laws and regulations, liabilities also can be imposed for cleanup of currently and formerly owned, leased or operated properties, or properties to which we sent hazardous substances or wastes, regardless of whether we directly caused the contamination or violated any law. For example, we could have future liability relating to any contamination that remains from historic industrial operations by others at our properties. Additionally, some of our facilities have a long history of industrial operations and, in the past, contaminants have been detected and remediated at one of our facilities in Izmir, Turkey. There can be no assurance that we will not in the future become subject to compliance requirements, obligations to undertake cleanup or related activities, or claims or proceedings relating to environmental, health or safety matters, hazardous substances or wastes, contaminated sites, or other environmental or natural resource damages, that could impose significant liabilities and costs on us and materially harm our business, operating results or financial condition. 27
Claims that we infringe, misappropriate or otherwise misuse the intellectual property rights of others could subject us to significant liability and disrupt our business. Our competitors and third partythird-party suppliers of components and raw materials used in our products protect their intellectual property rights by means such as trade secrets and patents. In the future we may be sued for violations of 38
other parties’ intellectual property rights, and the risk of this type of lawsuit will likely increase as our size, geographic presence and market share expand and as the number of competitors in our market increases. Any such claims or litigation, whether meritorious or not, could: be time-consuming and expensive to defend;
divert the attention of our technical and managerial resources;
adversely affect our relationships with current or future customers;
require us to enter into royalty or licensing agreements with third parties, which may not be available on terms that we deem acceptable;
prevent us from operating all or a portion of our business or force us to redesign our manufacturing processes or products, which could be difficult, time-consuming and expensive;
limit the supply or increase the cost of key raw materials and components used in our products;
subject us to significant liability for damages or result in significant settlement payments; and
require us to indemnify our customers or suppliers.
Any of the foregoing could disrupt our business and materially harm our operating results and financial condition. In addition, intellectual property disputes have in the past arisen between our customers which negatively affected such customers’ demand for wind blades manufactured by us. If such intellectual property disputes involving, or between, one or more of our customers should arise in the future, our business could be materially harmed.
We may form joint ventures, or acquire businesses or assets, in the future, and we may not realize the benefits of those transactions.
We have, in the past, entered into joint ventures with third parties for the manufacture of wind blades. For example, we entered into joint ventures with third parties in both our Mexico and Turkey locations. We may create new or additional joint ventures with third parties, or acquire businesses or assets, in the future that we believe will complement or augment our existing business. We cannot assure you that, following any such joint venture or acquisition, we will achieve the expected synergies to justify the transaction. We may encounter numerous difficulties in manufacturing any new products resulting from a joint venture or acquisition that delay or prevent us from realizing their expected benefits or enhancing our business. If we enter into joint ventures or acquire businesses or assets with respect to promising markets, we may not be able to realize the benefit of those joint ventures or acquired businesses assets if we are unable to successfully integrate them with our existing operations and company culture.
Work disruptions resulting from our collective bargaining agreements could result in increased operating costs and materially harm our business, operating results and financial condition. Certain of our employees in Turkey and Matamoros, Mexico, which in the aggregate represented approximately 37%38% of our workforce as of December 31, 2019,2020, are covered by collective bargaining arrangements.agreements. Our collective bargaining arrangementagreement for our certain of our Turkish employeesTurkey facilities are in effect through the end of 2020 and we are in the process of negotiating an amendment for calendar year 2021. In March 2018, we entered into a collective bargaining agreement with a labor union for certain of our employees in our Matamoros, Mexico facility. In January 2019, thousands of workers employed in dozens of manufacturing facilities in Matamoros, Mexico, went on strike. In general, these workers, who were represented by several different labor unions, demanded an increase in their wage rate and an annual bonus. In February 2019, our manufacturing production employees in Matamoros, Mexico, who are represented by a labor union, went on strike also demanding an increase in their hourly wage rate and the payment of an annual bonus. In February 2019, our manufacturing production employees in Matamoros, Mexico, who are represented by a labor union, went on strike also demanding an increase in their hourly wage rate and the payment of an annual bonus. During this strike, our Matamoros manufacturing facility stopped production for several weeks until we reached a revised agreement with 39
our labor union. In the first quarter of 2020, weWe recently amended our Matamoros collective bargaining agreement to adjust the salaries and bonuses payable to our associates for calendar year 20202021 that are covered by this agreement. Additionally, our other employees working at other manufacturing facilities may vote to be represented by a labor union in the future. There can be no assurance that we will not experience labor disruptions such as work stoppages or other slowdowns by workers at any of our facilities. Should significant industrial action, threats of strikes or related disturbances occur, we could experience further disruptions of operations and increased labor costs in Turkey, Mexico or other locations, which could materially harm our business, operating results or financial condition. Any such work stoppage or slow-down at any of our facilities could also result in additional expenses and possible loss of revenue for us. Our information technology infrastructure could experience serious failures or disruptions, the failure of which could materially harm our business, operating results and financial condition. Information technology is part of our business strategy and operations. It enables us to streamline operation processes, facilitate the collection and reporting of business data, and provide for internal and external communications. There are risks that information technology system failures, network disruptions, breaches of data security and phishing and ransomware attacks could disrupt our operations. Any significant disruption or breach may materially harm our business, operating results or financial condition. We incur significant increased costs as a result of operating as a public company, and our management devotes substantial time to compliance initiatives. As a public company, we incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and NASDAQ, impose various requirements on public companies, including requiring establishment and maintenance of effective disclosure controls and internal control over financial reporting and changes in corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs. We estimate that we incur approximately $2 million to $3 million in expenses annually in response to these requirements.
Section 404(a) of the Sarbanes-Oxley Act requires annual management assessment of the effectiveness of our internal control over financial reporting. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our management and other personnel devote a substantial amount of time to these compliance initiatives, diverting their attention away from the day-to-day management of our business. We may also need to upgrade our financial and operating systems, implement additional financial and management controls, reporting systems and procedures, and add additional accounting, auditing and financial staff with appropriate public company experience and technical accounting knowledge. We have operations in China, Mexico, Turkey and India and may have difficulty hiring and retaining employees in these countries who have the experience necessary to implement the kind of management and financial controls that are expected of a U.S. public company. In this regard, for example, China has only recently begun to adopt management and financial reporting concepts and practices like those in the United States. If we are not able to comply with these requirements in a timely manner or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline, and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities, which would require additional financial and management resources.
We are faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
We may be subject to taxation in many jurisdictions in the United States and around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax laws, including increased tax rates or revised interpretations of existing tax laws and precedents, which could harm our liquidity and operating results. In addition, the taxing authorities in these jurisdictions could review our tax returns, or authorities in 40
jurisdictions in which we do not file tax returns could assert that we are subject to tax in those jurisdictions, and in 28
either case could impose additional tax, interest and penalties. Further, the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, or that our transfer pricing arrangements with our foreign subsidiaries are improper, any of which could have a material adverse impact on us and the results of our operations. Risks Related to Ownership of Our Common Stock The price of our common stock may fluctuate substantially and your investment may decline in value. The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including: actual or anticipated fluctuations in our results of operations;
| • | actual or anticipated fluctuations in our results of operations; |
our ability to provide products due to shipments subject to delayed delivery and deferred revenue arrangements;
| • | our ability to provide products due to shipments subject to delayed delivery and deferred revenue arrangements; |
loss of or changes in our relationship with one or more of our customers;
| • | loss of or changes in our relationship with one or more of our customers; |
failure to meet our earnings estimates;
| • | failure to meet our earnings estimates; |
conditions and trends in the energy and manufacturing markets in which we operate and changes in estimates of the size and growth rate of these markets;
| • | conditions and trends in the energy and manufacturing markets in which we operate and changes in estimates of the size and growth rate of these markets; |
announcements by us or our competitors of significant contracts, developments, acquisitions, strategic partnerships or divestitures;
| • | announcements by us or our competitors of significant contracts, developments, acquisitions, strategic partnerships or divestitures; |
availability of equipment, labor and other items required for the manufacture of wind blades;
| • | availability of equipment, labor and other items required for the manufacture of wind blades; |
changes in governmental policies;
| • | changes in governmental policies; |
additions or departures of members of our senior management or other key personnel;
| • | our ability to successfully grow our transportation business; |
changes in market valuation or earnings of our competitors;
| • | additions or departures of members of our senior management or other key personnel; |
sales of our common stock, including sales of our common stock by our directors and officers or by our other principal stockholders;
| • | changes in market valuation or earnings of our competitors; |
the trading volume of our common stock; and
| • | sales of our common stock, including sales of our common stock by our directors and officers or by our other principal stockholders; |
| • | the trading volume of our common stock; and |
general market and economic conditions.
| • | general market and economic conditions. |
In addition, the stock market in general, including NASDAQ, as well as the market for broader energy and renewable energy companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, securities class-action litigation has often been instituted against a company following periods of volatility in the market price of that company’s securities. Securities class-action litigation, if instituted against us, could result in substantial costs or damages and a diversion of management’s attention and resources, which could materially harm our business and operating results.
A significant portion of our total outstanding shares may be sold into the public market in future sales, which could cause the market price of our common stock to drop significantly, even if our business is doing well. Sales of a substantial number of shares of our common stock in the public market can occur at any time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2019,2020, we had 35,180,70636,563,798 shares of common stock outstanding. All shares can now be sold, subject to any applicable volume limitations under federal securities laws. In addition, as of December 31, 2019, there were: (i) 2,594,228 shares subject to outstanding options, We may issue debt or 7.4% ofequity securities under our outstanding shares; (ii) 354,427 restricted stock units, or 1.0% of our outstanding shares; (iii) 491,718
41
performance stock units, or 1.4% of our outstanding shares; and (iv) 6,621,512 shares reserved for future issuance, or 18.8% of our outstanding shares under the Amended and Restated 2015 Stock Option and Incentive Plan (the 2015 Plan) that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements and Rules 144 and 701 under the Securities Act. We also filed aautomatic shelf registration statement, which we filed in September 2017 for the resale of up to 19,774,751 shares of common stock by certain of our common stockholders. We also have2020, or in other registered all shares of common stock that we may issue under our employeeor unregistered convertible debt or equity incentive plans. These shares can be freely sold in the public market upon issuance and subject to the restrictions imposed on our affiliates under Rule 144.offerings.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material 29
portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you and may cause the market price of our common stock to drop significantly. The exercise of options and warrants and other issuances of shares of common stock or securities convertible into common stock under our equity compensation plans will dilute your interest. Under our existing equity compensation plans, as of December 31, 2019,2020, we had outstanding options to purchase 2,594,2281,499,586 shares of our common stock, 354,427668,454 restricted stock units and 491,718650,523 performance stock units to our employees and non-employee directors. From time to time, we expect to grant additional options and other stock awards in accordance with the 2015 Plan.awards. The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of shares of our common stock. Additionally, any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing their percentage ownership of the total outstanding shares. If we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised or we issue stock, stockholders may experience further dilution. If equity research analysts issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.
The trading market for our common stock relies in part on the research and reports that equity research analysts publish about us and our business. We do not control the work performed by these analysts. The demand for our common stock could decline if one or more equity analysts downgrade our stock or if those analysts issue unfavorable or inaccurate commentary. If such analysts cease publishing reports about us or our business, we could lose visibility in the market, which in turn could cause our share price and trading volume to decline.
We do not currently intend to pay dividends on the common stock, which may hinder your ability to achieve a return on your investment.
We have never declared or paid any cash dividends on our common stock. The continued operation and expansion of our business will require substantial funding and thus we currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Accordingly, you are not likely to receive any dividends on common stock in the foreseeable future, and your ability to achieve a return on your investment will therefore depend on appreciation in the price of the common stock.
Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management. Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their 42
shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include: a classified board of directors; limitations on the removal of directors; advance notice requirements for stockholder proposals and nominations; the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our amended and restated by-laws; and the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine. The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, is necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. In addition, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote. In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them. 43
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock. 30
None. Item 2. Properties Our headquarters is located in Scottsdale, Arizona, and we own or lease various other facilities in the United States, China, Mexico, Turkey, India, Denmark and Germany. We believe that our properties are generally in good condition, are well maintained and are generally suitable and adequate to carry out our business at expected capacity for the foreseeable future. The table below lists the locations and square footage forvarious information regarding our facilities as of February 27, 2020:24, 2021: | | Year | | Leased or | | Approximate | | | | | Operating | | Year | | Leased or | | Approximate | | | | Location | | Commenced | | Owned | | Square Footage | | | Description of Use | | Segment | | Commenced | | Owned | | Square Footage | | | Description of Use | Newton, IA, United States | | 2008 | | Leased | | | 337,922 | | | Wind Blade Manufacturing Facility | | U.S. | | 2008 | | Leased | | | 337,922 | | | Wind Blade Manufacturing Facility | Newton, IA, United States | | 2018 | | Leased | | | 114,078 | | | Transportation Manufacturing Facility | | U.S. | | 2018 | | Leased | | | 114,078 | | | Transportation Manufacturing Facility | Dafeng, China | | 2013 | | Leased | | | 381,102 | | | Wind Blade Manufacturing Facility | | Asia | | 2013 | | Leased | | | 381,102 | | | Wind Blade Manufacturing Facility | Dafeng, China | | 2015 | | Leased | | | 446,034 | | | Wind Blade Manufacturing Facility | | Asia | | 2015 | | Leased | | | 446,034 | | | Wind Blade Manufacturing Facility | Taicang Port, China | | 2007 | | Owned | | | 208,445 | | | Precision Molding Facility | | Asia | | 2007 | | Owned | | | 208,445 | | | Precision Molding Facility | Yangzhou, China | | 2018 | | Leased | | | 934,133 | | | Wind Blade Manufacturing Facility | | Asia | | 2018 | | Leased | | | 934,133 | | | Wind Blade Manufacturing Facility | Juárez, Mexico | | 2013 | | Leased | | | 345,984 | | | Wind Blade Manufacturing Facility | | Mexico | | 2013 | | Leased | | | 345,984 | | | Wind Blade Manufacturing Facility | Juárez, Mexico | | 2016 | | Leased | | | 453,096 | | | Wind Blade Manufacturing Facility | | Mexico | | 2016 | | Leased | | | 453,096 | | | Wind Blade Manufacturing Facility | Juárez, Mexico | | 2017 | | Leased | | | 339,386 | | | Wind Blade Manufacturing Facility | | Mexico | | 2017 | | Leased | | | 339,386 | | | Wind Blade Manufacturing Facility | Juárez, Mexico | | 2018 | | Leased | | | 300,277 | | | Precision Molding Manufacturing Facility | | Mexico | | 2018 | | Leased | | | 300,277 | | | Precision Molding Manufacturing Facility | Matamoros, Mexico | | 2017 | | Leased | | | 527,442 | | | Wind Blade Manufacturing Facility | | Mexico | | 2017 | | Leased | | | 527,442 | | | Wind Blade Manufacturing Facility | Izmir, Turkey | | 2012 | | Leased | | | 343,000 | | | Wind Blade Manufacturing Facility | | EMEA | | 2012 | | Leased | | | 343,000 | | | Wind Blade Manufacturing Facility | Izmir, Turkey | | 2015 | | Leased | | | 817,078 | | | Wind Blade Manufacturing Facility | | EMEA | | 2015 | | Leased | | | 817,078 | | | Wind Blade Manufacturing Facility | Warren, RI, United States | | 2004 | | Leased | | | 108,750 | | | Precision Molding Development and Manufacturing and Research and Development Facility, Transportation Manufacturing Facility | | U.S. | | 2004 | | Leased | | | 108,750 | | | Precision Molding Development and Manufacturing and Research and Development Facility, Transportation Manufacturing Facility | Santa Teresa, NM, United States | | 2014 | | Leased | | | 503,710 | | | Wind Blade Storage Facility | | Mexico | | 2014 | | Leased | | | 503,710 | | | Wind Blade Storage Facility | Scottsdale, AZ, United States | | 2015 | | Leased | | | 22,508 | | | Corporate Headquarters | | U.S. | | 2015 | | Leased | | | 22,508 | | | Corporate Headquarters | Kolding, Denmark | | 2018 | | Leased | | | 2,583 | | | Advanced Engineering Center | | U.S. | | 2018 | | Leased | | | 2,583 | | | Advanced Engineering Center | Chennai, India | | 2019 | | Leased | | | 776,280 | | | Wind Blade Manufacturing Facility | | India | | 2019 | | Leased | | | 776,280 | | | Wind Blade Manufacturing Facility | Berlin, Germany | | 2019 | | Leased | | | 4,982 | | | Engineering Center | | U.S. | | 2019 | | Leased | | | 4,684 | | | Engineering Center |
Item 3. Legal Proceedings From time to time, we are party to various lawsuits, claims, and otherFor a discussion of our legal proceedings, that ariserefer to Note 14 – Commitments and Contingencies – (b) Legal Proceedings of the Notes to Consolidated Financial Statements in the ordinary coursePart II, Item 8 of business, some of which are covered by insurance. Upon resolution of any pending legal matters, we may incur charges in excess of presently established reserves. Our management does not believe that any such charges would, individually or in the aggregate, have a material adverse effectthis Annual Report on our financial condition, results of operations or cash flows.Form 10-K.
Item 4. Mine Safety Disclosures Not applicable. 4431
PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information On July 22, 2016, our common stock began trading on the NASDAQ Global Market under the symbol “TPIC.” Prior to that time, there was no public market for our stock. Stock Performance Graph
The following graph and table illustrate the total stockholder return from July 22, 2016 through December 31, 2019,2020, on our common stock, the Russell 2000 Index, the S&P Small Cap 600 Energy (Sector) Index and the NASDAQ Clean Edge Green Energy Index, assuming an investment of $100.00 on July 22, 2016 including the reinvestment of dividends.
| | Base Period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Base Period | | | | | | | | | | | | | | | | | | | | | | | | 7/22/16 | | | 12/30/16 | | | 6/30/17 | | | 12/29/17 | | | 6/29/18 | | | 12/31/18 | | | 6/28/19 | | | 12/31/19 | | | 7/22/16 | | | 12/30/16 | | | 12/29/17 | | | 12/31/18 | | | 12/31/19 | | | 12/31/20 | | TPI Composites, Inc. | | $ | 100.00 | | | $ | 118.29 | | | $ | 136.28 | | | $ | 150.88 | | | $ | 215.63 | | | $ | 181.27 | | | $ | 182.30 | | | $ | 136.50 | | | $ | 100.00 | | | $ | 118.29 | | | $ | 150.88 | | | $ | 181.27 | | | $ | 136.50 | | | $ | 389.23 | | Russell 2000 | | $ | 100.00 | | | $ | 111.89 | | | $ | 116.69 | | | $ | 126.60 | | | $ | 135.47 | | | $ | 111.19 | | | $ | 129.16 | | | $ | 137.56 | | | $ | 100.00 | | | $ | 111.89 | | | $ | 126.60 | | | $ | 111.19 | | | $ | 137.56 | | | $ | 162.82 | | S&P Small Cap 600 Energy (Sector) | | $ | 100.00 | | | $ | 133.11 | | | $ | 84.00 | | | $ | 97.60 | | | $ | 107.35 | | | $ | 55.64 | | | $ | 57.15 | | | $ | 47.19 | | | $ | 100.00 | | | $ | 133.11 | | | $ | 97.60 | | | $ | 55.64 | | | $ | 47.19 | | | $ | 28.17 | | NASDAQ Clean Edge Green Energy | | $ | 100.00 | | | $ | 102.59 | | | $ | 119.52 | | | $ | 134.16 | | | $ | 128.63 | | | $ | 116.50 | | | $ | 139.39 | | | $ | 163.93 | | | $ | 100.00 | | | $ | 102.59 | | | $ | 134.16 | | | $ | 116.50 | | | $ | 163.93 | | | $ | 462.91 | |
Holders As of January 31, 2020,29, 2021, there were five stockholderswas one stockholder of record of our common stock, although there is a much larger number of beneficial owners. 32
Dividends We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain earnings, if any, to finance the development and growth of our business and do not anticipate paying cash dividends on the common stock in the future. Any payment of any future dividends will be at the discretion of the board of directors, subject to compliance with certain covenants in our loan agreements, after taking into account various factors, including our financial condition, operating results, capital requirements, restrictions contained in 45
any future financing instruments, growth plans and other factors the board deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” included in Part II, Item 7.7 of this Annual Report on Form 10-K. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of the People’s Republic of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.526.6 million) of registered capital is contributed to a surplus reserve, our ChineseChina operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, weour China operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. AtAs of December 31, 2019,2020, the amount of the surplus reserve fund was $6.6$7.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Liquidity and Capital Resources” included in Part II, Item 7.7 of this Annual Report on Form 10-K. Securities Authorized for Issuance under Equity Compensation Plans The information required in response to Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K which is incorporated herein by reference. Recent Sales of Unregistered Securities None. Use of Proceeds from Registered Securities None Issuer Purchases of Equity Securities
None
46
Item 6. Selected Financial Data by the Issuer
The following selected consolidated financial data should be readtable summarizes the total number of shares of our common stock that we repurchased during the three months ended December 31, 2020 from certain employees who surrendered common stock to pay the taxes in conjunctionconnection with the information contained in “Management’svesting of restricted stock units. Period | | Total Number of Shares Purchased | | | Average Price Paid per Share | | | Total Number of Shares Purchased as Part of Publicly Announced Program | | | Maximum Number of Shares That May Yet Be Purchased Under the Program | | October (October 1 - October 31) | | | — | | | $ | — | | | | — | | | | — | | November (November 1 - November 30) | | | — | | | | — | | | | — | | | | — | | December (December 1 - December 31) | | | 31,880 | | | | 52.78 | | | | — | | | | — | | Total | | | 31,880 | | | $ | 52.78 | | | | — | | | | — | |
Item 6. Selected Financial Data Not applicable. 33
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report on Form 10-K and the consolidated financial statements and related notes included in Part II, Item 8 of this Annual Report on Form 10-K, in order to understand the factors that may affect the comparability of the financial data presented below. | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 (1) | | | 2016 (1) | | | 2015 | | Consolidated Statement of Operations Data: | | (in thousands, except per share data) | | Net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | | $ | 769,019 | | | $ | 585,852 | | Cost of sales | | | 1,290,619 | | | | 882,075 | | | | 804,099 | | | | 664,026 | | | | 528,247 | | Startup and transition costs | | | 68,033 | | | | 74,708 | | | | 40,628 | | | | 18,127 | | | | 15,860 | | Total cost of goods sold | | | 1,358,652 | | | | 956,783 | | | | 844,727 | | | | 682,153 | | | | 544,107 | | Gross profit | | | 77,848 | | | | 72,841 | | | | 110,471 | | | | 86,866 | | | | 41,745 | | General and administrative expenses | | | 39,916 | | | | 43,542 | | | | 40,373 | | | | 33,892 | | | | 14,126 | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 4,581 | | | | — | | | | — | | | | — | | Restructuring charges, net | | | 3,927 | | | | — | | | | — | | | | — | | | | — | | Income from operations | | | 15,888 | | | | 24,718 | | | | 70,098 | | | | 52,974 | | | | 27,619 | | Other income (expense): | | | | | | | | | | | | | | | | | | | | | Interest income | | | 157 | | | | 181 | | | | 95 | | | | 344 | | | | 161 | | Interest expense | | | (8,179 | ) | | | (10,417 | ) | | | (12,381 | ) | | | (17,614 | ) | | | (14,565 | ) | Loss on extinguishment of debt | | | — | | | | (3,397 | ) | | | — | | | | (4,487 | ) | | | — | | Realized loss on foreign currency remeasurement | | | (4,107 | ) | | | (13,489 | ) | | | (4,471 | ) | | | (757 | ) | | | (1,802 | ) | Miscellaneous income | | | 3,648 | | | | 4,650 | | | | 1,191 | | | | 238 | | | | 246 | | Total other expense | | | (8,481 | ) | | | (22,472 | ) | | | (15,566 | ) | | | (22,276 | ) | | | (15,960 | ) | Income before income taxes | | | 7,407 | | | | 2,246 | | | | 54,532 | | | | 30,698 | | | | 11,659 | | Income tax benefit (provision) | | | (23,115 | ) | | | 3,033 | | | | (15,798 | ) | | | (3,654 | ) | | | (3,977 | ) | Net income (loss) | | | (15,708 | ) | | | 5,279 | | | | 38,734 | | | | 27,044 | | | | 7,682 | | Net income attributable to preferred stockholders(2) | | | — | | | | — | | | | — | | | | 5,471 | | | | 9,423 | | Net income (loss) attributable to common stockholders | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | | $ | 21,573 | | | $ | (1,741 | ) | | | | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | Basic(3) | | | 35,062 | | | | 34,311 | | | | 33,844 | | | | 17,530 | | | | 4,238 | | Diluted(3) | | | 35,062 | | | | 36,002 | | | | 34,862 | | | | 17,616 | | | | 4,238 | | Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.45 | ) | | $ | 0.15 | | | $ | 1.14 | | | $ | 1.23 | | | $ | (0.41 | ) | Diluted | | $ | (0.45 | ) | | $ | 0.15 | | | $ | 1.11 | | | $ | 1.22 | | | $ | (0.41 | ) |
| | December 31, | | | | 2019 | | | 2018 | | | 2017 (1) | | | 2016 (1) | | | 2015 | | Consolidated Balance Sheet Data: | | (in thousands) | | Cash and cash equivalents | | $ | 70,282 | | | $ | 85,346 | | | $ | 148,113 | | | $ | 119,066 | | | $ | 45,917 | | Total assets | | | 826,677 | | | | 604,855 | | | | 545,737 | | | | 436,833 | | | | 329,920 | | Total debt, net of debt issuance costs and discount | | | 141,389 | | | | 137,623 | | | | 121,385 | | | | 123,155 | | | | 129,346 | | Total liabilities | | | 621,627 | | | | 383,898 | | | | 325,183 | | | | 265,433 | | | | 322,287 | | Total convertible and senior redeemable preferred shares and warrants | | | — | | | | — | | | | — | | | | — | | | | 198,830 | | Total stockholders’ equity (deficit) | | | 205,050 | | | | 220,957 | | | | 220,554 | | | | 171,400 | | | | (191,197 | ) |
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 (1) | | | 2016 (1) | | | 2015 | | Other Financial Information: | | (in thousands, except other operating information) | | Total billings(4) | | $ | 1,387,235 | | | $ | 1,006,541 | | | $ | 941,565 | | | $ | 764,424 | | | $ | 600,107 | | EBITDA(4) | | $ | 54,009 | | | $ | 42,308 | | | $ | 88,516 | | | $ | 65,641 | | | $ | 37,479 | | Adjusted EBITDA(4) | | $ | 81,914 | | | $ | 68,173 | | | $ | 100,111 | | | $ | 76,300 | | | $ | 39,281 | | Capital expenditures | | $ | 74,408 | | | $ | 52,688 | | | $ | 44,828 | | | $ | 30,507 | | | $ | 26,361 | | Free cash flow(4) | | $ | (17,324 | ) | | $ | (55,946 | ) | | $ | 29,772 | | | $ | 29,335 | | | $ | 4,932 | | Total debt, net of debt issuance costs and discount | | $ | 141,389 | | | $ | 137,623 | | | $ | 121,385 | | | $ | 123,155 | | | $ | 129,346 | | Net cash (debt)(4) | | $ | (71,779 | ) | | $ | (53,155 | ) | | $ | 24,557 | | | $ | (6,379 | ) | | $ | (90,667 | ) | | | | | | | | | | | | | | | | | | | | | | Other Operating Information: | | | | | | | | | | | | | | | | | | | | | Sets(5) | | | 3,178 | | | | 2,423 | | | | 2,736 | | | | 2,154 | | | | 1,609 | | Estimated megawatts(6) | | | 9,324 | | | | 6,560 | | | | 6,602 | | | | 4,920 | | | | 3,595 | | Dedicated manufacturing lines(7) | | | 52 | | | | 55 | | | | 48 | | | | 44 | | | | 34 | | Manufacturing lines installed(8) | | | 48 | | | | 43 | | | | 41 | | | | 33 | | | | 30 | | Manufacturing lines in startup(9) | | | 14 | | | | 16 | | | | 9 | | | | 3 | | | | 10 | | Manufacturing lines in transition(10) | | | 10 | | | | 15 | | | | — | | | | 3 | | | | 11 | |
(1)
| Reflects the impact of the adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, (Topic 606) effective January 1, 2018. See Note 1 - Recently Issued Accounting Pronouncements - Revenue from Contracts with Customers of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a further discussion. Prior period information for 2015 has not been restated and is, therefore, not comparable to the 2019, 2018, 2017 and 2016 information.
|
(2)
| Represents the accrual of dividends on our convertible and senior redeemable preferred shares, the accretion to redemption amounts on our convertible preferred shares and warrant fair value adjustments. Immediately prior to the closing of the IPO, all preferred shares were converted into shares of our common stock and as a result, the accrual of dividends ceased.
|
(3)
| For the years ended December 31, 2017 and 2016, the weighted-average diluted shares outstanding include the conversion on a net issuance basis of our common warrants and the stock options issued under the 2015 Plan and the 2008 Stock Option and Grant Plan. For the year ended December 31, 2015, the weighted-average common shares outstanding are the same under the basic and diluted per share calculations as we incurred a net loss in that year.
|
(4)
| See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information and the reconciliations of total billings, EBITDA, adjusted EBITDA, free cash flow and net cash (debt) to net sales, net income (loss), net income (loss), net cash provided by (used in) operating activities and total debt, net of debt issuance costs and discount, respectively, the most directly comparable financial measures calculated and presented in accordance with GAAP.
|
(5)
| Number of wind blade sets (which consist of three wind blades) invoiced worldwide in the period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
48
(6)
| Estimated megawatts of energy capacity to be generated by wind blade sets invoiced in the period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
(7)
| Number of wind blade manufacturing lines that are dedicated to our customers under long-term supply agreements at the end of the period. For the year ended December 31, 2017, includes seven manufacturing lines for GE Wind that were not extended beyond 2017. Dedicated manufacturing lines may be greater than total manufacturing line capacity in instances where we have signed new supply agreements for manufacturing facilities that are under construction or have not yet been built. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
(8)
| Number of wind blade manufacturing lines installed and either in operation, startup or transition at the end of the period. For the year ended December 31, 2017, includes four manufacturing lines for GE Wind that were not extended beyond 2017. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
(9)
| Number of wind blade manufacturing lines that were in a startup phase during the pre-production and production ramp-up period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
(10)
| Number of wind blade manufacturing lines that were being transitioned to a new wind blade model during the period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics Used By Management to Measure Performance” included in Part II, Item 7 of this Annual Report on Form 10-K for more information.
|
49
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly those under “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K. OVERVIEW Our Company We are the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. We enable many of the industry’sdeliver high-quality, cost-effective composite solutions through long term relationships with leading wind turbine original equipment manufacturers (OEM), who have historically relied on in-house production, to outsourcein the manufacturing of some of their wind blades through our global footprint of advanced manufacturing facilities strategically located to serve large and growing wind markets in a cost-effective manner. Given the importance of wind energy capture, turbine reliabilitytransportation markets. We also provide field service inspection and cost to power producers, the size, quality and performance of wind blades have become highly strategic to our OEM customers. As a result, we have become a key supplierrepair services to our OEM customers in the manufacture ofand wind bladesfarm owners and related precision moldingoperators, and assembly systems. We have entered into long-term supply agreements pursuant to which we dedicate capacity at our facilities to our customers in exchange for their commitment to purchase minimum annual volumes of wind blade sets (which consist of three wind blades). This collaborative dedicated supplier model provides us with contracted volumes that generate significant revenue visibility, drive capital efficiency and allow us to produce wind blades at a lower total delivered cost, while ensuring critical dedicated capacity for our customers. We also leverage our advanced composite technology and history of innovation to supply high strength, lightweight and durable composite products to the transportation market. In November 2017, we signedWe are headquartered in Scottsdale, Arizona and operate factories throughout the U.S., China, Mexico, Turkey, and India. We operate additional engineering development centers in Denmark and Germany. For a five- year supply agreement with Proterra Inc. (Proterra) to supply Proterra Catalyst® composite bus bodies. In February 2018, we entered into an agreement with Navistar, Inc. (Navistar) to design and develop an all composite Class 8 tractor cab. This collaborative development project was entered into in connection with Navistar’s recent award under the Department of Energy’s (DOE) Super Truck II investment program, which is designed to promote fuel efficiency in commercial vehicles. In 2019, we also agreed to develop prototype composite body delivery vehicles for Workhorse Group. In November 2018, we announced a capital investment of approximately $11.5 million in 2019 to develop a highly automated pilot manufacturing line for the electric vehicle market within our Warren, Rhode Island facility, and we plan to commence operating this pilot line later this year. We expect this investment will enable us to further develop our technology, create defensible product and process IP and demonstrate our capability to manufacture composite components cost effectively at automotive volume rates. We also expect this pilot line will also help our current and potential customers to de-risk the decision-making process to commit to TPI for high-volume manufacturing programs in the future.
Our wind blade and precision molding and assembly systems manufacturing businesses accounted for approximately 96%, 95% and 96%overview of our total net sales for eachCompany, refer to the discussion in “Business—Overview” included in Part I, Item 1 of the years ended December 31, 2019, 2018 and 2017, respectively. As of February 27, 2020, our long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.8 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $5.2 billion through the end of 2023. In recent years, we have experienced significant growth in our OEM customer base, as according to data from WoodMac, our OEM customers collectively accounted for approximately 55% of the global onshore wind energy market and approximately 87% of that market excluding China over the three years ended December 31, 2018, basedthis Annual Report on MWs of energy capacity installed. Additionally, our customers represented 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2018, based on MWs of energy capacity installed. We believe these figures demonstrate the leading position of our existing OEM customers, as well as our opportunity to develop relationships with new OEM customers as additional OEMs seeking to capitalize onForm 10-K.
50
the benefits of outsourced wind blade manufacturing while maintaining high quality customization and dedicated capacity. We believe that these trends will help us to strengthen our current customer base, grow our business worldwide, increase our revenue and improve our business prospects.
We divide ourOur business operations are defined geographically into fourfive geographic operating segments—segments - (1) the United States (U.S.), (2) Asia, (3) Mexico, and(4) Europe, the Middle East and Africa (EMEA) and India (EMEAI), as follows:
Our U.S. segment includes (1)(5) India. For further information regarding our operating segments, refer to Note 19 – Segment Reporting of the manufacturingNotes to Consolidated Financial Statements in Part II, Item 8 of wind blades at our Newton, Iowa plant, (2) the manufacturing of precision molding and assembly systems used to manufacture wind blades at our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry at our Rhode Island facility, (4) wind blade inspection and repair services in North America, (5) our advanced engineering center in Kolding, Denmark, which provides technical and engineering resources to our manufacturing facilities, (6) our engineering center in Berlin, Germany which we purchased in July 2019 and (7) our corporate headquarters, the costs of which are included in general and administrative expenses.
Our Asia segment includes (1) the manufacturing of wind blades at our facilities in Dafeng, China and Yangzhou, China, the latter of which commenced operations in March 2019, (2) the manufacturing of precision molding and assembly systems at our Taicang Port, China facility and (3) wind blade inspection and repair services.
Our Mexico segment manufactures wind blades from three facilities in Juárez, Mexico and a facility in Matamoros, Mexico at which we commenced operations in July 2018. In November 2018, we entered into a new lease agreement with a third party for a new precision molding and assembly systems manufacturing facility in Juárez, Mexico and we commenced operations at this facility in March 2019. This segment also performs wind blade inspection and repair services.Annual Report on Form 10-K.
Our EMEAI segment manufactures wind blades from two facilities in Izmir, Turkey and also performs wind blade inspection and repair services. In February 2019, we entered into a new lease agreement with a third party for a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. This segment also performs wind blade inspection and repair services.
Key Trends Affecting our Business We have identified the following material trends affecting our business: Our business seeks to capitalize on two major global trends: (i) increasing worldwide demand for renewable energy; and (ii) increasing worldwide demand for electric vehicles.
| • | The COVID-19 pandemic adversely affected our business and operations during the year ended December 31, 2020. During the first quarter of 2020, our China manufacturing facilities were adversely impacted by the COVID-19 pandemic in the form of reduced production levels and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. During the second quarter of 2020, all of our manufacturing facilities with the exception of our China manufacturing facilities and our Rhode Island manufacturing facility were required to temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. By the end of the second quarter of 2020, most of our manufacturing facilities had returned to operating at or near normal production levels. Although all of our manufacturing facilities currently are operating at or near normal production levels, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities or at our other locations to the extent there is a resurgence of COVID-19 cases in the regions where we operate or there is an outbreak of positive COVID-19 cases in any of our facilities. |
The wind power generation industry has grown rapidly and expanded worldwide over the last five years to meet global demand for electricity and the expanded use of renewable energy. Our sales of wind blades to our wind turbine customers have grown rapidly over the last several years in response to these trends. In 2019, our net sales grew to $1.44 billion compared to net sales of $1.03 billion in 2018. We expect our revenue to continue to grow in 2020 but at a slower rate than in 2019.
| • | Our business seeks to capitalize on two major global trends: (i) increasing worldwide demand for renewable energy; and (ii) increasing worldwide demand for electric vehicles. |
During the last several years, wind turbine OEMs generally have increasingly outsourced the production of wind blades and other key components to specialized manufacturers to meet this increasing global demand for wind energy in a cost-effective manner in new and growing markets. That shift, together with the overall expansion of the wind power generation industry, has increased our addressable market. Given our growth in production, we have hired several thousand new employees globally in the past two years. In addition, we have expanded our wind turbine OEM customer base from one to five OEM customers since 2012, capitalizing on the growth and expansion of the wind energy generation industry generally as well as the specific trend of most wind turbine OEMs increasing the outsourcing of the manufacturing of wind blades for growth and diversification.
| • | The wind power generation industry has grown rapidly and expanded worldwide over the last five years to meet global demand for electricity and the expanded use of renewable energy. Our sales of wind blades to our wind turbine customers have grown rapidly over the last several years in response to these trends. In 2020, our net sales grew to $1.67 billion compared to net sales of $1.44 billion in 2019. |
5134
| • | We believe the long term global demand for wind energy will continue to be strong and potentially accelerate in the coming years due to a multitude of factors, including: increased cost competitiveness of wind energy compared to fossil fuel generated electricity; increased demand from corporations and utility providers for renewable energy; recent international policy initiatives designed to promote the growth of renewable energy; and the Biden administration’s proposed plans to promote renewable energy growth in the United States. However, many of the recently announced domestic and international policy initiatives to expand renewable energy have yet to be implemented into concrete legislation and regulations. As such, we expect our revenue in 2021 to continue to grow but at a rate lower than our revenue growth rate in 2020 due primarily to lower expected demand for wind blades manufactured in our China manufacturing facilities, but partially offset by stronger expected demand for wind blades manufactured in our Mexico, Turkey and India manufacturing facilities. We expect to produce slightly less wind blades sets in 2021 compared to 2020, but we expect that the average sales price per set in 2021 will be higher than in 2020 because we plan to produce larger wind blades in 2021. |
| • | During the last several years, many wind turbine OEMs have increased the outsourced production of wind blades and other key components to specialized manufacturers to meet the increasing global demand for wind energy in a cost-effective manner in new and growing markets. That shift, together with the overall expansion of the wind power generation industry, has increased our addressable market. Given our growth in production, we have hired several thousand new employees globally in the past two years. In addition, we have expanded our wind turbine OEM customer base from one to five OEM customers since 2012, capitalizing on the growth and expansion of the wind energy generation industry generally as well as the specific trend of most wind turbine OEMs increasing the outsourcing of the manufacturing of wind blades for growth and diversification. |
| • | Changing customer demands, including shifts to bigger wind turbines with larger wind blades, have driven some of our customers to require us to transition to new wind blade models one or two times during the term of a long-term supply agreement. Although we generally receive transition payments to compensate us for certain costs incurred during these transitions, these payments generally do not fully cover the transition costs and lost margin. In 2019,2020, we had a significant number of our manufacturing lines in transition to largerpostponed several wind blade modelsmodel transitions due to the COVID-19 pandemic and we also had a significant number of lines starting up in our new manufacturing facilitiesfacility in Matamoros, Mexico and Yangzhou, China. This large number of transitions and startupsChennai, India, which had an adverse impact on our results of operations and profitability in 2019. In 2020,2020. As such, we expect to continue to have a significantlarger number of lines in transition and startupduring 2021, which will have an adverse impact on our results of operations for 2020, but we2021. We expect thisthese line transitions to provide a foundation for longer term revenue growth and profitability as these lines ramp up to full production levels. |
We expect our new manufacturing facilities to generally generate operating losses in their first 18 months of operations due to production and overhead expenses as they initially operate far below capacity during the pre-production and production ramp up periods. As a result, this generally has a negative impact on our results of operations during these ramp-up periods. In addition, construction of new facilities and expansion of existing facilities, including the fabrication of precision molding and assembly systems to outfit those facilities, is complex and involves inherent risks. For planning purposes, we generally estimate that the startup of a new six-line manufacturing facility requires cash for net operating expenses and working capital of between $20 million to $25 million. We also estimate that capital expenditures, primarily for machinery and equipment, of between $30 million to $35 million will be required. We expect to incur significant startup costs and expenses during 2020 in connection with the recent startup of our new manufacturing facility in Chennai, India.
Many governments are shifting from feed-in tariffs to auction-based tenders as a means of promoting the development and growth of renewable energy sources such as wind energy. As a result of this shift, our wind turbine OEM customers have experienced intense pricing pressure with respect to the sale of their turbines together with increased competitive pricing from solar energy. As a result of these pricing pressures, the financial performance of certain smaller wind turbine OEMs has deteriorated over the last twelve months. In 2019, one of our former customers, Senvion, entered into insolvency proceedings in Germany and Senvion’s insolvency had an adverse impact on our results of operations in 2019. In addition, ENERCON, one of our current customers, announced in 2019 that it was entering into financial restructuring discussions with its lenders. To date, our financial performance has not been impacted by ENERCON’s announced restructuring although if ENERCON’s financial positions deteriorates further in 2020, it could have an adverse impact on our results of operations in 2020.
| • | We expect our new manufacturing facilities to generally generate operating losses in their first 12 to 18 months of operations due to production and overhead expenses as they initially operate far below capacity during the pre-production and production ramp up periods. As a result, this generally has a negative impact on our results of operations during these ramp-up periods. In addition, construction of new facilities and expansion of existing facilities, including the fabrication of precision molding and assembly systems to outfit those facilities, is complex and involves inherent risks. |
5235
| • | The long-term supply agreements we sign with our customers provide us with significant visibility of future production demands due in part to the annual minimum purchase commitments of our customers contained in those agreements. These annual minimum purchase commitments generally require our customers to purchase a negotiated percentage of the manufacturing capacity that we have agreed to dedicate to them. Generally, this percentage begins at 100% of the manufacturing capacity for the first few years of the supply agreement, and the percentage declines over time in subsequent years according to the terms of the agreement, but generally remains above 50%. It is our experience that our customers will generally order wind blades from us in a volume that exceeds (sometimes substantially) the annual minimum purchase commitments contained in our supply agreements, particularly in the later years of a supply agreement when the annual minimum purchase commitment percentage declines. As of February 27, 2020,24, 2021, our long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.8 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $5.2$4.6 billion through the end of 2023.2024. As noted elsewhere in this Annual Report on Form 10-K, some of our long-term supply agreements are subject to early termination by our customers if our customers pay an early termination fee. Additionally, some of our contracts allow our customers to reduce the number of lines under contract without penalty, prior to the end of the contact term. We caution investors that the annual minimum purchase commitments in our long-term supply agreements can understate the forecasted net sales that we are likely to generate in a given period or periods if all of our long-term supply agreements remain in place and pricing remains materially unchanged, and they could potentially overstate the forecasted net sales that we are likely to generate in a given period or periods if one or more of our agreements were to be terminated by our customers for any reason, or our plants are underutilized due to market conditions our plants are underutilized.conditions. See “Business—Wind Blade Long-Term Supply Agreements” included in Part 1, Item 1A of this Annual Report on Form 10-K for additional information. |
As the global vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. We believe there is an increasing demand for composites products for electric vehicles. As part of our diversification strategy, we have made significant investments to expand our transportation business during the last several years. In 2018 and 2019, we experienced significant losses relating to our transportation business and experienced operational challenges as we are expanding this business. Specifically, we experienced extended startup delays and challenges with respect to our Newton, Iowa transportation facility, which had an adverse impact on our results of operations in 2019. We plan to cease manufacturing composite bus bodies from our Newton, Iowa manufacturing facility in the first quarter of 2020 and consolidate these operations into our Warren, Rhode Island manufacturing facility. We expect our transportation business results of operations will improve substantially in 2020 compared to 2019 although we expect it will continue to operate at a loss in 2020.
The Coronavirus will have an adverse impact on our business, particularly our manufacturing facilities in China. We expect that the impact of the Coronavirus will have an adverse impact on our net sales, net income and Adjusted EBITDA for the first quarter of 2020 and also may have an adverse impact on our financial condition and results of operations for the rest of 2020. Although we are currently attempting to take all reasonable steps to mitigate the impact of the Coronavirus, including taking steps to make up the anticipated lost wind blade volume later this year, we currently estimate that the Coronavirus will negatively impact our net income and Adjusted EBITDA in 2020 by up to approximately $10 million. In addition, if we experience any additional unexpected delays in the resumption of our full production capacity at our China manufacturing facilities or incur additional unanticipated costs and expenses as a result of the Coronavirus, such production delays and unanticipated costs and expenses will have a further adverse impact on our business, financial condition and results of operations in 2020.
| • | As the global vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. We believe there is an increasing demand for composites products for electric vehicles. As part of our diversification strategy, we have made significant investments to expand our transportation business during the last several years. In 2018 through 2020, we experienced significant losses relating to our transportation business and experienced operational challenges as we are expanding this business. Specifically, we experienced extended startup delays and challenges with respect to our Newton, Iowa transportation facility, which had an adverse impact on our results of operations in 2019 and 2020. We ceased manufacturing composite bus bodies from our Newton, Iowa manufacturing facility in the first quarter of 2020 and consolidated these operations into our Warren, Rhode Island manufacturing facility. From 2018 to 2020, we invested approximately $50 million in our transportation business. We expect our transportation business will continue to operate at a loss in 2021 and expect to invest between approximately $15 million and $20 million in our transportation business in 2021. |
COMPONENTS OF RESULTS OF OPERATIONS Net Sales We recognize revenue from manufacturing services over time as our customers control the product as it is produced, and we may not use or sell the product to fulfill other customers’ contracts. Net sales include amounts billed to our customers for our products, including wind blades, precision molding and assembly systems and other 53
products and services, as well as the progress towards the completion of the performance obligation for products in progress, which is determined on a ratio of direct costs incurred to date in fulfillment of the contract to the total estimated direct costs required to complete the performance obligation. Cost of Goods Sold Cost of goods sold includes the costs we incur at our production facilities to make products saleable on both products invoiced during the period as well as products in progress towards the completion of each performance obligation. Cost of goods sold includes such items as raw materials, direct and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, production process improvement activities, product engineering and internal transfer costs. In addition, all depreciation associated with assets used in the production of our products is also included in cost of goods sold. Direct labor costs consist of salaries, benefits and other personnel related costs for employees engaged in the manufacturing of our products and services. 36
Startup and transition costs are primarily unallocated fixed overhead costs and underutilized direct labor costs incurred during the period production facilities are transitioning wind blade models and ramping up manufacturing. All direct labor costs are included in the measure of progress towards completion of the relevant performance obligation when determining revenue to be recognized during the period. The cost of sales for the initial wind blades from a new model manufacturing line is generally higher than when the line is operating at optimal production volume levels due to inefficiencies during ramp-up related to labor hours per blade, cycle times per blade and raw material usage. Additionally, these costs as a percentage of net sales are generally higher during the period in which a facility is ramping up to full production capacity due to underutilization of the facility. Manufacturing overhead at each of our facilities includes virtually all indirect costs (including share-based compensation costs) incurred at the plants, including engineering, finance, information technology, human resources and plant management. General and Administrative Expenses General and administrative expenses primarily relate to the unallocated portion of costs incurred at our corporate headquarters and our research facilities and include salaries, benefits and other personnel related costs for employees engaged in research and development, engineering, finance, internal audit, information technology, human resources, business development, global operational excellence, global supply chain, in-house legal and executive management. Other costs include outside legal and accounting fees, risk management (insurance), share-based compensation and certain other administrative and global resources costs. The unallocated research and development expenses incurred at our Warren, Rhode Island location as well as at our Kolding, Denmark advanced engineering center and our Berlin, Germany engineering center are also included in general and administrative expenses. For the years ended December 31, 2020, 2019 2018 and 2017,2018, total research and development expenses totaled $1.0 million, $1.0 million and $0.8 million, and $1.6 million, respectively. Realized Loss on Sale of Assets and Asset Impairments
Realized lossLoss on sale of assets represents the realized losses on the sale of certain receivables, on a non-recourse basis under supply chain financing arrangements with our customers, to financial institutions and realized losses on the sale of other assets at our corporate and manufacturing facilities. Asset impairments represent the realized losses on the impairment of our assets at our corporate and manufacturing facilities.
Restructuring Charges Restructuring charges primarily consist of employee severance, one-time termination benefits and ongoing benefits related to the reduction of our workforce and other costs associated with exit activities, which may include costs related to leased facilities to be abandoned and facility and employee relocation costs. 54
Other Income (Expense) Other income (expense) consists primarily of interest expense on our debt borrowings and the amortization of deferred financing costs on such borrowings. Other income (expense) also includes realized gains and losses onborrowings, foreign currency remeasurement,income and losses, interest income, losses on extinguishment of debt and miscellaneous income and expense. Income Taxes Income taxes consists of federal, state, provincial, local and foreign taxes based on income in jurisdictions in which we operate, including in the U.S., China, Mexico, Turkey and India. The composite income tax rate, tax provisions, deferred tax assets and liabilities vary according to the jurisdiction in which the income or loss arises. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. 37
KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE In addition to measures of financial performance presented in our consolidated financial statements in accordance with GAAP, we use certain other financial measures and operating metrics to analyze our performance. These “non-GAAP” financial measures consist of total billings, EBITDA, adjusted EBITDA, free cash flow and net cash (debt), which help us evaluate growth trends, establish budgets, assess operational efficiencies, oversee our overall liquidity, and evaluate our overall financial performance. The key operating metrics consist of wind blade sets invoiced,produced, estimated megawatts of energy capacity to be generated by wind blade sets invoiced,produced, utilization, dedicated manufacturing lines, manufacturing lines installed, manufacturing lines in operation, manufacturing lines in startup and manufacturing lines in transition,installed, which help us evaluate our operational performance. We believe that these measures are useful to investors in evaluating our performance. Key Financial Measures The key financial measures as of and for the years ended December 31 are as follow: | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | Total billings(1) | | $ | 1,387,235 | | | $ | 1,006,541 | | | $ | 941,565 | | Net income | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | EBITDA(1) | | $ | 54,009 | | | $ | 42,308 | | | $ | 88,516 | | Adjusted EBITDA(1) | | $ | 81,914 | | | $ | 68,173 | | | $ | 100,111 | | Capital expenditures | | $ | 74,408 | | | $ | 52,688 | | | $ | 44,828 | | Free cash flow(1) | | $ | (17,324 | ) | | $ | (55,946 | ) | | $ | 29,772 | | Total debt, net of debt issuance costs and discount | | $ | 141,389 | | | $ | 137,623 | | | $ | 121,385 | | Net cash (debt)(1) | | $ | (71,779 | ) | | $ | (53,155 | ) | | $ | 24,557 | |
55
Key Operating Metrics (2)
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | Sets | | | 3,178 | | | | 2,423 | | | | 2,736 | | Estimated megawatts | | | 9,324 | | | | 6,560 | | | | 6,602 | | Utilization | | | 79 | % | | | 71 | % | | | 86 | % | Dedicated manufacturing lines | | | 52 | | | | 55 | | | | 48 | | Manufacturing lines installed | | | 48 | | | | 43 | | | | 41 | | Manufacturing lines in operation | | | 24 | | | | 12 | | | | 32 | | Manufacturing lines in startup | | | 14 | | | | 16 | | | | 9 | | Manufacturing lines in transition | | | 10 | | | | 15 | | | | — | |
| | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Net sales | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 1,029,624 | | Net income (loss) | | | (19,027 | ) | | | (15,708 | ) | | | 5,279 | | EBITDA(1) | | | 52,323 | | | | 54,009 | | | | 42,308 | | Adjusted EBITDA(1) | | | 94,498 | | | | 85,841 | | | | 68,173 | | Capital expenditures | | | 65,666 | | | | 74,408 | | | | 52,688 | | Net cash provided by (used in) operating activities | | | 37,570 | | | | 57,084 | | | | (3,258 | ) | Free cash flow(1) | | | (28,096 | ) | | | (17,324 | ) | | | (55,946 | ) | Total debt, net of debt issuance costs and discount | | | 216,867 | | | | 141,389 | | | | 137,623 | | Net debt(1) | | | (88,061 | ) | | | (71,779 | ) | | | (53,155 | ) |
(1) | See below for more information and a reconciliation of total billings, EBITDA, adjusted EBITDA, free cash flow and net cash (debt)debt to net sales, net income (loss), net income (loss), net cash provided by (used in) operating activities and total debt, net of debt issuance costs, respectively, the most directly comparable financial measures calculated and presented in accordance with GAAP. |
(2)
| See below for more information on each of our key operating metrics.
|
Key Financial Measures
Total billings
We define total billings, a non-GAAP financial measure, as the total amounts we have invoiced our customers for products and services for which we are entitled to payment under the terms of our long-term supply agreements or other contractual agreements. We monitor total billings, and believe it is useful to present to investors as a supplement to our GAAP measures, because we believe it more directly correlates to sales activity and operations based on the timing of actual transactions with our customers, which facilitates comparison of our performance between periods and provides a more timely indication of trends in sales. Under GAAP, total net sales recognized on products in production represents the total amount that we have recognized as revenue under the cost-to-cost method for services performed during the period under our long-term supply agreements. Services performed but unbilled include procurement of raw materials and production of work in process and undelivered finished goods. Under our long-term supply agreements with our customers, we invoice our customers for wind blades once the blades pass certain acceptance procedures and title passes to our customers. Our customers generally pay us for the wind blades between 5 to 25 days after receipt of the invoice based on negotiated payment terms and when considering our supply chain financing arrangements.
Our use of total billings has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
Total billings includes wind blades that have not been delivered and for which we are responsible if damage occurs to them while we hold them; and
Other companies, including companies in our industry, may define total billings differently, which reduces its usefulness as a comparative measure.
EBITDA and adjusted EBITDA We define EBITDA, a non-GAAP financial measure, as net income or loss plus interest expense (including losses on extinguishment of debt and net of interest income), income taxes and depreciation and amortization. We define adjusted EBITDA as EBITDA plus any share-based compensation expense, plus or minus any realized gains or losses from foreign currency remeasurement,losses or income, plus or minus any gainslosses or lossesgains from the sale of assets.assets and asset impairments, plus any restructuring charges. Adjusted EBITDA is the primary metric used by our management and our board of directors to establish budgets and operational goals for managing our business and evaluating our performance. In addition, our credit agreement (the Credit Agreement) that we entered into in April 2018 contains minimum EBITDA (as defined in the Credit Agreement) covenants with which we must comply. We monitor adjusted EBITDA as a supplement to our GAAP 56
measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period-to-period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities. Our use of adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
| • | adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; |
| • | adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments; |
38
adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
| • | adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness; |
adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
| • | adjusted EBITDA does not reflect losses on extinguishment of debt relating to prepayment penalties, termination fees and the write off of any remaining debt discount and debt issuance costs upon the repayment or refinancing of our debt; |
adjusted EBITDA does not reflect losses on extinguishment of debt relating to prepayment penalties, termination fees and the write off of any remaining debt discount and debt issuance costs upon the repayment or refinancing of our debt;
| • | adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; |
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
| • | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements relating to the future need to augment or replace those assets; |
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements relating to the future need to augment or replace those assets;
| • | adjusted EBITDA does not reflect share-based compensation expense on equity-based incentive awards to our officers, employees, directors and consultants; |
adjusted EBITDA does not reflect the realized gains or losses from foreign currency remeasurement in our international operations;
| • | adjusted EBITDA does not reflect the foreign currency income or losses in our operations; |
adjusted EBITDA does not reflect share-based compensation expense on equity-based incentive awards to our officers, employees, directors and consultants;
| • | adjusted EBITDA does not reflect the gains or losses on the sale of assets and asset impairments; |
adjusted EBITDA does not reflect the realized gains or losses on the sale of assets and asset impairments; and
| • | adjusted EBITDA does not reflect restructuring charges; and |
other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces their usefulness as comparative measures.
| • | other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces their usefulness as comparative measures. |
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments noted in this presentation.herein. Our presentations of EBITDA and adjusted EBITDA should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider EBITDA and adjusted EBITDA alongside other financial performance measures, including our net income (loss) and other GAAP measures. Free cash flow We define free cash flow as net cash provided by (used in) operating activities less capital expenditures. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our business for purposes such as repaying maturing debt and funding business acquisitions. Net cash (debt) We define net cash (debt) as total unrestricted cash and cash equivalents less the total principal amount of debt outstanding. The total principal amount of debt outstanding is comprised of the long-term debt and current maturities of long-term debt as presented in our consolidated balance sheets adding back any debt issuance costs. We believe that the presentation of net cash (debt) provides useful information to investors because our management reviews net cash (debt) as part of our oversight of overall liquidity, financial flexibility and leverage. Net cash (debt) is important when we consider opening new plantsmanufacturing facilities and expanding existing plants,manufacturing facilities, as well as for capital expenditure requirements. 57
The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures: Total billings, 39
EBITDA and adjusted EBITDA for the years ended December 31 are reconciled as follows: | | Year Ended December 31, | | | 2020 | | | 2019 | | | 2018 | | | | 2019 | | | 2018 | | | 2017 | | | | | (in thousands) | | | Net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | | Change in gross contract assets | | | (43,405 | ) | | | (15,011 | ) | | | (13,437 | ) | | Foreign exchange impact(1) | | | (5,860 | ) | | | (8,072 | ) | | | (196 | ) | | Total billings | | $ | 1,387,235 | | | $ | 1,006,541 | | | $ | 941,565 | | | | | | | | | | | | | | | | | (in thousands) | | Net income (loss) | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | | $ | (19,027 | ) | | $ | (15,708 | ) | | $ | 5,279 | | Adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 38,580 | | | | 26,429 | | | | 21,698 | | | | 49,667 | | | | 38,580 | | | | 26,429 | | Interest expense (net of interest income) | | | 8,022 | | | | 10,236 | | | | 12,286 | | | | 10,399 | | | | 8,022 | | | | 10,236 | | Loss on extinguishment of debt | | | — | | | | 3,397 | | | | — | | | | — | | | | — | | | | 3,397 | | Income tax provision (benefit) | | | 23,115 | | | | (3,033 | ) | | | 15,798 | | | | 11,284 | | | | 23,115 | | | | (3,033 | ) | EBITDA | | | 54,009 | | | | 42,308 | | | | 88,516 | | | | 52,323 | | | | 54,009 | | | | 42,308 | | Share-based compensation expense | | | 5,681 | | | | 7,795 | | | | 7,124 | | | | 10,352 | | | | 5,681 | | | | 7,795 | | Realized loss on foreign currency remeasurement | | | 4,107 | | | | 13,489 | | | | 4,471 | | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 4,581 | | | | — | | | Foreign currency loss, net | | | | 19,986 | | | | 4,107 | | | | 13,489 | | Loss on sale of assets and asset impairments | | | | 7,748 | | | | 18,117 | | | | 4,581 | | Restructuring charges, net | | | | 4,089 | | | | 3,927 | | | | — | | Adjusted EBITDA | | $ | 81,914 | | | $ | 68,173 | | | $ | 100,111 | | | $ | 94,498 | | | $ | 85,841 | | | $ | 68,173 | |
(1)
| Represents the effect of the difference in the exchange rates used by our various foreign subsidiaries when converted to U.S. dollars on the net sales and contract assets as of period-end.
|
Free cash flow for the years ended December 31 is reconciled as follows: | | Year Ended December 31, | | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Net cash provided by (used in) operating activities | | $ | 57,084 | | | $ | (3,258 | ) | | $ | 74,600 | | | $ | 37,570 | | | $ | 57,084 | | | $ | (3,258 | ) | Less capital expenditures | | | (74,408 | ) | | | (52,688 | ) | | | (44,828 | ) | | | (65,666 | ) | | | (74,408 | ) | | | (52,688 | ) | Free cash flow | | $ | (17,324 | ) | | $ | (55,946 | ) | | $ | 29,772 | | | $ | (28,096 | ) | | $ | (17,324 | ) | | $ | (55,946 | ) |
Net cash (debt)debt as of December 31 is reconciled as follows: | | December 31, | | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Cash and cash equivalents | | $ | 70,282 | | | $ | 85,346 | | | $ | 148,113 | | | $ | 129,857 | | | $ | 70,282 | | | $ | 85,346 | | Less total debt, net of debt issuance costs | | | (141,389 | ) | | | (137,623 | ) | | | (121,385 | ) | | | (216,867 | ) | | | (141,389 | ) | | | (137,623 | ) | Less debt issuance costs | | | (672 | ) | | | (878 | ) | | | (2,171 | ) | | | (1,051 | ) | | | (672 | ) | | | (878 | ) | Net cash (debt) | | $ | (71,779 | ) | | $ | (53,155 | ) | | $ | 24,557 | | | Net debt | | | $ | (88,061 | ) | | $ | (71,779 | ) | | $ | (53,155 | ) |
Key Operating Metrics(1) Key
The key operating metrics consistas of sets invoiced, estimated megawatts of energy capacityand for wind blade sets invoiced, utilization, dedicated manufacturing lines, manufacturing lines installed, manufacturing lines in operation, manufacturing lines in startup and manufacturing lines in transition.the year ended December 31 are as follows: 58
| | 2020 | | | 2019 | | | 2018 | | Sets | | | 3,544 | | | | 3,189 | | | | 2,423 | | Estimated megawatts | | | 12,080 | | | | 9,598 | | | | 6,560 | | Utilization | | | 81 | % | | | 79 | % | | | 71 | % | Dedicated manufacturing lines | | | 53 | | | | 52 | | | | 55 | | Manufacturing lines installed | | | 55 | | | | 48 | | | | 43 | |
(1) | See below for more information on each of our key operating metrics. |
Sets represents the number of wind blade sets, (which consistconsisting of three wind blades)blades each, which we invoicedproduced worldwide during the period. We monitor sets and believe that presenting sets to investors is helpful because we believe that it is the most direct measurement of our manufacturing output during the period. Sets primarily impact net sales and total billingssales. Estimated megawatts are the energy capacity to be generated by wind blade sets invoiced inproduced during the period. Our estimate is based solely on name-plate capacity of the wind turbine on which the wind blades we manufacture 40
are expected to be installed. We monitor estimated megawatts and believe that presenting estimated megawatts to investors is helpful because we believe that it is a commonly followed measurement of energy capacity across our industry and provides an indication of our share of the overall wind blade market. Utilization represents the percentage of the number of wind blades invoiced during athe period compared to the total potential wind blade capacity of the manufacturing lines installed at the end ofduring the period. We monitor utilization because we believe it helps investors to better understand how close we are to operating at maximum production capacity. Dedicated manufacturing lines are the number of wind blade manufacturing lines that we have dedicated to our customers pursuant to our long-term supply agreements at the end of the period. We monitor dedicated manufacturing lines and believe that presenting this metric to investors is helpful because we believe that the number of dedicated manufacturing lines is the best indicator of demand for the wind blades we manufacture for customers under our long-term supply agreements in any given period. We believeLines become dedicated upon the execution of a long-term supply agreement; this means that lines are typically dedicated manufacturing lines provide an understanding of additional capacity within an existing facility. Dedicated manufacturing lines primarily impacts our net sales and total billings.before they are installed. Manufacturing lines installed represents the number of wind blade manufacturing lines installed and either in operation, startup or transition at the end ofduring the period. We believe that total manufacturing lines installed provides an understanding of the number of manufacturing lines installed and either in operation, startup or transition. Manufacturing lines in operation is the number of wind blade From time to time, we have manufacturing lines installed less the number of manufacturing lines in startup and in transition. We monitor manufacturing lines in operation because we believe it helps investors understand the number of our manufacturing lines that are operating in a mature state of production.
Manufacturing lines in startup is the number of wind blade manufacturing lines that were in a startup phase during the pre-production and production ramp up period,not dedicated to our customers pursuant to the opening of a new manufacturing facility, the expansion of an existing manufacturing facility or the addition of new manufacturing lines in an existing manufacturing facility. We monitor and present this metric because we believe it helps investors to better understand the impact of the startup phase of our new manufacturing facilities on our gross profit and net income.long-term supply agreement.
Manufacturing lines in transition is the number of wind blade manufacturing lines that were being transitioned to a new wind blade model during the period. We monitor and present this metric because we believe it helps investors to better understand the impact of these transitions on our gross profit and net income.
59
RESULTS OF OPERATIONS Year Ended December 31, 20192020 Compared to Year Ended December 31, 20182019 The following table summarizes certain information relating toof our operating results (in thousands) and relatedas a percentage of net sales for the years ended December 31 that have been derived from our consolidated financial statements:statements of operations: | | 2019 | | | 2018 | | | 2020 | | | | 2019 | | | Net sales | | $ | 1,436,500 | | | | 100.0 | % | | $ | 1,029,624 | | | | 100.0 | % | | | 100.0 | | % | | | 100.0 | | % | Cost of sales | | | 1,290,619 | | | | 89.8 | % | | | 882,075 | | | | 85.7 | % | | | 93.5 | | | | | 89.8 | | | Startup and transition costs | | | 68,033 | | | | 4.8 | % | | | 74,708 | | | | 7.2 | % | | | 2.7 | | | | | 4.8 | | | Total cost of goods sold | | | 1,358,652 | | | | 94.6 | % | | | 956,783 | | | | 92.9 | % | | | 96.2 | | | | | 94.6 | | | Gross profit | | | 77,848 | | | | 5.4 | % | | | 72,841 | | | | 7.1 | % | | | 3.8 | | | | | 5.4 | | | General and administrative expenses | | | 39,916 | | | | 2.8 | % | | | 43,542 | | | | 4.2 | % | | | 2.0 | | | | | 2.8 | | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 1.3 | % | | | 4,581 | | | | 0.5 | % | | Loss on sale of assets and asset impairments | | | | 0.5 | | | | | 1.3 | | | Restructuring charges, net | | | 3,927 | | | | 0.2 | % | | | — | | | | 0.0 | % | | | 0.2 | | | | | 0.2 | | | Income from operations | | | 15,888 | | | | 1.1 | % | | | 24,718 | | | | 2.4 | % | | | 1.1 | | | | | 1.1 | | | Other expense | | | (8,481 | ) | | | (0.6 | )% | | | (22,472 | ) | | | (2.2 | )% | | Income before income taxes | | | 7,407 | | | | 0.5 | % | | | 2,246 | | | | 0.2 | % | | Income tax benefit (provision) | | | (23,115 | ) | | | (1.6 | )% | | | 3,033 | | | | 0.3 | % | | Net income (loss) | | $ | (15,708 | ) | | | (1.1 | )% | | $ | 5,279 | | | | 0.5 | % | | Total other expense | | | | (1.6 | ) | | | | (0.6 | ) | | Income (loss) before income taxes | | | | (0.5 | ) | | | | 0.5 | | | Income tax provision | | | | (0.6 | ) | | | | (1.6 | ) | | Net loss | | | | (1.1 | ) | % | | | (1.1 | ) | % |
41
Net sales Consolidated discussion The following table summarizes our net sales by product/service for the yearyears ended December 31, 2019 increased by $406.9 million or 39.5% to $1,436.5 million compared to $1,029.6 million31: | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Wind blade sales | | $ | 1,580,055 | | | $ | 1,328,717 | | | $ | 251,338 | | | | 18.9 | % | Precision molding and assembly systems sales | | | 28,073 | | | | 48,680 | | | | (20,607 | ) | | | -42.3 | % | Transportation sales | | | 36,196 | | | | 28,870 | | | | 7,326 | | | | 25.4 | % | Other sales | | | 25,813 | | | | 30,233 | | | | (4,420 | ) | | | -14.6 | % | Total net sales | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 233,637 | | | | 16.3 | % |
The increase in the same period in 2018. Netnet sales of wind blades increased by 42.4% to $1,328.7 million for the year ended December 31, 2019 as compared to $933.3 million in the same period in 2018. The increase was primarily driven by a 31%11% increase in the number of wind blades produced during the year ended December 31, 20192020 as compared to the same period in 2018 largely2019 as a result of increased production at our Turkey,China, Mexico, India and ChinaIowa facilities. The increase was also due to a higher average sales price due to the mix of wind blade models produced during the year ended December 31, 20192020 compared to the same period in 2018.2019. Net sales from the manufacturing of precision molding and assembly systems decreased, primarily in Asia, during the year ended December 31, 2019 were $48.7 million2020 as compared to $48.9 million in the same period in 2018.2019, primarily due to our customers deferring a number of blade model transitions due to the COVID-19 pandemic. Additionally, there was a $11.6 millionan increase in transportation and other sales during the year ended December 31, 20192020 as compared to the same period in 2018.2019. The impact of the fluctuating U.S. dollar against the Euro in our Turkey operations and the Chinese Renminbi in our China operations had a favorable impact of 0.1% on consolidated net sales and total billings for the year ended December 31, 2019 was a net decrease of 2.1% and 2.2%, respectively,2020 as compared to 2018. 2019. Although our net sales increased for the year ended December 31, 2020 compared to the same period in 2019, we estimate that our net sales were adversely impacted by approximately $148.0 million, based upon 352 wind blade sets, which we had forecasted to produce at our Mexico, China, Iowa, Turkey and India manufacturing facilities in the periods under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels primarily during the first and second quarters of 2020 as a result of certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. Segment discussion The following table summarizes our net sales by our five geographic operating segments for the years ended December 31: | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | U.S. | | $ | 181,941 | | | $ | 169,317 | | | $ | 12,624 | | | | 7.5 | % | Asia | | | 527,083 | | | | 393,809 | | | | 133,274 | | | | 33.8 | % | Mexico | | | 495,839 | | | | 435,606 | | | | 60,233 | | | | 13.8 | % | EMEA | | | 373,545 | | | | 437,081 | | | | (63,536 | ) | | | -14.5 | % | India | | | 91,729 | | | | 687 | | | | 91,042 | | | NM | | Total net sales | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 233,637 | | | | 16.3 | % |
NM – not meaningful. 42
U.S. Segment The following table summarizes our net sales by product/service for the U.S. segment for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Wind blade sales | | $ | 135,415 | | | $ | 120,125 | | | $ | 15,290 | | | | 12.7 | % | Precision molding and assembly systems sales | | | — | | | | 3,774 | | | | (3,774 | ) | | NM | | Transportation sales | | | 33,849 | | | | 28,523 | | | | 5,326 | | | | 18.7 | % | Other sales | | | 12,677 | | | | 16,895 | | | | (4,218 | ) | | | -25.0 | % | Total net sales | | $ | 181,941 | | | $ | 169,317 | | | $ | 12,624 | | | | 7.5 | % |
The increase in the U.S. segment’s net sales of wind blades was primarily due to a 14% increase in the number of wind blades produced in the year ended December 31, 2020 as compared to the same period in 2019, as well as a higher average sales price due to the mix of wind blade models produced in the comparable periods. Although our U.S. net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our U.S. net sales were adversely impacted due to reduced production levels at our U.S. manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020. Asia Segment The following table summarizes our net sales by product/service for the Asia segment for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Wind blade sales | | $ | 511,090 | | | $ | 366,206 | | | $ | 144,884 | | | | 39.6 | % | Precision molding and assembly systems sales | | | 13,134 | | | | 25,203 | | | | (12,069 | ) | | | -47.9 | % | Other sales | | | 2,859 | | | | 2,400 | | | | 459 | | | | 19.1 | % | Total net sales | | $ | 527,083 | | | $ | 393,809 | | | $ | 133,274 | | | | 33.8 | % |
The increase in the Asia segment’s net sales of wind blades was primarily due to a 22% net increase in the number of wind blades produced in the year ended December 31, 2020 as compared to the same period in 2019 and an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. Although our Asia net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our Asia net sales were adversely impacted due to reduced production levels at our Asia manufacturing facilities due to the COVID-19 pandemic primarily during the first quarter of 2020. Net sales from the manufacturing of precision molding and assembly systems during the 2020 period decreased by $12.1 million as compared to the 2019 period primarily due to our customers deferring a number of blade model transitions due to the COVID-19 pandemic. 43
Mexico Segment The following table summarizes our net sales by product/service for the Mexico segment for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Wind blade sales | | $ | 472,994 | | | $ | 410,337 | | | $ | 62,657 | | | | 15.3 | % | Precision molding and assembly systems sales | | | 14,939 | | | | 19,703 | | | | (4,764 | ) | | | -24.2 | % | Transportation sales | | | 2,347 | | | | 347 | | | | 2,000 | | | NM | | Other sales | | | 5,559 | | | | 5,219 | | | | 340 | | | | 6.5 | % | Total net sales | | $ | 495,839 | | | $ | 435,606 | | | $ | 60,233 | | | | 13.8 | % |
The increase in the Mexico segment’s net sales of wind blades reflects a 18% net increase in overall wind blade volume and an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. In addition, our 2019 net sales were impacted by the employees strike at our Matamoros production facility. Although our Mexico net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our Mexico net sales were adversely impacted due to reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020. EMEA Segment The following table summarizes our net sales by product/service for the EMEA segment for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Wind blade sales | | $ | 368,907 | | | $ | 431,362 | | | $ | (62,455 | ) | | | -14.5 | % | Other sales | | | 4,638 | | | | 5,719 | | | | (1,081 | ) | | | -18.9 | % | Total net sales | | $ | 373,545 | | | $ | 437,081 | | | $ | (63,536 | ) | | | -14.5 | % |
The decrease in the EMEA segment’s net sales of wind blades was driven by a 22% decrease in wind blade production at our two Turkey plants due to transitions and reduced production levels at these manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020. The decrease was partially offset by an increase in the average sales price of wind blades delivered in the comparative periods and an increase in the year over year number of wind blades still in the production process at the end of the period. The fluctuating U.S. dollar relative to the Euro had a favorable impact of 0.3% on net sales during the year ended December 31, 2020 as compared to the 2019 period. 44
India Segment The following table summarizes our net sales by product/service for the India segment for the years ended December 31: | | | | | Change | | | 2020 | | | 2019 | | | $ | | | % | | | (in thousands) | | | | Wind blade sales | | $ | 91,649 | | | $ | 687 | | | $ | 90,962 | | | NM | Other sales | | | 80 | | | | — | | | | 80 | | | NM | Total net sales | | $ | 91,729 | | | $ | 687 | | | $ | 91,042 | | | NM |
The increase in the India segment’s net sales of wind blades was driven by the startup of production in 2020. No material production took place in 2019. Total cost of goods sold The following table summarizes our total cost of goods sold for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Cost of sales | | $ | 1,561,432 | | | $ | 1,290,619 | | | $ | 270,813 | | | | 21.0 | % | Startup and transition costs | | | 44,606 | | | | 68,033 | | | | (23,427 | ) | | | -34.4 | % | Total cost of goods sold | | $ | 1,606,038 | | | $ | 1,358,652 | | | $ | 247,386 | | | | 18.2 | % | % of net sales | | | 96.2 | % | | | 94.6 | % | | | | | | | 1.6 | % |
Total cost of goods sold for the year ended December 31, 20192020 was $1,358.7$1,606.0 million and included $48.5$25.9 million related to 14 lines in startup and $19.5$18.7 million related to 10 lines in transition during the period. This compares to total cost of goods sold for the year ended December 31, 20182019 of $956.8$1,358.7 million and included $61.9$48.5 million related to lines in startup costs and $12.8$19.5 million related to lines in transition costs.during the period. Cost of goods sold as a percentage of net sales increased by approximately two percentage points during the year ended December 31, 20192020 as compared to the same period in 2018,2019, driven primarily by the extended startupincrease in warranty costs primarily relating to a remediation campaign for a specific wind blade model for one of our Newton, Iowa transportation facility, significant underutilizationcustomers, and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, in Matamoros, Mexico due to the strike, partially offset by a $6.7 million decrease in startup and transition costs, the impact of savings in raw material costs and foreign currency fluctuations. The impact of the fluctuating U.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso decreasedhad a favorable impact of 1.5% on consolidated cost of goods sold by 3.1% for the year ended December 31, 20192020 as compared to 2018.2019. 60
General and administrative expenses The following table summarizes our general and administrative expenses for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | General and administrative expenses | | $ | 33,496 | | | $ | 39,916 | | | $ | (6,420 | ) | | | -16.1 | % | % of net sales | | | 2.0 | % | | | 2.8 | % | | | | | | | -0.8 | % |
The decrease in general and administrative expenses as a percentage of net sales for the year ended December 31, 2019 totaled $39.9 million, or 2.8% of net sales,2020 as compared to $43.5 million, or 4.2% of net sales, for the same period in 2018. The decrease as a percentage of net sales2019 was primarily driven by lower incentive compensationtravel and a reductiontraining costs due to the COVID-19 pandemic. 45
Loss on sale of assets and asset impairments The following table summarizes our loss on sale of assets and asset impairments for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Loss on sale of assets and asset impairments | | $ | 7,748 | | | $ | 18,117 | | | $ | (10,369 | ) | | | -57.2 | % | % of net sales | | | 0.5 | % | | | 1.3 | % | | | | | | | -0.8 | % |
The decrease in the performance assumptions related to certain of our share-based plans. Realized loss on sale of assets and asset impairments for the year ended December 31, 2020 as compared to the same period in 2019 totaled $18.1was primarily due to: (i) a decrease of $4.4 million comprisedin asset impairment charges primarily related to the shutdown of $8.1our second Newton, Iowa facility in 2019, (ii) a decrease of $4.1 million in losses on the sale of realizedassets at our corporate and manufacturing facilities, and (iii) lower losses on the sale of receivables under supply chain financing arrangements with our customers $5.3 million of realized losses onin the sale of assets at our corporate and manufacturing facilities and $4.7 million of asset impairment charges primarily relatedcurrent year period due to decreasing interest rates as compared to the shutdown of our second Newton, Iowa Facility. Realized loss on sale of assets and asset impairmentsequivalent prior year period.
Restructuring charges, net Restructuring charges, net, for the year ended December 31, 20182020 totaled $4.6 million,$4.1 million. These charges primarily related to downsizing at our Dafeng, China manufacturing facility, comprised of $2.5$3.8 million of realized losses on the saleseverance benefits to terminated employees, and $0.2 million of assetsother charges, primarily related to exit costs, at our corporate and manufacturing facilities and $2.1second Newton, Iowa facility. The $3.8 million of realized losses on the sale of receivables under supply chain financing arrangements withseverance benefits relating to our customers. ThereDafeng, China facility were no asset impairment charges for the year ended December 31, 2018. paid to terminated employees in January 2021. Restructuring charges, net, for the year ended December 31, 2019 totaled $3.9 million. These charges primarily related to the closing of our Taicang City, China manufacturing facility, comprised of $3.3 million of severance benefits to terminated employees and $0.6 million of other charges, primarily related to exit costs. There were no corresponding charges for the same period in 2018. Other expense totaled $8.5 million for the year ended December 31, 2019 as compared to $22.5 million for the same period in 2018. The $14.0 million decrease was primarily due to a $9.4 million decrease in realized losses on foreign currency remeasurement and a $5.6 million decrease in interest expense, primarily related to the loss on the extinguishment of debt of $3.4 million in the 2018 period. These decreases were partially offset by a $1.0 million decrease in miscellaneous income.
Income taxes reflected a provision of $23.1 million for the year ended December 31, 2019 as compared to a benefit of $3.0 million for the same period in 2018. The increase in taxes was primarily due to the benefit for the reversal of the valuation allowance related to our U.S. federal deferred tax assets in the three months ended September 30, 2018 and the earnings mix by jurisdiction in the year ended December 31, 2019 as compared to the same period in 2018. Net loss for the year ended December 31, 2019 was $15.7 million as compared to net income of $5.3 million in the same period in 2018. The decrease was primarily due to the reasons set forth above. The net loss per share was $0.45 for the year ended December 31, 2019, compared to diluted income per share of $0.15 for the year ended December 31, 2018.(loss) from operations
Segment Discussiondiscussion The following table summarizes our net sales and income (loss) from operations by our fourfive geographic operating segments for the years ended December 31: | | 2019 | | | 2018 | | | | | | | | | | | | | Net Sales | | (in thousands) | | | | | | | | | Change | | | | | 2020 | | | 2019 | | | $ | | | % | | | | | (in thousands) | | | | | | U.S. | | $ | 169,317 | | | $ | 163,716 | | | $ | (40,991 | ) | | $ | (78,278 | ) | | $ | 37,287 | | | | 47.6 | % | Asia | | | 393,809 | | | | 306,255 | | | | 62,869 | | | | 24,132 | | | | 38,737 | | | | 160.5 | % | Mexico | | | 435,606 | | | | 268,756 | | | | (9,611 | ) | | | 3,533 | | | | (13,144 | ) | | NM | | EMEAI | | | 437,768 | | | | 290,897 | | | Total net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | EMEA | | | | 23,331 | | | | 70,449 | | | | (47,118 | ) | | | -66.9 | % | India | | | | (16,832 | ) | | | (3,948 | ) | | | (12,884 | ) | | NM | | Total income from operations | | | $ | 18,766 | | | $ | 15,888 | | | $ | 2,878 | | | | 18.1 | % | % of net sales | | | | 1.1 | % | | | 1.1 | % | | | | | | | 0.0 | % |
61
| | 2019 | | | 2018 | | Income (Loss) from Operations | | (in thousands) | | U.S. | | $ | (78,278 | ) | | $ | (67,357 | ) | Asia | | | 24,132 | | | | 28,147 | | Mexico | | | 3,533 | | | | 12,154 | | EMEAI | | | 66,501 | | | | 51,774 | | Total income from operations | | $ | 15,888 | | | $ | 24,718 | |
U.S. Segment Net salesThe decrease in the year ended December 31, 2019 increased by $5.6 million or 3.4% to $169.3 million compared to $163.7 million in the same period in 2018. Net sales of wind blades decreased to $120.1 million during the year ended December 31, 2019 from $126.3 million in the same period of 2018. The decrease was primarily due to a 19% reduction in the number of wind blades produced in the year ended December 31, 2019 as compared to the same period in 2018 because of wind blade model transitions, partially offset by a higher average sales price due to the mix of wind blade models produced in both periods. Net sales from the manufacturing of precision molding and assembly systems during the year ended December 31, 2019 were $3.8 million compared to $5.0 million during the same period in 2018. Additionally, there was a $13.1 million increase in transportation and other sales during the year ended December 31, 2019 as compared to the same period in 2018.
The loss from operations in the U.S. segment for the year ended December 31, 2019 was $78.3 million2020 as compared to a loss of $67.4 million in the same period in 2018. As previously discussed,2019 was primarily due to: (i) the loss amounts include corporate general and administrativedecreased costs of $39.9 million and $43.5 million for the years ended December 31, 2019 and 2018, respectively. The 2019 operating results were unfavorably impacted by the extended startup at our Newton, Iowa transportation facility, the asset impairment charges related to the shutdown of our Newton, Iowa transportation facility, (ii) the decrease in transition costs at our Newton, Iowa blade facility, and(iii) the lowerincrease in wind blade volume, discussed above.
Asia Segment
Net sales in(iv) the year ended December 31, 2019 increased by $87.6 million or 28.6% to $393.8 million compared to $306.3 million in the same period in 2018. Net sales of wind blades were $366.2 million in the year ended December 31, 2019 as compared to $264.4 million in the same period of 2018. The increase in the net sales of wind blades was primarily due to an increase in the year over year number of wind blades still in the production process at the end of the period, an increase in the average sales price of wind blades and (v) a decrease in general and administrative expenses, partially offset by increased direct material costs at our Newton, Iowa blade facility. Although our U.S. loss from operations decreased for the year ended December 31, 2020 compared to the same period in 2019, our income from operations for the year ended December 31, 2020 was adversely impacted due to a changereduced production levels at our U.S. blade manufacturing facility due to the COVID-19 pandemic during the
46
second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. Asia Segment The increase in the mix of wind blades betweenincome from operations in the two periods and a 20%Asia segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to the net increase in overall wind blade volume notwithstandingand increase in the reduced productionaverage sales price of wind blades, a decrease in Taicang, China as a result of Senvion’s insolvency. Net sales from the manufacturing of precision moldingstartup and assembly systems totaled $25.2 million during the 2019 period compared to $36.6 million during the 2018 period.transition costs and lower direct labor costs. The impact of the fluctuating U.S. dollar against the Chinese Renminbi had an unfavorable impact of 1.5% on net sales during the year ended December 31, 2019 as compared to the same period in 2018. Income from operations in the Asia segment for the year ended December 31, 2019 was $24.1 million as compared to $28.1 million in the same period in 2018. This decrease was driven by the insolvency of a customer as noted above and the resultant revenue reduction relating to our contract with that customer and the related restructuring charges in Taicang, partially offset by a decrease in startup and transition costs. This was partially offset by the fluctuating U.S. dollar against the Chinese Renminbi which had a favorable impact of 2.8%0.3% on cost of goods sold for the year ended December 31, 20192020 as compared to the 20182019 period.
Mexico Segment
Net sales in Although our Asia income from operations increased for the year ended December 31, 2019 increased by $166.9 million or 62.1% to $435.6 million2020 as compared to $268.8 million in the same period in 2018. 2019, our income from operations was adversely impacted due to reduced production levels at our Asia manufacturing facilities due to the COVID-19 pandemic during the first quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.
Mexico Segment The increase reflects a 44% netdecrease in income from operations in the Mexico segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to increased warranty costs, the reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. These increased costs were partially offset by the overall increase in overall wind blade volume, an increase in the average sales price of wind blades, due to a change in the mix of wind blades 62
between the two periods and an increase in the year over year number of wind blades still in the production process at the end of the period. Net sales from the manufacturing of precision molding and assembly systems during the year ended December 31, 2019 were $19.7 million compared to $7.2 million during the same period in 2018.
Income from operations in the Mexico segment for the year ended December 31, 2019 was $3.5 million as compared to $12.2 million in the same period in 2018. The decrease was due primarily to a significant underutilization of labor in Matamoros as well as increaseddecreased startup and transition costs, partially offset by the overall increase in wind blade volume noted abovefavorable foreign currency fluctuations as well as from savings in raw material costs. The fluctuating U.S. dollar relative to the Mexican Peso had a favorable impact of 0.1%1.9% on cost of goods sold for the year ended December 31, 20192020 as compared to 2018.2019.
EMEAIEMEA Segment
Net sales duringThe decrease in income from operations in the EMEA segment for the year ended December 31, 2019 increased by $146.9 million or 50.5% to $437.8 million2020 as compared to $290.9 million in the same period in 2018. The increase2019 was primarily driven by a 70% increase inincreased warranty costs, decreased wind blade production at our two Turkey plants. This increase wasmanufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, the increased transition costs at one of our Turkey manufacturing facilities, partially offset by a decrease in the average sales price of wind blades delivered in the comparative periods.favorable foreign currency fluctuations. The fluctuating U.S. dollar relative to the Euro had an unfavorable impact of 5.3% on net sales during the year ended December 31, 2019.
Income from operations in the EMEAI segment for the year ended December 31, 2019 was $66.5 million as compared to $51.8 million in the same period in 2018. The increase was primarily driven by the increased wind blade production at our two Turkey plants, lower startup and transition costs at our Turkey plants and the favorable impact on cost of goods sold of the fluctuation of the U.S. dollar relative to the Turkish Lira and Euro had a favorable impact of 8.5%3.2% on cost of goods sold for the year ended December 31, 20192020 as compared to 2018, partially offset by higher material costs related2019.
India Segment The increase in the loss from operations in the India segment for the year ended December 31, 2020 as compared to a new product at our second Turkey plant andthe same period in 2019 was primarily due to the increased startup costs related to our new plantIndia manufacturing facility during 2020. Other income (expense) The following table summarizes our total other income (expense) for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Interest income | | $ | 102 | | | $ | 157 | | | $ | (55 | ) | | | -35.0 | % | Interest expense | | | (10,501 | ) | | | (8,179 | ) | | | (2,322 | ) | | | -28.4 | % | Foreign currency loss, net | | | (19,986 | ) | | | (4,107 | ) | | | (15,879 | ) | | NM | | Miscellaneous income | | | 3,876 | | | | 3,648 | | | | 228 | | | | 6.3 | % | Total other expense | | $ | (26,509 | ) | | $ | (8,481 | ) | | $ | (18,028 | ) | | NM | |
47
The increase in India.the total other expense for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to increases in foreign currency loss, net primarily due to net Euro liability exposure against the Turkish Lira in the current year period as compared to the same period in 2019. Income tax provision The following table summarizes our income tax provision for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Income tax provision | | $ | 11,284 | | | $ | 23,115 | | | $ | (11,831 | ) | | | -51.2 | % | Effective tax rate | | | -145.7 | % | | | 312.1 | % | | | | | | | | |
The decrease in the income tax provision for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to tax benefits from the effect of tax law changes and the release of valuation allowances in certain jurisdictions, partially offset by lower pretax income related to the earnings mix by jurisdiction and unrecognized tax benefits in the year ended December 31, 2020 as compared to the same period in 2019. Net loss The following table summarizes our net loss for the years ended December 31: | | | | | | | | | | | | | | | | | Change | | | | 2020 | | | 2019 | | | $ | | | % | | | | (in thousands) | | | | | | Net loss | | $ | 19,027 | | | $ | 15,708 | | | $ | 3,319 | | | | 21.1 | % |
The increase in the net loss for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to the reasons set forth above. In addition, we estimate that our net loss during the year ended December 31, 2020 was adversely impacted by approximately $26.5 million, net of taxes, based upon the forecasted gross margin on the wind blade sets we had forecasted to produce at our Mexico, China, Iowa, Turkey and India manufacturing facilities in the period under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. In addition, during the period we incurred $15.5 million, net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The diluted net loss per share was $0.54 for the year ended December 31, 2020, compared to a diluted net loss per share of $0.45 for the year ended December 31, 2019. Year Ended December 31, 20182019 Compared to Year Ended December 31, 20172018 For a comparison of our results of operations for the years ended December 31, 20182019 and 2017,2018, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on March 5, 20192, 2020 incorporated herein by reference. LIQUIDITY AND CAPITAL RESOURCES As a result of the uncertainty relating to: (i) the rapidly evolving nature, magnitude and duration of the COVID-19 pandemic, (ii) the variety of measures implemented by governments around the world to address its effects and (iii) the impact on our manufacturing operations, we have and will continue to manage our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the year ended December 31, 2020, we had net borrowings of $58.7 million under our Credit Agreement. In addition, during the year ended December 31, 2020, we entered into or amended four unsecured credit agreements with four Turkish financial institutions resulting in net borrowings of $25.1 million and current availability of $52.9 million. 48
Our primary needs for liquidity have been, and in the future will continue to be, capital expenditures, new facility startup costs, the impact of transitions, working capital, and debt service costs and warranty costs. Our capital expenditures have been primarily related to machinery and equipment for new facilities or facility expansions. Historically, we have funded our working capital needs through cash flows from operations, the proceeds received from our credit facilities and from proceeds received from the issuance of stock. DuringWe had net borrowings under our financing arrangements of $75.7 million for the year ended December 31, 2020 as compared to net repayments under our financing arrangements of $2.1 million and $8.9 million for the years ended December 31, 2019 2018 and 2017, we had net repayments of financing arrangements of $2.1 million, $8.9 million and $8.1 million,2018, respectively. As of December 31, 20192020 and 2018,2019, we had $142.1$217.9 million and $138.5$142.1 million in outstanding indebtedness, excluding debt issuance costs, respectively. As of December 31, 2019,2020, we had an aggregate of $100.4$120.5 million of remaining capacity and $40.9$94.2 million of remaining availability under our various credit facilities. Working capital requirements have increased as a result of our overall growth and the need to fund higher accounts receivable and inventory levels as our business volumes have increased as well as the increased level of transitions.increased. Based upon current and anticipated levels of operations, we believe that cash on hand, available credit facilities and cash flow from operations will be adequate to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our indebtedness over the next twelve months. We anticipate that any new facilities and future facility expansions will be funded through cash flows from operations, the incurrence of other indebtedness and other potential sources of liquidity. At December 31, 20192020 and 2018,2019, we had unrestricted cash, cash equivalents and short-term investments totaling $70.3$129.9 million and $85.3$70.3 million, respectively. The December 31, 20192020 balance includes $24.5$61.0 million of cash located outside of the United States, including $9.9$47.4 million in China, $6.0 million in Turkey, $9.7 million in China, $2.4$5.0 million in India, $2.1 million in Mexico 63
and $0.4$0.5 million in Denmark.other countries. In February 2020, we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement was increased from $150.0 million to $205.0 million. Our ability to repatriate funds from China to the United States is subject to a number of restrictions imposed by the Chinese government. We repatriate funds through several technology license and corporate/administrative service agreements. We are compensated quarterly based on agreed upon royalty rates for such intellectual property licenses and quarterly fees for those services. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of the People’s Republic of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.526.6 million) of registered capital is contributed to a surplus reserve, our ChineseChina operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, our ChineseChina operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. At December 31, 2019,2020, the amount of the surplus reserve fund was $6.6$7.0 million. Cash Flow Discussion The following table summarizes our key cash flow activity for the years ended December 31: | | 2020 | | | 2019 | | | $ Change | | | | (in thousands) | | Net cash provided by operating activities | | $ | 37,570 | | | $ | 57,084 | | | $ | (19,514 | ) | Net cash used in investing activities | | | (65,666 | ) | | | (75,510 | ) | | | 9,844 | | Net cash provided by financing activities | | | 88,612 | | | | 970 | | | | 87,642 | | Impact of foreign exchange rates on cash, cash equivalents and restricted cash | | | (2,069 | ) | | | (171 | ) | | | (1,898 | ) | Net change in cash, cash equivalents and restricted cash | | $ | 58,447 | | | $ | (17,627 | ) | | $ | 76,074 | |
49
Operating Cash Flows | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Net income (loss) | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | Depreciation and amortization | | | 38,580 | | | | 26,429 | | | | 21,698 | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 4,581 | | | | 334 | | Share-based compensation expense | | | 5,681 | | | | 7,795 | | | | 7,124 | | Restructuring charges, net | | | 3,927 | | | | — | | | | — | | Other non-cash items | | | 5,157 | | | | (11,179 | ) | | | 2,223 | | Changes in assets and liabilities | | | 1,330 | | | | (36,163 | ) | | | 4,487 | | Net cash provided by (used in) operating activities | | $ | 57,084 | | | $ | (3,258 | ) | | $ | 74,600 | |
Net cash provided by operating activities totaled $57.1decreased by $19.5 million for the year ended December 31, 2020 as compared to the same period in 2019 and was primarily as the result of the net loss, adjusted for non-cash items (depreciationdecreased operating results and amortization, realized loss on the sale of assets and asset impairments, share-based compensation expense, restructuring charges, net and other non-cash items) which generated $55.8 million of operating cash flow and netcertain changes in our working capital generated $1.3 million of operating cash flow. The key components of the net change in working capital include a $80.7 million increase in accounts payable and accrued expenses, a $10.9 million increase in accrued warranty, a $7.0 million decrease in operating lease right of use assets and operating lease labilities and a $2.8 million increase in other noncurrent liabilities. This was mostly offset by a $57.6 million increase in contract assets and liabilities, a $19.4 million increase in accounts receivable, a $13.7 million increase in other current assets, a $7.2 million increase in other noncurrent assets, a $1.1 million increase in prepaid expenses and a $1.1 million increase in inventories. The working capital changes in contract assets and liabilities, accounts receivable, accounts payable and accrued expenses and accrued warranty are primarily the result of the timing of production in the year ended December 31, 2019.capital. Investing Cash Flows Net cash used in operatinginvesting activities totaled $3.3decreased by $9.8 million for the year ended December 31, 2018 and was2020 as compared to the same period in 2019 primarily as the result of a $36.2 million decrease in working capital and $6.6 million of other non-cash items, mostly offset by non-cash depreciation and amortization charges totaling $26.4 million, share-based compensation costs of $7.8 million and net income of $5.3 million. The key components of the decrease in working capital include a $59.2 million increase in accounts receivable, a $7.9 million increase in contract assets and labilities, a $5.2 million increase in other noncurrent assets, and a $2.0 million decrease in other noncurrent liabilities. This was partially offset by a $32.3 million increase in accounts payable and accrued expenses and a $6.3 million increase in accrued warranty. The working capital changes in contract assets and liabilities, accounts receivable, accounts payable and accrued expenses and accrued warranty are primarily the result of the timing of production in the year ended December 31, 2018.expenditures. 64
Investing Cash Flows
| | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Purchase of property and equipment | | $ | (74,408 | ) | | $ | (52,688 | ) | | $ | (44,828 | ) | Acquisition of a business | | | (1,102 | ) | | | — | | | | — | | Proceeds from sale of assets | | | — | | | | — | | | | 850 | | Net cash used in investing activities | | $ | (75,510 | ) | | $ | (52,688 | ) | | $ | (43,978 | ) |
Net cash flows used in investing activities totaled $75.5 million and $52.7 million in the years ended December 31, 2019 and 2018, respectively, driven primarily by capital expenditures for new facilities and expansion or improvements at existing facilities. The capital expenditures for the year ended December 31, 2019 primarily related to our new manufacturing facilities in Yangzhou, China and Chennai, India, our second manufacturing facility in Turkey, our new tooling facility and the expansion of one of our blade manufacturing facilities in Juárez, Mexico and continued investments in our other existing facilities. The capital expenditures for the year ended December 31, 2018 primarily related to our new wind blade plants in Matamoros, Mexico and Yangzhou, China, the expansion and improvements at our Taicang, China facility, our second wind blade plant in Turkey, our second facility in Newton, Iowa and costs to enhance our information technology systems. The above capital expenditure amounts do not include the amounts which we financed primarily through finance leases totaling $5.8 million and $22.0 million in the years ended December 31, 2019 and 2018, respectively.
We anticipate fiscal year 20202021 capital expenditures of between $80$55 million to $90$65 million and we estimate that the cost that we will incur after December 31, 20192020 to complete our current projects in process will be approximately $18.3$13.8 million. We have used, and will continue to use, cash flows from operations, the proceeds received from our credit facilities and the proceeds received from the issuance of stock for major projects currently being undertaken, which include purchasing equipment for our new manufacturing facility in Chennai, India and the continued investment in our existing Turkey, Mexico, China and ChinaU.S. facilities. Financing Cash Flows | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Net proceeds from (repayments of) revolving and term loans | | $ | 22,000 | | | $ | 14,463 | | | $ | (3,750 | ) | Net proceeds from (repayments of) accounts receivable financing | | | (10,719 | ) | | | 424 | | | | (1,020 | ) | Net repayments of working capital loans | | | — | | | | — | | | | (4,638 | ) | Principal repayments of finance leases | | | (9,128 | ) | | | — | | | | — | | Net proceeds from (repayments of) other debt | | | (4,286 | ) | | | (23,763 | ) | | | 1,313 | | Debt issuance costs | | | — | | | | (281 | ) | | | (454 | ) | Proceeds from exercise of stock options | | | 5,223 | | | | 4,284 | | | | 1,430 | | Repurchase of common stock including shares withheld in lieu of income taxes | | | (2,120 | ) | | | (2,859 | ) | | | (1,264 | ) | Net cash provided by (used in) financing activities | | $ | 970 | | | $ | (7,732 | ) | | $ | (8,383 | ) |
Net cash flows provided by financing activities for the year ended December 31, 2019 totaled $1.0 million. The net cash flows used in financing activities totaled $7.7increased by $87.6 million for the year ended December 31, 2018. Net cash provided by financing activities for2020 as compared to the year ended December 31,same period in 2019 primarily reflectsas the net proceeds fromresult of increased borrowings on our revolving and term loans and the proceeds from the exercise of stock options, mostly offset by the net repayment of accounts receivable financing and other growth-related debt, principal repayments of finance leases and the repurchase of common stock including shares withheld in lieu of income taxes. Net cash used in financing activities for the year ended December 31, 2018 primarily reflects the net repayment of other debt and the repurchase of common stock 65
associated with taxes on the vesting of share-based awards, mostly offset by the net proceeds from revolving and term loans and theas well as increased proceeds from the exercise of stock options.
Description of Our Indebtedness
ReferFor a discussion of our indebtedness, refer to Note 1211 - Long-Term Debt, Net of Debt Issuance Costs and Current Maturities of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of our indebtedness.10-K.
Other Contingencies AsFor a discussion of December 31, 2019, we were not involvedour legal proceedings, refer to Note 14 – Commitments and Contingencies – (b) Legal Proceedings of the Notes to Consolidated Financial Statements in any material litigation. In the future, however, we may become involved in various claims and legal actions arising in the ordinary coursePart II, Item 8 of business which may have a material adverse effectthis Annual Report on our consolidated financial position, results of operations or liquidity.Form 10-K.
The wind blades and other composite structures that we produce are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade or the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade (which could include significant transportation and installation costs) at our sole expense. At December 31, 20192020 and 2018,2019, we had accrued warranty reserves totaling $47.6$50.9 million and $36.8$47.6 million, respectively. As of December 31, 2019,2020, we had no material operating expenditures for environmental matters, including government imposed remedial or corrective actions, during the year ended December 31, 2019.2020. Off-Balance Sheet Transactions We are not presently involved in any off-balance sheet arrangements, including transactions with unconsolidated special-purpose or other entities that would materially affect our financial position, results of operations, liquidity or capital resources, other than our accounts receivable assignment agreements described below. Furthermore, we do not have any relationships with special-purpose or other entities that provide off-balance sheet financing; liquidity, market risk or credit risk support; or engage in leasing or other services that may expose us to liability or risks of loss that are not reflected in the consolidated financial statements and related notes. 50
Our Mexico segment has an existingsegments enter into accounts receivable assignment agreementagreements with avarious financial institution under whichinstitutions. Under these agreements, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our Mexico segment’s customers at aan agreed-upon discount calculated based on an effective annual raterate. The following table summarizes certain key details of LIBOR plus 2.75%. In September 2018, our U.S. and Mexico segments entered into aneach of the accounts receivable assignment agreement, as amended, with a financial institution. Under this agreement, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our U.S. (Iowa location) and Mexico segment’s customers at a discount calculated based on LIBOR plus 1.25%.
In the fourth quarter of 2018, our EMEAI segment entered into an accounts receivable assignment agreement with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse revolving basis, up to 15.0 million Euro (approximately $16.8 millionagreements in place as of December 31, 2019) of the accounts receivable amounts related to one of our EMEAI segment’s customers at a discount calculated based on EURIBOR plus 2.65%.2020:
In the fourth quarter of 2018, our EMEAI segment entered into an accounts receivable assignment agreement with a financial institution. Under this agreement, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our EMEAI segment’s customers at a discount calculated based on EURIBOR plus 0.75%.
In the first quarter of 2019, our Asia and Mexico segments entered into separate accounts receivable purchase agreements, as amended, with a financial institution. Under these agreements, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time up to $60.0 million of a customer’s accounts receivable amounts in our Asia segment and up to $30.0 million of a customer’s accounts receivable amounts in our Mexico segment at a discount calculated based on the three month LIBOR plus 1.0% and the number of days from the date of purchase to maturity.
66
In the second quarter of 2019, our Asia segment entered into an accounts receivable purchase agreement with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time up to $20.0 million of a customer’s accounts receivable amounts in our Asia segment at a discount calculated based on the three month LIBOR plus 1.0% and the number of days from the date of purchase to maturity.
In the fourth quarter of 2019, our Asia segment entered into an accounts receivable purchase agreement with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time an unlimited amount of a customer’s accounts receivable amounts in our Asia segment at a discount calculated based on a fixed rate of 4.2% and the number of days from the date of purchase to maturity.
Year Of Initial Agreement | | Segment(s) Related To | | Current Annual Interest Rate | 2014 | | Mexico | | LIBOR plus 0.75% | 2018 | | Mexico | | LIBOR plus 1.25% | 2018 | | EMEA | | EURIBOR plus 0.75% | 2019 | | Asia and Mexico | | LIBOR plus 1.00% | 2019 | | Asia and Mexico | | LIBOR plus 1.00% | 2019 | | Asia | | Fixed rate of 3.85% | 2020 | | EMEA | | EURIBOR plus 1.95% | 2020 | | India | | LIBOR plus 1.00% | 2020 | | U.S. | | LIBOR plus 1.25% |
As the receivables are purchased by the financial institutions under the agreements as described in the preceding paragraphs,noted above, the receivables wereare removed from our consolidated balance sheet. During the years ended December 31, 2020 and 2019, $1,251.5 million and 2018, $776.2 million, and $214.6 millionrespectively, of receivables were sold under the accounts receivable assignment agreements described above, respectively. above. Contractual Obligations The following table summarizes certain of our contractual obligations as of December 31, 2019:2020: | | Payments Due by Period | | | Payments Due by Period | | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | Less than 1 year | | | 1-3 years | | | 3-5 years | | | More than 5 years | | | Total | | | | (in thousands) | | | (in thousands) | | Long-term debt obligations(1) | | $ | 13,501 | | | $ | 14,649 | | | $ | 113,911 | | | $ | — | | | $ | 142,061 | | | $ | 32,551 | | | $ | 185,150 | | | $ | 217 | | | $ | — | | | $ | 217,918 | | Operating lease obligations(2) | | | 25,425 | | | | 44,287 | | | | 38,497 | | | | 66,584 | | | | 174,793 | | | | 34,798 | | | | 62,644 | | | | 54,004 | | | | 98,764 | | | | 250,210 | | Purchase obligations | | | 2,798 | | | | 3,668 | | | | 1,429 | | | | — | | | | 7,895 | | | | 2,568 | | | | 2,465 | | | | 714 | | | | — | | | | 5,747 | | Estimated interest payments(3) | | | 4,647 | | | | 8,006 | | | | 1,887 | | | | — | | | | 14,540 | | | | 7,529 | | | | 8,904 | | | | 6 | | | | — | | | | 16,439 | | Total contractual obligations | | $ | 46,371 | | | $ | 70,610 | | | $ | 155,724 | | | $ | 66,584 | | | $ | 339,289 | | | $ | 77,446 | | | $ | 259,163 | | | $ | 54,941 | | | $ | 98,764 | | | $ | 490,314 | |
(1) | See “—Description of Our Indebtedness” above. |
(2) | Our operating lease obligations represent the contractual payments due for the lease of our corporate office in Scottsdale, Arizona in addition to our facilities in Iowa, Rhode Island, New Mexico, China, Mexico, Turkey, Denmark, Germany and Denmark.India. |
(3) | Includes interest on variable rate debt based on interest rates as of December 31, 2019.2020. See “—Description of Our Indebtedness” above. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of our assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to income taxes and warranty expense. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates. 51
We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements. Revenue Recognition. The majority of our revenue is generated from long-term contracts associated with manufacturing of wind blades and related services. We account for a long-term contract when it has the approval from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and the collectability of consideration is probable. 67
To determine the proper revenue recognition method for each long-term contract, we evaluate whether the original contract should be accounted for as one or more performance obligations. This evaluation requires judgment and the decisions reached could change the amount of revenue and gross profit recorded in a given period. As most of our contracts contain multiple performance obligations, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Our manufacturing services are customer specific and involve production of items that cannot be sold to other customers due to the customers’ protected intellectual property; therefore, we allocate the total transaction price under our contracts with multiple performance obligations using the contractually stated prices, as these prices represent the relative standalone selling price based on an expected cost plus margin model. property.
Revenue is primarily recognized over time as we have an enforceable right to payment upon termination and we may not use or sell the product to fulfill other customers’ contracts. In addition, the customer does not have return or refund rights for items produced that conform to the specifications included in the contract. Because control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. We useobligation under the cost-to-cost input measure of progress for our contracts as this method provides the best representation of the production progress towards satisfaction of the performance obligation as the materials are distinct to the product being manufactured because of customer specifications provided for in the contract, the costs incurred are proportional to the progress towards completion of the product, and the products do not involve significant pre-fabricated component parts.obligation. Under the cost-to-cost method, progress and the related revenue recognition is determined by a ratio of direct costs incurred to date in fulfillment of the performance obligation to the total estimated direct costs required to complete the performance obligation. Determining the revenue to be recognized for services performed under our manufacturing contracts involves judgments and estimates relating to the total consideration to be received and the expected direct costs to complete the performance obligation. As such, revenue recognized reflects our estimates of future contract volumes and the direct costs to complete the performance obligation. The judgments and estimates relating to the total consideration to be received include the amount of variable consideration as our contracts typically provide the customer with a range of production output options from guaranteed minimum volume obligations to the production capacity of the facility, and customers will provide periodic non-cancellable commitments for the number of wind blades to be produced over the term of the agreement. The total consideration also includes payments expected to be received associated with wind blade model transitions. We use historical experience, customer commitments and forecasted future production based on the capacity of the plant to estimate the total revenue to be received to complete the performance obligation. In addition, the amount of revenue per unit produced may vary based on the costs of production of the wind blades as we may be able to change the price per unit based on changes in the cost of production. Further, some of our contracts provide opportunities for us to share in labor and material cost savings as well as absorb some additional costs as an incentive for more efficient production, both of which impact the margin realized on the contract and ultimately the total amount of revenue to be recognized. Additionally, certain of our customer contracts provide for us to make concessions, such as in the form of liquidated damages, for missed production deadlines which are paid over a negotiated timeline. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information available to us at the time of the estimate and may materially change as additional information becomes known.
Our contracts may be modified to account for changes in specifications of products and changing requirements. IfUnder the contract modifications are for goods or services that are not distinct from the existing contract, they are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis. If contract modifications are for goods and services that are distinct from the existing contract and increases the amount of consideration reflecting the standalone sale price of the additional goods or services, then the contract modification is accounted for as a separate contract and is evaluated for one or more performance obligations.
68
Each reporting period, we evaluate the progress towards satisfaction of each performance obligation based on any contract modifications that have occurred, cost incurred to date, and an estimate of the expected future revenue and costs to be incurred to complete the performance obligation. Based on this analysis, any changes in estimates of revenue, cost of sales,cost-to-cost method, contract assets and liabilities and the related impact to operating income are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on the percentage of completion of the performance obligation.
Wind blade pricing is based on annual commitments of volume as established in our customer contracts and orders less than committed volume may result in a higher price per wind blade to our customers. Orders in excess of annual commitments may result in discounts to our customers from the contracted price for the committed volume. Our customers typically provide periodic purchase orders with the price per wind blade given the current cost of the bill of materials, labor requirements and volume desired. We record an allowance for expected utilization of early payment discounts which are reported as a reduction of the related revenue.
Precision molding and assembly systems included in a customer’s contract are based upon the specific engineering requirements and design determined by the customer and are specific to the wind blade design and function desired. From the customer’s engineering specifications, a job cost estimate is developed along with a production plan, and the desired margin is applied based on the location the work is to be performed and complexity of the customer’s design. Precision molding and assembly systems are generally built to produce wind blades which may be manufactured by us in production runs specified in the customer contract.
Contract assets primarily relate to our rights to consideration for work completed but not billed at the reporting date on manufacturing services contracts. The majority of the contract asset balance relates to materials procured based on customer specifications. The contract assets are transferred to accounts receivable when the rights become unconditional, which generally occurs when customers are invoiced upon the determination that a product conforms to the contract specificationsspecifications.
See Note 1 – Summary of Operations and invoices are due basedSummary of Significant Accounting Policies – (c) Revenue Recognition of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on each customer’s negotiated payment terms, which, when factoring in supply chain financing arrangements, range from 5 to 25 days. We apply the practical expedient that allows us to exclude payment terms under one year from the transfer of a promised good or service from consideration of a significant financing component in its contracts. With regards to the production of precision molding and assembly systems, our contracts generally callForm 10-K, for progress payments to be made in advance of production. Generally, payment is made at certain percentage of completion milestones with the final payment due upon delivery to the manufacturing facility. These progress payments are recorded within contract liabilities as current liabilities in the consolidated balance sheets and are reduced as we record revenue over time. We evaluate indications that a customer may not be able to meet the obligations under our long-term supply agreements to determine if an account receivable or contract asset may be impaired. Our customers may request, in situations where they do not have space available to receive products or do not want to take possession of products immediately for other reasons, that their finished products be stored by us in onefurther discussion of our facilities. Most of our contracts provide for a limited number of wind blades to be stored during the period of the contract with any additional wind blades stored subject to additional storage fees, which are included in the wind blade product revenue.
Revenueaccounting policies related to non-recurring engineering and freight services provided underrevenue recognition, including accounting policies surrounding our customer contracts is recognized at a point in time following the transfer of control of the promised services to the customer. Customers usually pay the carrier directly for the cost of shipping associated with items produced. When we pay the shipping costs, we apply the practical expedient that allows us to account for shipping and handling as a fulfillment costs and include the revenue in the associated performance obligation and the costs are included in cost of goods sold.non-manufacturing related services.
Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions, that are collected by us from a customer, are excluded from revenue.
Income Taxes. In connection with preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our assessment of any net operating loss carryforwards, as well as estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We also have to assess whether any portion of our earnings generated in one taxing jurisdiction might be claimed as earned by income tax authorities in a differing tax jurisdiction. Significant judgment 69
is required in determining our annual tax rate, the allocation of earnings to various jurisdictions and in the evaluation of our tax positions. Additionally,In the normal course of business, we record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating loss and tax credit carryforwards. We then assess the likelihood that our deferred income tax assets will be realized by evaluating all available positive and negative evidence in order to determine if it is more-likely-than-not that the deferred tax assets will be realized. To the extent we believe that the realization ofestablish valuation allowances for our deferred tax assets when the realization of the assets is not more-likely-than-not, we are requiredmore likely than not. We intend to establish amaintain such valuation allowance. In doing so we consideredallowances on our recent operating history, taxpaying history and future reversals of deferred tax liabilities based upon future operating projections.assets until there is sufficient evidence to support the reversal of all or some portion of the allowances. Historically, as a result of cumulative losses in the United States, we determined that a valuation allowance for all of our U.S. deferred tax assets was appropriate. Duringappropriate, however during the third quarter of 2018, we reversed a portion of the United StatesU.S. valuation allowance, based on the available evidence at that time. During the first quarter ofIn 2019 a full valuation allowance was recorded in Taicang due to cumulative lossesand India. Given our anticipated future earnings in Taicang. We also maintain a fullIndia from becoming fully operational in 2020, we reversed the valuation allowance in India due to cumulative losses. We periodically evaluate all available positive and negative evidence regarding the future recoverability of our deferred tax assets and, when we determine that the recoverability of deferred tax assets meets the criteria of more-likely-than-not, we reduce the valuation allowance against our deferred tax assets.jurisdiction in 2020. The effect of a change in judgment concerning the realizability of deferred tax assets is included in provision forour income taxes.tax provision.
52
As of December 31, 2019,2020, we have U.S. federal NOLsnet operating losses (NOLs) of approximately $20.9$103.0 million, state NOLs of approximately $158.0$253.2 million, foreign NOLs of approximately $31.3$41.0 million and foreign tax credits of approximately $1.9 million available to offset future taxable income in the U.S., China and India. OnIn December 22, 2017, the current PresidentTax Cuts and Jobs Act (Tax Reform) was signed into law, Tax Reform, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a mandatory one-time transition tax, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. Tax Reform also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, interest expense limitations, net operating lossNOL deduction limitations, tax on GILTIglobal intangible low tax income (GILTI) earned by foreign corporate subsidiaries, the BEAT,base erosion anti abuse tax (BEAT), and a deduction for FDII.foreign derived intangible income (FDII).
AtAs of December 31, 2018, we completed the accounting for the enactment-date income tax effects of Tax Reform, which resulted in an immaterial impact to theour financial statements. Upon further analyses of certain aspects of Tax Reform, and refinement of calculations during 2018, we increased our provisional amount of previously untaxed foreign earnings by $13.8 million, to $88.1 million. This resulted in no change to our U.S. federal income tax expense due to the impact of foreign tax credits. In addition, the provisional net tax expense, which was estimated at approximately $0.1 million, primarily attributable to the reduction in the federal tax rate, was unchanged. Additionally,unchanged and we have made a policy election to account for any impacts of GILTI tax in the period in which it is incurred.
Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions in which we operate, principally, China, Mexico, and Turkey. Significant judgements and estimates are required in determining our consolidated income tax expense. The statutory federal corporate income tax rate in the U.S. decreased from 35% toU. S. is 21% beginning in January 2018, whileand the tax rates in China, Mexico and MexicoTurkey are 25%, 30% and 30%22%, respectively. During the fourth quarter of 2017, Turkey also modified its statutory corporate income tax rate from 20% to 22% for 2018, 2019, and 2020. Our second Turkey facility is located in a tax-free zone and is not subject to income taxes for itson earnings recognized from its manufacturing activities. Warranty Expense. As discussed above, the The wind blades we manufacture are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade in the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade at our sole expense. We provide warranties for all of our products with terms and conditions that vary depending on the product sold. We record warranty expense based upon our estimate 70
of future repairs using a probability-based methodology that considers previous warranty claims, identified quality issues and industry practices. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount. Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, availability of materials, shipping and handling, and de-installation and re-installation costs at customers’ sites, among others. When a potential or actual warranty claim arises, we may accrue additional warranty reserves for the estimated cost of remediation or proposed settlement. In 2020, we accrued additional warranty expenses of approximately $12.9 million beyond the normal warranty expense describe above related to a remediation campaign for a specific wind blade model for one of our customers. We have not experienced any material warranty expenses beyond the provision described above in the years ended December 31, 2019 2018 and 2017.2018. However, changes in warranty reserves could have a material effect on our consolidated financial statements. For example, as of December 31, 2020, a change in the estimated warranty accrual rate of 1% across all products would change the warranty accrual by approximately $42.5 million. 53
Recent Accounting Pronouncements For a discussion of recent accounting pronouncements, see Note 1 – Summary of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk in the ordinary course of our business. These market risks are principally limited to changes in foreign currency exchange rates and commodity prices. Foreign Currency Risk. We conduct international operations in China, Mexico, Turkey and India. Our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. In recent years, exchange rates between these foreign currencies and the U.S. dollar have fluctuated significantly and may do so in the future. A hypothetical change of 10% in the exchange rates for the countries above would have resulted in a change to income from operations of approximately $10.9$46.2 million and $7.4$10.9 million for the years ended December 31, 2020 and 2019, and 2018, respectively. Commodity Price Risk. We are subject to commodity price risk under agreements for the supply of our raw materials. We have not hedged our commodity price exposure. We generally lock in pricing for our key raw materials for 12 months which protects us from price increases within that period. As many of our raw material supply agreements have meet or release clauses, if raw materials prices go down, we are able to benefit from the reductions in price. We believe that this adequately protects us from increases in raw material prices and also enables us to take full advantage of decreases. Resin and resin systems are the primary commodities for which we do not have fixed pricing. Approximately 40% of the resin and resin systems we use are purchased under contracts controlled by twoone of our customers and therefore they receive/bear 100% of any increase or decrease in resin costs further limiting our exposure to price fluctuations. WePrior to taking into account any contractual obligations of our customers to share with us the cost savings or increases resulting from a change in the price of resin and resin systems, we believe that a 10% change in the price of resin and resin systems for the customers in which we are exposed to fluctuating prices would have had an impact to income from operations of approximately $9.3$10.1 million and $7.6$9.3 million for the years ended December 31, 2020 and 2019, respectively. Under our customer supply agreements, our customers typically receive 70% of the cost savings or increases resulting from a change in the price of resin and 2018, respectively. Furthermore,resin systems. In late 2019, worldwide demand for balsa wood increased as a result of shortages of other types of core materials. In addition, our supply chain for balsa wood, which is primarily sourced from Ecuador, has been further stressed due to the COVID-19 pandemic. As a result of this amount does not include theincreased demand and supply chain disruption, we did have fixed pricing for a portion of any increase or decreaseour contracts and purchase orders for balsa wood for most of 2020. We believe that a 10% change in the price of balsa wood would be shared with our customers under our long-term supply agreements, which is generally 70%.have had an impact to income from operations of approximately $8.0 million for the year ended December 31, 2020. Interest Rate Risk. As of December 31, 2019, our EMEAI segment has one general credit agreement with a Turkish financial institution outstanding which is tied to EURIBOR. This agreement had collateralized financing of capital expenditures outstanding as of December 31, 2019 of $7.9 million. In addition, as of December 31, 2019,2020, our Credit Agreement includes interest on the unhedged principal amount of $37.4$96.2 million which is tied to LIBOR. TheLIBOR, and our EMEA segment has one EMEAI general credit agreement andoutstanding which is tied to the Euro Interbank Offered Rate (EURIBOR). For a discussion of the interest rate swap arrangement we entered into related to our Credit Agreement, noted aboveSee Note 13 – Financial Instruments of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. The EMEA credit agreement had unsecured financing of $11.2 million and financing of capital expenditures of $4.3 million outstanding as of December 31, 2020. Our Credit Agreement and the one EMEA general credit agreement are the only variable rate debt agreements that we had outstanding as of December 31, 20192020 as all remaining working capital loans, accounts receivable, secured and unsecured financing and finance lease obligations are fixed rate instruments and are not subject to fluctuations in interest rates. Due to the relatively low LIBOR and EURIBOR rates in effect as of 54
December 31, 2019,2020, a 10% 71
change in the LIBOR or EURIBOR rate would not have had a material impact on our future earnings, fair values or cash flows. Item 8. Financial Statements and Supplementary Data The financial statements required to be filed pursuant to this Item 8 are appended to this Report. An index of those financial statements is found in Item 15. Item 9. Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of December 31, 20192020 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2019.2020. Management’s Report on Internal Control Over Financial Reporting As required by Rules 13a-15(f) promulgated under the Exchange Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2019.2020. Management based its assessment on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 20192020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors. Our internal control over financial reporting as of December 31, 20192020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein. Changes in Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting during the three months ended December 31, 2019,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information Not applicable. 7255
PART III Item 10. Directors, Executive Officers and Corporate Governance The information required by this Item is incorporated by reference to “Business – Information about our Executive Officers” included in Part 1, Item 1 of this Annual Report on Form 10-K and the information that will be contained in our proxy statement related to the 20202021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2019.2020. Item 11. Executive Compensation The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 20202021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2019.2020. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 20202021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2019.2020. Item 13. Certain Relationships and Related Transactions, and Director Independence The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 20202021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2019.2020. Item 14. Principal Accounting Fees and Services The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 20202021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2019.2020. 7356
PART IV Item 15. Exhibits and Financial Statement Schedules (a) | Financial Statements and Schedules |
The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K. See Exhibit Index. Item 16. Form 10-K Summary Not applicable. 7457
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors TPI Composites, Inc.: Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of TPI Composites, Inc. and subsidiaries (the Company) as of December 31, 20192020 and 2018,2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, (deficit), and cash flows for each of the years in the three-year period ended December 31, 2019,2020, and the related notes (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019,2020, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 20192020 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Adoption of New Accounting Pronouncement As discussed in Note 1 to the consolidated financial statements, effective January 1, 2019, the Company changed its method of accounting for leases due to the adoption of Financial Accounting Standards Board Accounting Standard Codification Topic 842, Leases. Basis for Opinions The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included F-2
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment.judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Evaluation of variableVariable consideration and direct costs to complete performance obligations for wind blade manufacturing revenuesales
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company generates the majority of its revenue from long-term contracts associated with manufacturing custom wind blades. Revenue from manufacturing wind blades is primarily recognized over time based on progress towards the completion of the performance obligation in the contract. Progress is determined by the ratio of direct costs incurred to date in fulfillment of the performance obligation to the total estimated direct costs required to complete the performance obligation. The Company recognizes variable consideration for wind blade manufacturing revenuesales that includes estimates of future contract volumes. Wind blade manufacturing revenuesales under long-term contracts was $1,328,717$1,580,055 thousand compared to consolidated revenuetotal net sales of $1,436,500$1,670,137 thousand in fiscal 2019.2020. We identified the evaluation of estimates of future contract volumes and direct costs to complete performance obligations for wind blade manufacturing revenuesales as a critical audit matter. Evaluating these estimates requiresrequired a high degree of auditor judgment as changes to the inputs can have a significant effect on the Company’s revenue. Each wind blade contract contains variable consideration that includes estimates of future contract volumes. Each wind blade contract also requires a measure of progress that includes estimates of direct costs to complete the performance obligations. F-3
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s process to recognize revenue recognition process, includingfrom wind blade sales. This included controls F-3
related to estimates of future contract volumes and direct costs to complete the performance obligation. We read a sampleselection of long-term customer contracts, and observed that terms, conditions, and key elements of the contracts were included in the Company’s estimate of future contract volumes. We evaluated the Company’s ability to estimate future contract volumes and direct costs to complete the performance obligations by comparing these estimates to historical results. We evaluated estimated future contract volumes by assessing (1) manufacturing plant capacity, (2) historical production volume, and (3) customer purchase commitments. We evaluated estimated direct costs to complete the performance obligations by examining the estimated amounts agreed upon with the customer and comparing them to historical prices.costs. We compared the estimated future direct cost per blade to historical direct costs per blade and assessed the potential impact of future manufacturing efficiencies. Further, we evaluated historical direct labor utilization and rate per hourcost by wind blade type and manufacturing plant, and analyzed jurisdiction-specific inflation rates based on publicly available government data. We assessed current period revenue based upon the estimated consideration, the ratio of direct costs incurred to date in fulfillment of the performance obligations to the total estimated direct costs required to complete the performance obligations, and revenue recognized in previous periods for the performance obligations. /s/ KPMG LLP We have served as the Company’s auditor since 2008. Phoenix, Arizona February 28, 202025, 2021 F-4
TPI COMPOSITES, INC. AND SUBSIDIARIES Consolidated Balance Sheets
(In thousands, except par value data)CONSOLIDATED BALANCE SHEETS
| | December 31, | | | December 31, | | | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | | | | | | | | | (In thousands, except par value data) | | Assets | | | | | | | | | | | | | | | | | Current assets: | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 70,282 | | | $ | 85,346 | | | $ | 129,857 | | | $ | 70,282 | | Restricted cash | | | 992 | | | | 3,555 | | | | 339 | | | | 992 | | Accounts receivable | | | 184,012 | | | | 176,815 | | | | 132,768 | | | | 184,012 | | Contract assets | | | 166,515 | | | | 116,708 | | | | 216,928 | | | | 166,515 | | Prepaid expenses | | | 10,047 | | | | 9,219 | | | | 29,507 | | | | 10,047 | | Other current assets | | | 29,843 | | | | 16,819 | | | | 27,921 | | | | 29,843 | | Inventories | | | 6,731 | | | | 5,735 | | | | 10,839 | | | | 6,731 | | Total current assets | | | 468,422 | | | | 414,197 | | | | 548,159 | | | | 468,422 | | Property, plant and equipment, net | | | 205,007 | | | | 159,423 | | | | 209,001 | | | | 205,007 | | Operating lease right of use assets | | | 122,351 | | | | — | | | | 158,827 | | | | 122,351 | | Goodwill | | | 2,807 | | | | 2,807 | | | | 2,807 | | | | 2,807 | | Intangible assets and deferred costs, net | | | 4,170 | | | | 4,458 | | | | 4,146 | | | | 4,170 | | Other noncurrent assets | | | 23,920 | | | | 23,970 | | | | 33,317 | | | | 23,920 | | Total assets | | $ | 826,677 | | | $ | 604,855 | | | $ | 956,257 | | | $ | 826,677 | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | | | | | | | Accounts payable and accrued expenses | | $ | 293,104 | | | $ | 199,078 | | | $ | 295,992 | | | $ | 293,104 | | Accrued warranty | | | 47,639 | | | | 36,765 | | | | 50,852 | | | | 47,639 | | Current maturities of long-term debt | | | 13,501 | | | | 27,058 | | | | 32,551 | | | | 13,501 | | Current operating lease liabilities | | | 16,629 | | | | — | | | | 26,099 | | | | 16,629 | | Contract liabilities | | | 3,008 | | | | 7,143 | | | | 614 | | | | 3,008 | | Total current liabilities | | | 373,881 | | | | 270,044 | | | | 406,108 | | | | 373,881 | | Long-term debt, net of debt issuance costs and current maturities | | | 127,888 | | | | 110,565 | | | | 184,316 | | | | 127,888 | | Noncurrent operating lease liabilities | | | 113,883 | | | | — | | | | 155,925 | | | | 113,883 | | Other noncurrent liabilities | | | 5,975 | | | | 3,289 | | | | 8,873 | | | | 5,975 | | Total liabilities | | | 621,627 | | | | 383,898 | | | | 755,222 | | | | 621,627 | | Commitments and contingencies | | | | | | | | | | Commitments and contingencies (Note 14) | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | | | | | | | | Common shares, $0.01 par value, 100,000 shares authorized and 35,326 shares issued and 35,181 shares outstanding at December 31, 2019; 100,000 shares authorized and 34,745 shares issued and 34,678 shares outstanding at December 31, 2018 | | | 353 | | | | 347 | | | Common shares, $0.01 par value, 100,000 shares authorized and 36,771 shares issued and 36,564 shares outstanding at December 31, 2020; 100,000 shares authorized and 35,326 shares issued and 35,181 shares outstanding at December 31, 2019 | | | | 368 | | | | 353 | | Paid-in capital | | | 322,906 | | | | 311,771 | | | | 349,472 | | | | 322,906 | | Accumulated other comprehensive loss | | | (23,612 | ) | | | (14,392 | ) | | | (32,990 | ) | | | (23,612 | ) | Accumulated deficit | | | (90,689 | ) | | | (74,981 | ) | | | (109,716 | ) | | | (90,689 | ) | Treasury stock, at cost, 145 shares at December 31, 2019; 67 shares at December 31, 2018 | | | (3,908 | ) | | | (1,788 | ) | | Treasury stock, at cost, 207 shares at December 31, 2020; 145 shares at December 31, 2019 | | | | (6,099 | ) | | | (3,908 | ) | Total stockholders’ equity | | | 205,050 | | | | 220,957 | | | | 201,035 | | | | 205,050 | | Total liabilities and stockholders’ equity | | $ | 826,677 | | | $ | 604,855 | | | $ | 956,257 | | | $ | 826,677 | |
See accompanying notes to consolidated financial statements. F-5
TPI COMPOSITES, INC. AND SUBSIDIARIES Consolidated Statements of Operations
(In thousands, except per share data)CONSOLIDATED STATEMENTS OF OPERATIONS
| | | Year Ended December 31, | | | | Year Ended December 31, | | | 2020 | | | 2019 | | | 2018 | | | | 2019 | | | 2018 | | | 2017 | | | (In thousands, except per share data) | | Net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 1,029,624 | | Cost of sales | | | 1,290,619 | | | | 882,075 | | | | 804,099 | | | | 1,561,432 | | | | 1,290,619 | | | | 882,075 | | Startup and transition costs | | | 68,033 | | | | 74,708 | | | | 40,628 | | | | 44,606 | | | | 68,033 | | | | 74,708 | | Total cost of goods sold | | | 1,358,652 | | | | 956,783 | | | | 844,727 | | | | 1,606,038 | | | | 1,358,652 | | | | 956,783 | | Gross profit | | | 77,848 | | | | 72,841 | | | | 110,471 | | | | 64,099 | | | | 77,848 | | | | 72,841 | | General and administrative expenses | | | 39,916 | | | | 43,542 | | | | 40,373 | | | | 33,496 | | | | 39,916 | | | | 43,542 | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 4,581 | | | | — | | | Loss on sale of assets and asset impairments | | | | 7,748 | | | | 18,117 | | | | 4,581 | | Restructuring charges, net | | | 3,927 | | | | — | | | | — | | | | 4,089 | | | | 3,927 | | | | — | | Income from operations | | | 15,888 | | | | 24,718 | | | | 70,098 | | | | 18,766 | | | | 15,888 | | | | 24,718 | | Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | | 157 | | | | 181 | | | | 95 | | | | 102 | | | | 157 | | | | 181 | | Interest expense | | | (8,179 | ) | | | (10,417 | ) | | | (12,381 | ) | | | (10,501 | ) | | | (8,179 | ) | | | (10,417 | ) | Loss on extinguishment of debt | | | — | | | | (3,397 | ) | | | — | | | | — | | | | — | | | | (3,397 | ) | Realized loss on foreign currency remeasurement | | | (4,107 | ) | | | (13,489 | ) | | | (4,471 | ) | | Foreign currency loss, net | | | | (19,986 | ) | | | (4,107 | ) | | | (13,489 | ) | Miscellaneous income | | | 3,648 | | | | 4,650 | | | | 1,191 | | | | 3,876 | | | | 3,648 | | | | 4,650 | | Total other expense | | | (8,481 | ) | | | (22,472 | ) | | | (15,566 | ) | | | (26,509 | ) | | | (8,481 | ) | | | (22,472 | ) | Income before income taxes | | | 7,407 | | | | 2,246 | | | | 54,532 | | | Income (loss) before income taxes | | | | (7,743 | ) | | | 7,407 | | | | 2,246 | | Income tax benefit (provision) | | | (23,115 | ) | | | 3,033 | | | | (15,798 | ) | | | (11,284 | ) | | | (23,115 | ) | | | 3,033 | | Net income (loss) | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | | $ | (19,027 | ) | | $ | (15,708 | ) | | $ | 5,279 | | | | | | | | | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | | 35,062 | | | | 34,311 | | | | 33,844 | | | | 35,532 | | | | 35,062 | | | | 34,311 | | Diluted | | | 35,062 | | | | 36,002 | | | | 34,862 | | | | 35,532 | | | | 35,062 | | | | 36,002 | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | | | | | | Basic | | $ | (0.45 | ) | | $ | 0.15 | | | $ | 1.14 | | | $ | (0.54 | ) | | $ | (0.45 | ) | | $ | 0.15 | | Diluted | | $ | (0.45 | ) | | $ | 0.15 | | | $ | 1.11 | | | $ | (0.54 | ) | | $ | (0.45 | ) | | $ | 0.15 | |
See accompanying notes to consolidated financial statements. F-6
TPI COMPOSITES, INC. AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss)
(In thousands)CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
| | | Year Ended December 31, | | | | Year Ended December 31, | | | 2020 | | | 2019 | | | 2018 | | | | 2019 | | | 2018 | | | 2017 | | | (In thousands) | | Net income (loss) | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | | $ | (19,027 | ) | | $ | (15,708 | ) | | $ | 5,279 | | Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | Foreign currency translation adjustments | | | (7,026 | ) | | | (14,428 | ) | | | 3,304 | | | | (8,099 | ) | | | (7,026 | ) | | | (14,428 | ) | Unrealized gain (loss) on hedging derivatives, net of taxes of $(585) and $158 for the years ended December 31, 2019 and 2018 | | | (2,194 | ) | | | 594 | | | | — | | | Comprehensive income (loss) | | $ | (24,928 | ) | | $ | (8,555 | ) | | $ | 42,038 | | | Unrealized gain (loss) on hedging derivatives, net of taxes of $(200), $(585) and $158 for the years ended December 31, 2020, 2019 and 2018 | | | | (1,279 | ) | | | (2,194 | ) | | | 594 | | Comprehensive loss | | | $ | (28,405 | ) | | $ | (24,928 | ) | | $ | (8,555 | ) |
See accompanying notes to consolidated financial statements.
TPI COMPOSITES, INC. AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(In thousands)CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
| | Common | | | Paid-in | | | Accumulated other comprehensive | | | Accumulated | | | Treasury stock, | | | Total stockholders' equity | | | Common | | | Paid-in | | | Accumulated other comprehensive | | | Accumulated | | | Treasury stock, | | | Total stockholders' | | | | Shares | | | Amount | | | capital | | | income (loss) | | | deficit | | | at cost | | | (deficit) | | | Shares | | | Amount | | | capital | | | loss | | | deficit | | | at cost | | | equity | | Balance at December 31, 2016 | | | 33,737 | | | $ | 337 | | | $ | 292,833 | | | $ | (3,862 | ) | | $ | (117,908 | ) | | $ | — | | | $ | 171,400 | | | Cumulative-effect adjustment of the adoption of ASU 2016-09 on January 1, 2017 | | | — | | | | — | | | | 1,072 | | | | — | | | | (1,086 | ) | | | — | | | | (14 | ) | | Net income | | | — | | | | — | | | | — | | | | — | | | | 38,734 | | | | — | | | | 38,734 | | | Other comprehensive income | | | — | | | | — | | | | — | | | | 3,304 | | | | — | | | | — | | | | 3,304 | | | Common stock repurchased | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,264 | ) | | | (1,264 | ) | | Issuances under share-based compensation plan | | | 312 | | | | 3 | | | | 674 | | | | — | | | | — | | | | 753 | | | | 1,430 | | | Share-based compensation expense | | | — | | | | — | | | | 6,964 | | | | — | | | | — | | | | — | | | | 6,964 | | | | | | (In thousands) | | Balance at December 31, 2017 | | | 34,049 | | | | 340 | | | | 301,543 | | | | (558 | ) | | | (80,260 | ) | | | (511 | ) | | | 220,554 | | | | 34,049 | | | $ | 340 | | | $ | 301,543 | | | $ | (558 | ) | | $ | (80,260 | ) | | $ | (511 | ) | | $ | 220,554 | | Net income | | | — | | | | — | | | | — | | | | — | | | | 5,279 | | | | — | | | | 5,279 | | | | — | | | | — | | | | — | | | | — | | | | 5,279 | | | | — | | | | 5,279 | | Other comprehensive loss | | | — | | | | — | | | | — | | | | (13,834 | ) | | | — | | | | — | | | | (13,834 | ) | | | — | | | | — | | | | — | | | | (13,834 | ) | | | — | | | | — | | | | (13,834 | ) | Common stock repurchased | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,859 | ) | | | (2,859 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,859 | ) | | | (2,859 | ) | Issuances under share-based compensation plan | | | 696 | | | | 7 | | | | 2,695 | | | | — | | | | — | | | | 1,582 | | | | 4,284 | | | | 696 | | | | 7 | | | | 2,695 | | | | — | | | | — | | | | 1,582 | | | | 4,284 | | Share-based compensation expense | | | — | | | | — | | | | 7,533 | | | | — | | | | — | | | | — | | | | 7,533 | | | | — | | | | — | | | | 7,533 | | | | — | | | | — | | | | — | | | | 7,533 | | Balance at December 31, 2018 | | | 34,745 | | | | 347 | | | | 311,771 | | | | (14,392 | ) | | | (74,981 | ) | | | (1,788 | ) | | | 220,957 | | | | 34,745 | | | | 347 | | | | 311,771 | | | | (14,392 | ) | | | (74,981 | ) | | | (1,788 | ) | | | 220,957 | | Net loss | | | — | | | | — | | | | — | | | | — | | | | (15,708 | ) | | | — | | | | (15,708 | ) | | | — | | | | — | | | | — | | | | — | | | | (15,708 | ) | | | — | | | | (15,708 | ) | Other comprehensive loss | | | — | | | | — | | | | — | | | | (9,220 | ) | | | — | | | | — | | | | (9,220 | ) | | | — | | | | — | | | | — | | | | (9,220 | ) | | | — | | | | — | | | | (9,220 | ) | Common stock repurchased | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,120 | ) | | | (2,120 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,120 | ) | | | (2,120 | ) | Issuances under share-based compensation plan | | | 581 | | | | 6 | | | | 5,291 | | | | — | | | | — | | | | | | | | 5,297 | | | | 581 | | | | 6 | | | | 5,291 | | | | — | | | | — | | | | | | | | 5,297 | | Share-based compensation expense | | | — | | | | — | | | | 5,844 | | | | — | | | | — | | | | — | | | | 5,844 | | | | — | | | | — | | | | 5,844 | | | | — | | | | — | | | | — | | | | 5,844 | | Balance at December 31, 2019 | | | 35,326 | | | $ | 353 | | | $ | 322,906 | | | $ | (23,612 | ) | | $ | (90,689 | ) | | $ | (3,908 | ) | | $ | 205,050 | | | | 35,326 | | | | 353 | | | | 322,906 | | | | (23,612 | ) | | | (90,689 | ) | | | (3,908 | ) | | | 205,050 | | Net loss | | | | — | | | | — | | | | — | | | | — | | | | (19,027 | ) | | | — | | | | (19,027 | ) | Other comprehensive loss | | | | — | | | | — | | | | — | | | | (9,378 | ) | | | — | | | | — | | | | (9,378 | ) | Common stock repurchased | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,191 | ) | | | (2,191 | ) | Issuances under share-based compensation plan | | | | 1,445 | | | | 15 | | | | 16,569 | | | | — | | | | — | | | | — | | | | 16,584 | | Share-based compensation expense | | | | — | | | | — | | | | 9,997 | | | | — | | | | — | | | | — | | | | 9,997 | | Balance at December 31, 2020 | | | | 36,771 | | | $ | 368 | | | $ | 349,472 | | | $ | (32,990 | ) | | $ | (109,716 | ) | | $ | (6,099 | ) | | $ | 201,035 | |
See accompanying notes to consolidated financial statements.
TPI COMPOSITES, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
(In thousands)CONSOLIDATED STATEMENTS OF CASH FLOWS
| | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | | | | | | | | | | | | | (In thousands) | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) | | $ | (15,708 | ) | | $ | 5,279 | | | $ | 38,734 | | | $ | (19,027 | ) | | $ | (15,708 | ) | | $ | 5,279 | | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | | | | | | | Depreciation and amortization | | | 38,580 | | | | 26,429 | | | | 21,698 | | | | 49,667 | | | | 38,580 | | | | 26,429 | | Realized loss on sale of assets and asset impairments | | | 18,117 | | | | 4,581 | | | | 334 | | | Loss on sale of assets and asset impairments | | | | 7,748 | | | | 18,117 | | | | 4,581 | | Restructuring charges, net | | | 3,927 | | | | — | | | | — | | | | 4,089 | | | | 3,927 | | | | — | | Share-based compensation expense | | | 5,681 | | | | 7,795 | | | | 7,124 | | | | 10,352 | | | | 5,681 | | | | 7,795 | | Amortization of debt issuance costs | | | 206 | | | | 336 | | | | 573 | | | | 351 | | | | 206 | | | | 336 | | Loss on extinguishment of debt | | | — | | | | 3,397 | | | | - | | | | — | | | | — | | | | 3,397 | | Deferred income taxes | | | 4,951 | | | | (14,912 | ) | | | 1,650 | | | | (7,982 | ) | | | 4,951 | | | | (14,912 | ) | Changes in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Accounts receivable | | | (19,366 | ) | | | (59,200 | ) | | | (54,227 | ) | | | 42,986 | | | | (19,366 | ) | | | (59,200 | ) | Contract assets and liabilities | | | (57,583 | ) | | | (7,898 | ) | | | (4,423 | ) | | | (56,150 | ) | | | (57,583 | ) | | | (7,898 | ) | Operating lease right of use assets and operating lease liabilities | | | 6,953 | | | | — | | | | — | | | | 15,036 | | | | 6,953 | | | | — | | Inventories | | | (1,145 | ) | | | (1,685 | ) | | | 964 | | | | (4,276 | ) | | | (1,145 | ) | | | (1,685 | ) | Prepaid expenses | | | (1,052 | ) | | | 1,318 | | | | (1,724 | ) | | | (19,916 | ) | | | (1,052 | ) | | | 1,318 | | Other current assets | | | (13,692 | ) | | | (132 | ) | | | 4,874 | | | | 1,491 | | | | (13,692 | ) | | | (132 | ) | Other noncurrent assets | | | (7,177 | ) | | | (5,167 | ) | | | 2,816 | | | | 734 | | | | (7,177 | ) | | | (5,167 | ) | Accounts payable and accrued expenses | | | 80,720 | | | | 32,263 | | | | 51,474 | | | | 6,209 | | | | 80,720 | | | | 32,263 | | Accrued warranty | | | 10,874 | | | | 6,346 | | | | 9,330 | | | | 3,213 | | | | 10,874 | | | | 6,346 | | Other noncurrent liabilities | | | 2,798 | | | | (2,008 | ) | | | (4,597 | ) | | | 3,045 | | | | 2,798 | | | | (2,008 | ) | Net cash provided by (used in) operating activities | | | 57,084 | | | | (3,258 | ) | | | 74,600 | | | | 37,570 | | | | 57,084 | | | | (3,258 | ) | Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Purchases of property, plant and equipment | | | (74,408 | ) | | | (52,688 | ) | | | (44,828 | ) | | | (65,666 | ) | | | (74,408 | ) | | | (52,688 | ) | Acquisition of a business | | | (1,102 | ) | | | — | | | | — | | | | — | | | | (1,102 | ) | | | — | | Proceeds from sale of assets | | | — | | | | — | | | | 850 | | | Net cash used in investing activities | | | (75,510 | ) | | | (52,688 | ) | | | (43,978 | ) | | | (65,666 | ) | | | (75,510 | ) | | | (52,688 | ) | Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from revolving and term loans | | | 22,000 | | | | 89,435 | | | | — | | | | 80,000 | | | | 22,000 | | | | 89,435 | | Repayments of revolving and term loans | | | — | | | | (74,972 | ) | | | (3,750 | ) | | | (21,260 | ) | | | — | | | | (74,972 | ) | Net proceeds from (repayments of) accounts receivable financing | | | (10,719 | ) | | | 424 | | | | (1,020 | ) | | | (3,805 | ) | | | (10,719 | ) | | | 424 | | Proceeds from working capital loans | | | 3,535 | | | | — | | | | 9,936 | | | | — | | | | 3,535 | | | | — | | Repayments of working capital loans | | | (3,535 | ) | | | — | | | | (14,574 | ) | | | — | | | | (3,535 | ) | | | — | | Principal repayments of finance leases | | | (9,128 | ) | | | — | | | | — | | | | (6,116 | ) | | | (9,128 | ) | | | — | | Net proceeds from (repayments of) other debt | | | (4,286 | ) | | | (23,763 | ) | | | 1,313 | | | | 26,875 | | | | (4,286 | ) | | | (23,763 | ) | Debt issuance costs | | | — | | | | (281 | ) | | | (454 | ) | | | (730 | ) | | | — | | | | (281 | ) | Proceeds from exercise of stock options | | | 5,223 | | | | 4,284 | | | | 1,430 | | | | 15,839 | | | | 5,223 | | | | 4,284 | | Repurchase of common stock including shares withheld in lieu of income taxes | | | (2,120 | ) | | | (2,859 | ) | | | (1,264 | ) | | | (2,191 | ) | | | (2,120 | ) | | | (2,859 | ) | Net cash provided by (used in) financing activities | | | 970 | | | | (7,732 | ) | | | (8,383 | ) | | | 88,612 | | | | 970 | | | | (7,732 | ) | Impact of foreign exchange rates on cash, cash equivalents and restricted cash | | | (171 | ) | | | 617 | | | | 335 | | | | (2,069 | ) | | | (171 | ) | | | 617 | | Net change in cash, cash equivalents and restricted cash | | | (17,627 | ) | | | (63,061 | ) | | | 22,574 | | | | 58,447 | | | | (17,627 | ) | | | (63,061 | ) | Cash, cash equivalents and restricted cash, beginning of year | | | 89,376 | | | | 152,437 | | | | 129,863 | | | | 71,749 | | | | 89,376 | | | | 152,437 | | Cash, cash equivalents and restricted cash, end of year | | $ | 71,749 | | | $ | 89,376 | | | $ | 152,437 | | | $ | 130,196 | | | $ | 71,749 | | | $ | 89,376 | | Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | Cash paid for interest | | $ | 8,190 | | | $ | 9,904 | | | $ | 11,803 | | | Cash paid for income taxes, net | | | 18,640 | | | | 7,246 | | | | 17,263 | | | Supplemental disclosures of noncash investing and financing activities: | | | | | | | | | | | | | | Accrued capital expenditures in accounts payable | | | 14,644 | | | | 5,139 | | | | 5,725 | | |
See accompanying notes to consolidated financial statements.
TPI COMPOSITES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS – CONTINUED | | Year Ended December 31, | | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Supplemental cash flow information: | | | | | | | | | | | | | Cash paid for interest | | $ | 9,853 | | | $ | 8,190 | | | $ | 9,904 | | Cash paid for income taxes, net of refunds | | | 20,965 | | | | 18,640 | | | | 7,246 | | Noncash investing and financing activities: | | | | | | | | | | | | | Right of use assets obtained in exchange for new operating lease liabilities | | | 61,455 | | | | 15,855 | | | | — | | Property, plant, and equipment obtained in exchange for new finance lease liabilities | | | 163 | | | | 5,811 | | | | 21,968 | | Accrued capital expenditures in accounts payable | | | 7,556 | | | | 14,644 | | | | 5,139 | |
Reconciliation of Cash, Cash Equivalents and Restricted Cash: | | December 31, | | | | 2020 | | | 2019 | | | 2018 | | | 2017 | | Consolidated Balance Sheets | | (in thousands) | | Cash and cash equivalents | | $ | 129,857 | | | $ | 70,282 | | | $ | 85,346 | | | $ | 148,113 | | Restricted cash | | | 339 | | | | 992 | | | | 3,555 | | | | 3,849 | | Restricted cash included within other noncurrent assets | | | — | | | | 475 | | | | 475 | | | | 475 | | Consolidated Statements Of Cash Flows | | | | | | | | | | | | | | | | | Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | | $ | 130,196 | | | $ | 71,749 | | | $ | 89,376 | | | $ | 152,437 | |
See accompanying notes to consolidated financial statements.
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1. Summary of Operations and Summary of Significant Accounting Policies (a) Description of Business TPI Composites, Inc. is the holding company that conducts substantially all of its business operations through its direct and indirect subsidiaries (collectively, the Company or we). The Company was founded in 1968 and has been producing composite wind blades since 2001. The Company’s knowledge and experience of composite materials and manufacturing originates with its predecessor company, Tillotson Pearson Inc., a leading manufacturer of high-performance sail and powerboats along with a wide range of composite structures used in other industrial applications. Following the separation from the boat building business in 2004, the Company reorganized in Delaware as LCSI Holding, Inc. and then changed its corporate name to TPI Composites, Inc. in 2008. Today, the Company is headquartered in Scottsdale, Arizona and has expanded its global footprint to include domestic facilities in Newton, Iowa; Warren, Rhode Island and Santa Teresa, New Mexico and international facilities in Dafeng, China; Taicang Port, China; Yangzhou, China, Juárez, Mexico; Matamoros, Mexico; Izmir, Turkey; Chennai, India, Kolding, Denmark and Berlin, Germany. (b) Basis of Presentation We divide our business operations into four geographic operating segments—the United States (U.S.), Asia, Mexico and Europe, the Middle East, Africa and India (EMEAI), as follows:
Our U.S. segment includes (1) the manufacturing of wind blades at our Newton, Iowa plant, (2) the manufacturing of precision molding and assembly systems used to manufacture wind blades at our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which we also conduct at our Rhode Island facility, (4) wind blade inspection and repair services in North America, (5) our advanced engineering center in Kolding, Denmark, which provides technical and engineering resources to our manufacturing facilities, (6) our engineering center in Berlin, Germany which we purchased in July 2019 and (7) our corporate headquarters, the costs of which are included in general and administrative expenses.
Our Asia segment includes (1) the manufacturing of wind blades at our facilities in Dafeng, China and Yangzhou, China, the latter of which commenced operations in March 2019, (2) the manufacturing of precision molding and assembly systems at our Taicang Port, China facility and (3) wind blade inspection and repair services.
Our Mexico segment manufactures wind blades from three facilities in Juárez, Mexico and a facility in Matamoros, Mexico at which we commenced operations in July 2018. In November 2018, we entered into a new lease agreement with a third party for a new precision molding and assembly systems manufacturing facility in Juárez, Mexico and we commenced operations at this facility in March 2019. This segment also performs wind blade inspection and repair services.
Our EMEAI segment manufactures wind blades from two facilities in Izmir, Turkey and also performs wind blade inspection and repair services. In February 2019, we entered into a new lease agreement with a third party for a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. This segment also performs wind blade inspection and repair services.
The accompanying consolidated financial statements include the accounts of TPI Composites, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain prior period amounts in the consolidated financial statements and accompanying notes have been reclassified to conform to the current period’s presentation. (c) Public Offering In May 2017, we completed a secondary public offering of 5,075,000 shares of our common stock at a price of $16.35 per share, which included 575,000 shares issued pursuant to the underwriters’ option to purchase additional
F-10
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
shares. All of the shares were sold by existing stockholders and certain of our executive officers. The selling stockholders received all of the net proceeds of $78.8 million from the secondary public offering. We did not sell any shares and did not receive any of the proceeds from the offering and the costs paid by us in connection with the offering of $0.8 million were recorded in general and administrative costs in the accompanying consolidated statement of operations.
(d) Revenue Recognition
The majority of our revenue is generated from long-term contracts associated with manufacturing of wind blades and related services. We account for a long-term contract when it has the approval from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and the collectability of consideration is probable. To determine the proper revenue recognition method for each long-term contract, we evaluate whether the original contract should be accounted for as one or more performance obligations. This evaluation requires judgment and the decisions reached could change the amount of revenue and gross profit recorded in a given period. As most of our contracts contain multiple performance obligations, we allocate the total transaction price to each performance obligation based on the estimated relative standalone selling prices of the promised goods or services underlying each performance obligation. Our manufacturing services are customer specific and involve production of items that cannot be sold to other customers due to the customers’ protected intellectual property; therefore, we allocate the total transaction price under our contracts with multiple performance obligations using the contractually stated prices, as these prices represent the relative standalone selling price based on an expected cost plus margin model. Revenue is primarily recognized over time as we have an enforceable right to payment upon termination and we may not use or sell the product to fulfill other customers’ contracts. In addition, the customer does not have return or refund rights for items produced that conform to the specifications included in the contract. Because control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation. We use the cost-to-cost input measure of progress for our contracts as this method provides the best representation of the production progress towards satisfaction of the performance obligation as the materials are distinct to the product being manufactured because of customer specifications provided for in the contract, the costs incurred are proportional to the progress towards completion of the product, and the products do not involve significant pre-fabricated component parts. Under the cost-to-cost method, progress and the related revenue recognition is determined by a ratio of direct costs incurred to date in fulfillment of the performance obligation to the total estimated direct costs required to complete the performance obligation. F-11
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Determining the revenue to be recognized for services performed under our manufacturing contracts involves judgments and estimates relating to the total consideration to be received and the expected direct costs to complete the performance obligation. As such, revenue recognized reflects our estimates of future contract volumes and the direct costs to complete the performance obligation. The judgments and estimates relating to the total consideration to be received include the amount of variable consideration as our contracts typically provide the customer with a range of production output options from guaranteed minimum volume obligations to the production capacity of the facility, and customers will provide periodic non-cancellable commitments for the number of wind blades to be produced over the term of the agreement. The total consideration also includes payments expected to be received associated with wind blade model transitions. We use historical experience, customer commitments and forecasted future production based on the capacity of the plant to estimate the total revenue to be received to complete the performance obligation. In addition, the amount of revenueconsideration per unit produced may vary based on the costs of production of the wind blades as we may be able to change the price per unit based on changes in the cost of production. Further, some of our contracts provide opportunities for us to share in labor and material cost savings as well as absorb some additional costs as an incentive for more efficient production, both of which impact the margin realized on the contract and ultimately the total amount of revenue to be recognized. Additionally, certain of our customer contracts provide for us to make concessions, such as in the form of liquidated damages, for missed production deadlines which are paid over a negotiated timeline. We estimate variable consideration at the most likely amount to which we expect to be entitled. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our F-11
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information available to us at the time of the estimate and may materially change as additional information becomes known. Our contracts may be modified to account for changes in specifications of products and changing requirements. If the contract modifications are for goods or services that are not distinct from the existing contract, they are accounted for as if they were part of the original contract. The effect of a contract modification on the transaction price and the measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue on a cumulative catch-up basis. If contract modifications are for goods and services that are distinct from the existing contract and increases the amount of consideration reflecting the standalone sale price of the additional goods or services, then the contract modification is accounted for as a separate contract and is evaluated for one or more performance obligations. Each reporting period, we evaluate the progress towards satisfaction of each performance obligation based on any contract modifications that have occurred, cost incurred to date, and an estimate of the expected future revenueconsideration and costs to be incurred to complete the performance obligation. Based on this analysis, any changes in estimates of revenue, cost of sales, contract assetstotal consideration to be received and liabilities anddirect costs to complete the related impact to operating incomeperformance obligation are recognized on a cumulative catch-up basis, which recognizes in the current period the cumulative effect of the changes on current and prior periods based on the percentage of completion of the performance obligation. Wind blade pricing is based on annual commitments of volume as established in our customer contracts and orders less than committed volume may result in a higher price per wind blade to our customers. Orders in excess of annual commitments may result in discounts to our customers from the contracted price for the committed volume. Our customers typically provide periodic purchase orders with the price per wind blade given the current cost of the bill of materials, labor requirements and volume desired. We record an allowance for expected utilization of early payment discounts which are reported as a reduction of the related revenue.total consideration to be received. Precision molding and assembly systems included in a customer’s contract are based upon the specific engineering requirements and design determined by the customer and are specific to the wind blade design and function desired. From the customer’s engineering specifications, a job cost estimate is developed along with a production plan, and the desired margin is applied based on the location the work is to be performed and complexity of the customer’s design. Precision molding and assembly systems are generally built to produce wind blades which may be manufactured by us in production runs specified in the customer contract. F-12
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Contract assets primarily relate to our rights to consideration for work completed but not billed at the reporting date on manufacturing services contracts. The contract assets are transferred to accounts receivable when the rights become unconditional, which generally occurs when customers are invoiced upon the determination that a product conforms to the contract specifications and invoices are due based on each customer’s negotiated payment terms, which, when factoring in supply chain financing arrangements,our accounts receivable assignment agreements, range from 5 to 25 days. We apply the practical expedient that allows us to exclude payment terms under one year from the transfer of a promised good or service from consideration of a significant financing component in its contracts. With regards to the production of precision molding and assembly systems, our contracts generally call for progress payments to be made in advance of production. Generally, payment is made at certain percentage of completion milestones with the final payment due upon delivery to the manufacturing facility. These progress payments are recorded within contract liabilities as current liabilities in the consolidated balance sheets and are reduced as we record revenue over time. We evaluate indications that a customer may not be able to meet the obligations under our long-term supply agreements to determine if an account receivable or contract asset may be impaired. Our customers may request, in situations where they do not have space available to receive products or do not want to take possession of products immediately for other reasons, that their finished products be stored by us in one of our facilities. Most of our contracts provide for a limited number of wind blades to be stored during the period of the contract with any additional wind blades stored subject to additional storage fees, which are included in the wind blade product revenue.sales. Revenue related to field service inspection and repair services, non-recurring engineering and freight services provided under our customer contracts is recognized at a point in time following the transfer of control of the promised services to the customer. Customers F-12
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
usually pay the carrier directly for the cost of shipping associated with items produced. When we pay the shipping costs, we apply the practical expedient that allows us to account for shipping and handling as a fulfillment costs and include the revenue in the associated performance obligation and the costs are included in cost of goods sold. Taxes assessed by a governmental authority that are both imposed on and concurrent with specific revenue-producing transactions, that are collected by us from a customer, are excluded from revenue. (e)(d) Cost of Goods Sold
Cost of goods sold includes the costs we incur at our production facilities to make products saleable on both products invoiced during the period as well as products in progress towards the completionsatisfaction of eachthe related performance obligation.obligations for which we have an enforceable right to payment upon termination and we may not use or sell the product to fulfill other customers’ contracts. Cost of goods sold includes such items as raw materials, direct and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, production process improvement activities, product engineering and internal transfer costs.costs, as well as the allocated portion of costs incurred at our corporate headquarters and our research facilities. In addition, all depreciation associated with assets used in the production of our products is also included in cost of goods sold. Direct labor costs consist of salaries, benefits and other personnel related costs for employees engaged in the manufacturemanufacturing of our products and services. Startup and transition costs are primarily unallocated fixed overhead costs and underutilized direct labor costs incurred during the period production facilities are transitioning wind blade models and ramping up manufacturing. All direct labor costs are included in the measure of progress towards completion of the relevant performance obligation when determining revenue to be recognized during the period. The cost of sales for the initial wind blades from a new model manufacturing line is generally higher than when the line is operating at optimal production volume levels due to inefficiencies during ramp-up related to labor hours per blade, cycle times per blade and raw material usage. Additionally, these costs as a percentage of net sales are generally higher during the period in which a facility is ramping up to full production capacity due to underutilization of the facility. Manufacturing overhead at each of our facilities includes virtually all indirect costs (including share-based compensation costs) incurred at the plants, including engineering, finance, information technology, human resources and plant management. (f)F-13
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (e) General and Administrative Expenses General and administrative expenses primarily relate to the unallocated portion of costs incurred at our corporate headquarters and our research facilities and include salaries, benefits and other personnel related costs for employees engaged in research and development, engineering, finance, internal audit, information technology, human resources, business development, global operational excellence, global supply chain, in-house legal and executive management. Other costs include outside legal and accounting fees, risk management (insurance), share-based compensation and certain other administrative and global resources costs. The unallocated research and development expenses incurred at our Warren, Rhode Island location as well as at our Kolding, Denmark advanced engineering center and our Berlin, Germany engineering center are also included in general and administrative expenses. For the years ended December 31, 2020, 2019 2018 and 2017,2018, total research and development expenses totaled $1.0 million, $0.8$1.0 million and $1.6$0.8 million, respectively. F-13
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Realized(f) Loss on Sale of Assets and Asset Impairments
For the yearyears ended December 31, 2020, 2019 and 2018, the realized losslosses on the sale of certain receivables, on a non-recourse basis under supply chain financing arrangements with our customers, to financial institutions, the realized losslosses on the sale of other assets at our corporate and manufacturing facilities and asset impairment charges totaled $7.7 million, $18.1 million. For the year ended December 31, 2018, the realized loss on the sale of certain receivables, on a non-recourse basis under supply chain financing arrangements with our customers, to financial institutionsmillion and the realized loss on the sale of other assets at our manufacturing facilities totaled $4.6 million. There were no asset impairment charges for the year ended December 31, 2018.million, respectively. (h)(g) Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include highly liquid investments that are readily convertible to known amounts of cash with original maturities of three months or less. The carrying value of cash and cash equivalents approximates fair value. As of December 31, 20192020 and 2018,2019, our China locations collectively had unrestricted cash totaling $9.7$47.4 million and $28.9$9.7 million, respectively, in bank accounts in China. The Chinese government imposes certain restrictions on transferring cash out of China. The local governments in Turkey and Mexico impose no such restrictions on transferring cash out of the respective country. As of December 31, 20192020 and 2018,2019, we had provided for cash deposits for letters of guarantee used for customs clearance related to our China locations totaling $1.0$0.3 million and $3.5$1.0 million, respectively. These amounts are reported as restricted cash in our consolidated balance sheets. As of December 31, 2019, and 2018, we maintained a long-term deposit in interest bearing accounts, related to fully cash-collateralized letters of credit in connection an equipment lessor in Iowa, totaling $0.5 million. This balance was refunded to us in 2020. See Note 9, 8, Other Noncurrent Assets. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets which total the same such amounts in the consolidated statements of cash flows:
| | December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2016 | | | | (in thousands) | | Cash and cash equivalents | | $ | 70,282 | | | $ | 85,346 | | | $ | 148,113 | | | $ | 119,066 | | Restricted cash | | | 992 | | | | 3,555 | | | | 3,849 | | | | 2,259 | | Restricted cash included within other noncurrent assets | | | 475 | | | | 475 | | | | 475 | | | | 8,538 | | Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows | | $ | 71,749 | | | $ | 89,376 | | | $ | 152,437 | | | $ | 129,863 | |
(i)(h) Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. We follow the allowance method of recognizing uncollectible accounts receivable, which recognizes bad debt expense based on a review of the individual accounts outstanding and prior history of uncollectible accounts receivable. Credit is extended based on evaluation of each of our customer’s financial condition and is generally unsecured. Accounts receivable are generally due within 30 days and are stated net of an allowance for doubtful accounts in the consolidated balance sheets. Accounts are considered past due if outstanding longer than contractual payment terms. We record an allowance based on consideration of a number of factors, including the length of time trade accounts are past due, previous loss history, the credit-worthinesscreditworthiness of individual customers, economic conditions affecting specific customer industries, and economic conditions in general. We charge-off accounts receivable after all reasonable collection efforts have been exhausted. We credit payments subsequently received on such receivables to bad debt expense in the period payment is received. We record delinquent finance charges on outstanding accounts receivables only if they are collected. We wrote off no0 receivables during 2020 or 2019, and $0.2 million during 2018, and $0.2do not have any off-balance-sheet credit exposure related to our customers. See Note 4, Accounts Receivable. F-14
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements million during 2017, and do not have any off-balance-sheet credit exposure related to our customers. See Note 5, Accounts Receivable.
(j)(i) Inventories
Inventories represent materials purchased that are not restricted to fulfillment of a specific contract and are measured at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Cost is determined using the first-in, first-out method for such raw materials. Write-downs to reduce the carrying cost of obsolete, slow-moving, and unusable inventory to net realizable value are recognized in cost of goods sold. The effect of these write-downs establishes a new cost basis in the related inventory, which is not subsequently written up. (k)(j) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization of property, plant, and equipment is calculated on the straight-line method over the estimated useful lives of the assets. See Note 7, 6, Property, Plant and Equipment, Net. | | Estimated useful lives | Machinery and equipment | | 7–107-10 years
| Buildings | | 20 years | Leasehold improvements | | 5 to 10 years, or the term of the lease, if shorter | Office equipment and software | | 3 to 5 years | Furniture | | 3 to 5 years | Vehicles | | 5 years |
(l)(k) Recoverability of Long-Lived Assets
We review property, plant and equipment and other long-lived assets in order to assess recoverability based on expected future undiscounted cash flows whenever events or circumstances indicate that the carrying value may not be recoverable. If the sum of the expected future net cash flows is less than the carrying value, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying value exceeds the fair value of the asset. (m)(l) Goodwill, Intangible Assets and Deferred Costs, Net
Goodwill represents the excess of the acquisition cost of Composite Solutions, Inc. from True North Partners, LLC in 2004 over the fair value of identifiable assets acquired and liabilities assumed. Goodwill, which is entirely in the U.S. segment, is evaluated for impairment annually on October 31 and whenever events or circumstances make it likely that impairment may have occurred. In determining whether impairment has occurred, one compares the fair value of the related reporting unit (calculated using the discounted cash flow method) to its carrying value. If the carrying value exceeds the fair value, impairment is recognized for the difference. We may first assess qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. We performed our annual goodwill impairment test during 20192020 and determined that it is more-likely-than-not that its fair value exceeds its carrying amount. Our patents, licenses, trademarks and development tools were acquired in business acquisitions and provide contractual or legal rights, or other future benefits that could be separately identified. Our valuation of identified intangible assets was based upon discounted cash flow estimates that require significant management judgment with respect to revenue and expense growth rates, changes in working capital, and the selection and use of the appropriate discount rate. The intangible assets are amortized over their estimated useful life. Intangible assets with indefinite lives are evaluated at least annually for impairment or whenever events or circumstances make it likely that impairment may have occurred. F-15
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements As a result of our adoption of Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, (Topic 606),In addition, we recognizedrecognize an asset for deferred costs incurred to fulfill a contract when such costs meet certain criteria. These deferred costs are amortized over their estimated useful life. See Note 2, Revenue Fromfrom Contracts with Customers for a further discussion of those deferred costs recognized as a result of the adoption of Topic 606.costs. See Note 8, 7, Intangible Assets and Deferred Costs, Net.
(n)(m) Warranty Expense
We provide a limited warranty for our mold and wind blade products, including materials and workmanship, with terms and conditions that vary depending on the product sold, generally for periods that range from two to five years. We also provide a limited warranty for our transportation products, including materials and workmanship, with terms and conditions that vary depending on the product sold, generally for a period of approximately two years. Warranty expense is recorded based upon estimates of future repairs using a probability-based methodology that considers previous warranty claims, identified quality issues and industry practices. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is generally reversed against the current year warranty expense amount. See Note 10, 9, Accrued Warranty. (o)(n) Treasury Stock
Common stock purchased for treasury is recorded at historical cost. Transactions in treasury shares relate to shares withheld in lieu of income taxes associated with share-based compensation plans and are recorded at weighted-average cost. (p)(o) Foreign Currency Translation and RemeasurementsIncome and Losses
Foreign currency-denominated assets and liabilities are translated into U.S. dollars at exchange rates existing at the respective balance sheet dates. Results of operations of our foreign subsidiaries are translated at the average exchange rates during the respective periods. Translation adjustments are reported in accumulated other comprehensive loss in our consolidated balance sheets. Currency translation adjustments for the years ended December 31, 2020, 2019 2018 and 20172018 amounted to an other comprehensive losslosses of $8.1 million, $7.0 million an other comprehensive loss ofand $14.4 million and an other comprehensive gain of $3.3 million, respectively. Our reporting currency is the U.S. dollar. However, we have non-U.S. operating subsidiaries in our U.S., Mexico, Turkey, China and India operations. The U.S. parent companies of our China and Mexico operations, which are wholly-owned subsidiaries of TPI Composites, Inc., maintain their books and records in U.S. dollars.
| • | The U.S. parent companies of our China and Mexico operations, which are wholly-owned subsidiaries of TPI Composites, Inc., maintain their books and records in their functional currency, the US. dollar. |
Our Mexico operations maintain their books and records through multiple legal entities that are denominated in the local Mexican currency, the Peso.
| • | Our Mexico operations maintain their books and records through multiple legal entities that are denominated in the local Mexican currency, the Peso, which are remeasured to their U.S. dollar functional currency. |
Our Turkey operations maintain their books and records in the local Turkish currency, the Lira.
| • | Our Turkey operations maintain their books and records in their functional currency, the local Turkish currency, the Lira. |
Our China operations maintain their books and records in the local Chinese currency, the Renminbi.
| • | Our China operations maintain their books and records in their functional currency, the local Chinese currency, the Renminbi. |
Our Chennai, India operation maintains its books and records in the local India currency, the Rupee.
| • | Our Chennai, India operations maintain their books and records in their functional currency, the U.S. dollar. |
Our Kolding, Denmark operation, which is a wholly-owned subsidiary of TPI Composites, Inc., maintains its books and records denominated in the local Danish currency, the Krone.
| • | Our Kolding, Denmark operation, which is a wholly-owned subsidiary of TPI Composites, Inc., maintains its books and records in their functional currency, the local Danish currency, the Krone. |
Our Berlin, Germany operation, which is a wholly-owned subsidiary of TPI Composites, Inc., maintains its books and records in their official currency, the Euro.
| • | Our Berlin, Germany operation, which is a wholly-owned subsidiary of TPI Composites, Inc., maintains its books and records in their functional currency, the Euro. |
Foreign currency transaction gains and losses are reported in realized loss on foreign currency remeasurementincome (loss), net in our consolidated statements of operations. (q)F-16
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (p) Share-Based Compensation We maintain two1 active incentive compensation plans: the 2008 Stock Option and Grant Plan andplan: the Amended and Restated 2015 Stock Option and Incentive Plan (the 2015 Plan). In MayThe 2015 our board of directors and stockholders adopted and approved the 2015 Plan which provides for the issuance of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock units (RSUs), restricted stock awards, F-16
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
unrestricted stock awards, cash-based awards, performance-based restricted stock units (PSUs) and dividend equivalent rights to certain of our employees, non-employee directors and consultants. The term of stock options issued under the 2015 Plan may not exceed ten years from the date of grant. Under the 2015 Plan, incentive stock options and non-qualified stock options are granted at an exercise price that is not to be less than 100% of the fair market value of our common stock on the date of grant, as determined by the Compensation Committee of our board of directors. Stock options become vested and exercisable at such times and under such conditions as determined by the Compensation Committee on the date of grant. Upon approval of the 2015 Plan, no future grants will be made from the 2008 Stock Option and Grant Plan. We use the Black Scholes valuation model, unless the awards are subject to market conditions, in which case we utilize a binomial-lattice model (i.e., Monte Carlo simulation model), to determine the fair value of stock options and certain PSUs granted pursuant to the 2015 Plan.granted. The Monte Carlo simulation model utilizes multiple input variables to determine the share-based compensation expense. For grants with market conditions made in the year ended December 31, 2019,2020, we utilized a weighted-average volatility of 28.3%47.3%, a 0% dividend yield and a weighted-average risk-free interest rate of 2.5%0.5%. The volatility was based on the most recent comparable period for the Company and the peer group. The stock price projection for the Company and the components of the peer group assumes a 0% dividend yield. This is mathematically equivalent to reinvesting dividends in the issuing entity over the performance period. The risk-free interest rate is equal to the yield, as of the measurement date, of the zero-coupon U.S. Treasury bill that is commensurate with the remaining performance measurement period. The determination of the grant date fair value using an option-pricing model and simulation model requires judgment as well as assumptions regarding a number of other complex and subjective variables. These variables include our closing market price at the grant date as well as the following assumptions: Expected Volatility. As our common stock had not been publicly traded prior to July 2016, the expected volatility assumption reflects an average of our historical volatility and the volatilities of publicly traded peer group companies with a period equal to the expected life of the options. Expected Life (years). We use the simplified method to estimate the expected term of stock options. The simplified method for estimating expected term is to use the mid-point between the vesting term and the contractual term of the option. We elected to use the simplified method because we did not have historical exercise data to estimate the expected term due to the limited time period our common stock had been publicly traded. Risk-Free Interest Rate. The risk-free interest rate assumption is based upon the U.S. constant maturity treasury rates as the risk-free rate interpolated between the years commensurate with the expected life of the options. Dividend Yield. The dividend yield assumption is zero0 since we do not expect to declare or pay dividends in the foreseeable future. Forfeitures. Share-based compensation expense is reversed when the service-based award is forfeited. Expected Vesting Period. We amortize the share-based compensation expense over the requisite service period. Share-based compensation expense related to RSUs and PSUs are expensed over the vesting period using the straight-line method for our employees and our board of directors. The RSUs and PSUs do not have voting rights. We calculate the fair value of our share-based awards on the date of grant for our employees and directors. (r)(q) Leases
On January 1, 2019, we adopted the Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 842, Leases. We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right of use (ROU) assets, current operating lease liabilities, and noncurrent operating F-17
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements lease liabilities in the consolidated balance sheets. Finance leases are included in property, plant and equipment, current maturities of long-term debt, and long-term debt, net of debt issuance costs and current maturities in the consolidated balance sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. Variable payments are not included in ROU F-17
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
assets or lease liabilities and can vary from period to period based on asset usage or our proportionate share of common costs. The implicit rate within our leases is generally not determinable and, therefore, the incremental borrowing rate at lease commencement is utilized to determine the present value of lease payments. We estimate our incremental borrowing rate based on third-party lender quotes to obtain secured debt in a like currency for a similar asset over a timeframe similar to the term of the lease. The ROU asset also includes any lease prepayments made and any initial direct costs incurred and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. We have elected not to recognize ROU assets or lease liabilities for leases with a term of 12 months or less. We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient to account for these components as a single lease component for all classes of underlying assets. See section (x) Recently Issued Accounting Pronouncements - Accounting Pronouncements Adopted in 2019 – Leases for more details on leases. (s) Financial Instruments
Interest Rate Swap
We use interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with our credit agreement (the Credit Agreement) that we entered into in April 2018. We do not use such swap contracts for speculative or trading purposes.
To offset the variability of future interest payments on the Credit Agreement arising from changes in the London Interbank Offered Rate (LIBOR), in April 2018, we entered into an interest rate swap agreement with a financial institution for a notional amount of $75.0 million with an expiration date of April 2023. This interest rate swap effectively hedges $75.0 million of the future variable rate LIBOR interest expense to a fixed rate interest expense. The derivative instrument qualified for accounting as a cash flow hedge in accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 815, Derivatives and Hedging, and we designated it as such.
The settlement value of the interest rate swap is $2.7 million as of December 31, 2019 and is included in other noncurrent liabilities in the consolidated balance sheet. The unrealized loss on the swap of $2.2 million, net of tax, is included in the consolidated statement of other comprehensive income (loss). The settlement value of the interest rate swap was $0.8 million as of December 31, 2018 and is included in other noncurrent assets in the consolidated balance sheet. The unrealized gain on the swap of $0.6 million, net of tax, was included in the consolidated statement of other comprehensive income (loss).
Foreign Exchange Forward Contracts
We use foreign exchange forward contracts to mitigate our exposure to fluctuations in exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact. In September 2019, we entered into the first of these foreign exchange forward contracts. We do not use such forward contracts for speculative or trading purposes.
We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of December 31, 2019, these foreign exchange forward contracts hedged our forecasted cash flows for periods up to nine months. These foreign exchange forward contracts qualified for accounting as cash flow hedges in accordance with ASC Topic 815, and we designated them as such.
As of December 31, 2019, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were approximately 1.1 billion Mexican Peso. The fair value of the foreign exchange forward contracts is $0.7 million as of December 31, 2019 and includes $0.8 million in other current assets and $0.1 million in accounts payable and accrued expenses in the consolidated balance sheet. The unrealized gain on the
F-18
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
foreign exchange forward contracts of $0.5 million, net of tax, as of December 31, 2019 is included in the consolidated statement of other comprehensive income (loss).
Forward Contract on Intercompany Debt
We use forward contracts to mitigate our exposure associated with fluctuations in foreign currency exchange rates. We do not use such forward contracts for speculative or trading purposes.
In August 2018, we provided a Turkish Lira denominated intercompany loan to an EMEAI subsidiary of $15.0 million converted at the spot rate on the transaction date to 96.6 million Turkish Lira to fund their working capital requirements. We entered into a forward contract, with the same expiration as that of the intercompany loan’s maturity in October 2018, for a notional amount of 101.5 million Turkish Lira to reduce our exposure to currency fluctuations from the settlement of this Turkish Lira denominated intercompany loan. The derivative instrument qualifies for accounting as a cash flow hedge in accordance with ASC Topic 815, and we designated it as such. The forward contract was settled in October 2018.
(t)(r) Income Taxes
Income taxes are accounted for under the asset and liability method in accordance with FASB ASC Topic 740, Income Taxes. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those differences are projected to be recovered or settled. Realization of deferred tax assets is dependent on our ability to generate sufficient taxable income of an appropriate character in future periods. A valuation allowance is established if it is determined to be more-likely-than-not that a deferred tax asset will not be realized. (u) Net Income (Loss) Per Common Share Calculation
The basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during a period. Diluted net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding plus potentially dilutive securities using the treasury stock method. The table below reflects the calculation of the weighted-average number of common shares outstanding, using the treasury stock method, used in computing basic and diluted earnings per common share for the years ended December 31:
| | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Basic weighted-average shares outstanding | | | 35,062 | | | | 34,311 | | | | 33,844 | | Effect of dilutive awards | | | — | | | | 1,691 | | | | 1,018 | | Diluted weighted-average shares outstanding | | | 35,062 | | | | 36,002 | | | | 34,862 | |
Share-based compensation awards of 28,000 shares were excluded from the computation of net loss per share for the year ended December 31, 2019 because their effect would be anti-dilutive. Further, we had 1,176,000 potentially dilutive shares outstanding for the year ended December 31, 2019 which were excluded due to the net loss for the year. Share-based compensation awards of 30,000 shares were excluded from the computation of diluted net income per share for the year ended December 31, 2018 because their effect would be anti-dilutive. In addition, since 2018, certain performance-based restricted stock units have been excluded from the computation of diluted shares outstanding for the 2019 and 2018 periods presented as the performance conditions had not yet been met. We did not have any potential dilutive securities which were excluded from the computation of diluted net income per share for the year ended December 31, 2017.
(v)(s) Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial F-19
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property, plant and equipment, realizability of intangible assets, deferred costs and deferred tax assets, standalone selling prices and cost assumptionsfuture contract volumes and the direct costs to complete the performance obligation for revenue recognition, fair value of stock options, performance-based restricted stock units and warrants, warranty reserves and other contingencies. (w)(t) Fair Value of Financial Instruments
FASB ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value is follows: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability. F-18
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The carrying amounts of our cash and cash equivalents, trade accounts receivable, income taxes receivable, accounts payable and accrued expenses and income taxes payable approximate fair value because of the short-term nature of these financial instruments. The carrying amount of working capitalour short-term unsecured loans approximates fair value due to their short termshort-term nature and the loans carry a current market rate of interest, a levelLevel 2 input. The carrying value of our long-term debt approximates fair value based on its variable rate index or based upon market interest rates available to us for debt of similar risk and maturities, both of which are levelLevel 2 inputs. Since our derivative assets and liabilities are not traded on an exchange, we value them using standard industry valuation models. As applicable, these models project future cash flows and discount the amounts to a present value using market-based observable inputs, including interest rate curves, credit risk, foreign exchange rates, and forward and spot prices for currencies. These inputs are observable in active markets over the contract term of the derivative instruments we hold, and accordingly, we classify the valuation techniques as Level 2. (x)(u) Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted in 2019 Leases
In February 2016, the FASB established Topic 842, Leases, by Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard established a right of use model that required a lessee to recognize a ROU asset and related lease liability on the consolidated balance sheet for all leases with a term longer than 12 months. Leases were to be classified as either finance or operating, with classification affecting the pattern and classification of expense recognition in the consolidated statement of operations.
We adopted this new standard on January 1, 2019 and used the effective date as our date of initial application. Consequently, we have not provided financial information and the disclosures required under the new standard for periods before January 1, 2019.
The adoption of this standard had a material effect on our financial statements, the most significant of which related to the recognition of ROU assets and lease liabilities on our consolidated balance sheet for our real estate, equipment and auto operating leases and providing significant new disclosures about our leasing activities.
We elected the package of practical expedients, which allowed us to retain conclusions related to lease identification and classification under legacy GAAP. The new standard also provided practical expedients for an entity’s ongoing accounting. We elected the short-term lease recognition exemption for all leases that qualify. Accordingly, for those leases that qualified, we did not recognize ROU assets or lease liabilities, and this includes
F-20
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
not recognizing ROU assets or lease liabilities for existing short-term leases. We also elected the practical expedient to not separate lease and non-lease components for all of our leases. See Note 13, Leases.
Income Taxes
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allowed a reclassification from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the Tax Reform Act. We adopted this standard on January 1, 2019 and it did not have a material impact on our consolidated financial statements.
Share-Based Compensation
In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which expanded the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. We adopted this standard on January 1, 2019 and it did not have a material impact on our consolidated financial statements.
In July 2018, the FASB issued ASU 2018-09, Codification Improvements, which contained amendments that affected a wide variety of Topics in the Codification, including amendment to Subtopic 718-40, Compensation-Stock Compensation-Income Taxes, that clarified the timing of when an entity should recognize excess tax benefits. We adopted this standard on January 1, 2019 and it did not have a material impact on our consolidated financial statements.
Internal Use Software
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which allowed for the capitalization of implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). We adopted this standard on January 1, 2019 and it did not have a material impact on our consolidated financial statements.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which eliminated Step 2 from the goodwill impairment test. We adopted this standard during 2019 when we performed our annual impairment tests and it did not have a material impact on our consolidated financial statements.
Accounting Pronouncements Not Yet Adopted2020
Financial Instruments In June 2016, the FASB issued ASUAccounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The new standard is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held at each reporting date. This standard iswas effective for all public business entities for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We will adoptadopted this standard as ofon January 1, 2020 and we doit did not expect the adoption of this standard to have a material effect on our consolidated financial statements. Fair Value Measurement In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements in Topic 820. F-21
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
This standard iswas effective for all public business entities for annual and interim periods beginning after December 15, 2019, with early adoption permitted. We will adoptadopted this standard as ofon January 1, 2020 and we are currently evaluating the impact of the adoption of this standardit did not have a material effect on our consolidated financial statements. Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which primarily removes specific exemptions to the general principles in Topic 740 in GAAP and improves the financial statement preparers’ application of income tax-related guidance and simplifies GAAP. This standard is effective for all public business entities for annual and interim periods beginning after December 15, 2020, with early adoption permitted. We will adoptadopted this standard as ofon January 1, 20212020 and we are currently evaluating the impact of the adoption of this standardit did not have a material effect on our consolidated financial statements.
Recent Accounting Pronouncements Reference Rate Reform In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. These amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. This new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. These amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. F-19
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. We are currently evaluating our contracts and the optional expedients provided by these new standards. There have been no other recent accounting pronouncements or changes in accounting pronouncements during the current year that are of significance, or potential significance, to us. Note 2 – Revenue Fromfrom Contracts with Customers The following tables represents the disaggregation of our net sales revenue by product for each of our reportable segments: | | Year Ended December 31, 2019 | | | | Year Ended December 31, 2020 | | | | | U.S. | | | Asia | | | Mexico | | | EMEAI | | | Total | | | | U.S. | | | Asia | | | Mexico | | | EMEA | | | India | | | Total | | | | | (in thousands) | | | | (in thousands) | | | Wind blade sales | | $ | 120,125 | | | $ | 366,206 | | | $ | 410,337 | | | $ | 432,049 | | | $ | 1,328,717 | | | | $ | 135,415 | | | $ | 511,090 | | | $ | 472,994 | | | $ | 368,907 | | | $ | 91,649 | | | $ | 1,580,055 | | | Precision molding and assembly systems sales | | | 3,774 | | | | 25,203 | | | | 19,703 | | | | — | | | | 48,680 | | | | | — | | | | 13,134 | | | | 14,939 | | | | — | | | | — | | | | 28,073 | | | Transportation sales | | | 28,523 | | | | — | | | | 347 | | | | — | | | | 28,870 | | | | | 33,849 | | | | — | | | | 2,347 | | | | — | | | | — | | | | 36,196 | | | Other sales | | | 16,895 | | | | 2,400 | | | | 5,219 | | | | 5,719 | | | | 30,233 | | | | | 12,677 | | | | 2,859 | | | | 5,559 | | | | 4,638 | | | | 80 | | | | 25,813 | | | Total net sales | | $ | 169,317 | | | $ | 393,809 | | | $ | 435,606 | | | $ | 437,768 | | | $ | 1,436,500 | | | | $ | 181,941 | | | $ | 527,083 | | | $ | 495,839 | | | $ | 373,545 | | | $ | 91,729 | | | $ | 1,670,137 | | |
| | Year Ended December 31, 2018 | | | Year Ended December 31, 2019 | | | | U.S. | | | Asia | | | Mexico | | | EMEAI | | | Total | | | U.S. | | | Asia | | | Mexico | | | EMEA | | | India | | | Total | | | | (in thousands) | | | (in thousands) | | Wind blade sales | | $ | 126,335 | | | $ | 264,417 | | | $ | 256,101 | | | $ | 286,414 | | | $ | 933,267 | | | $ | 120,125 | | | $ | 366,206 | | | $ | 410,337 | | | $ | 431,362 | | | $ | 687 | | | $ | 1,328,717 | | Precision molding and assembly systems sales | | | 5,034 | | | | 36,616 | | | | 7,203 | | | | — | | | | 48,853 | | | | 3,774 | | | | 25,203 | | | | 19,703 | | | | — | | | | — | | | | 48,680 | | Transportation sales | | | 29,254 | | | | — | | | | — | | | | — | | | | 29,254 | | | | 28,523 | | | | — | | | | 347 | | | | — | | | | — | | | | 28,870 | | Other sales | | | 3,093 | | | | 5,222 | | | | 5,452 | | | | 4,483 | | | | 18,250 | | | | 16,895 | | | | 2,400 | | | | 5,219 | | | | 5,719 | | | | — | | | | 30,233 | | Total net sales | | $ | 163,716 | | | $ | 306,255 | | | $ | 268,756 | | | $ | 290,897 | | | $ | 1,029,624 | | | $ | 169,317 | | | $ | 393,809 | | | $ | 435,606 | | | $ | 437,081 | | | $ | 687 | | | $ | 1,436,500 | |
| | Year Ended December 31, 2017 | | | Year Ended December 31, 2018 | | | | U.S. | | | Asia | | | Mexico | | | EMEAI | | | Total | | | U.S. | | | Asia | | | Mexico | | | EMEA | | | India | | | Total | | | | (in thousands) | | | (in thousands) | | Wind blade sales | | $ | 164,870 | | | $ | 346,200 | | | $ | 200,355 | | | $ | 179,100 | | | $ | 890,525 | | | $ | 126,335 | | | $ | 264,417 | | | $ | 256,101 | | | $ | 286,414 | | | $ | — | | | $ | 933,267 | | Precision molding and assembly systems sales | | | 8,445 | | | | 18,408 | | | | 760 | | | | — | | | | 27,613 | | | | 5,034 | | | | 36,616 | | | | 7,203 | | | | — | | | | — | | | | 48,853 | | Transportation sales | | | 14,020 | | | | — | | | | — | | | | — | | | | 14,020 | | | | 29,254 | | | | — | | | | — | | | | — | | | | — | | | | 29,254 | | Other sales | | | 3,690 | | | | 7,912 | | | | 5,448 | | | | 5,990 | | | | 23,040 | | | | 3,093 | | | | 5,222 | | | | 5,452 | | | | 4,483 | | | | — | | | | 18,250 | | Total net sales | | $ | 191,025 | | | $ | 372,520 | | | $ | 206,563 | | | $ | 185,090 | | | $ | 955,198 | | | $ | 163,716 | | | $ | 306,255 | | | $ | 268,756 | | | $ | 290,897 | | | $ | — | | | $ | 1,029,624 | |
F-20
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In addition, most of our net sales are made directly to our customers, primarily large multi-national wind turbine manufacturers, under our long-term contracts which are typically five years in length. F-22
TPI COMPOSITES, INC. AND SUBSIDIARIES
NotesFor a further information regarding of our reportable segments, refer to Consolidated Financial Statements
Note 19, Segment Reporting. Contract Assets and Liabilities Contract assets consist of the amount of revenue recognized over time for performance obligations in production where control has transferred to the customer, but the contract does not yet allow for the customer to be billed. Typically, customers are billed when the product finishes production and meets the technical specifications contained in the contract. The time it takes to produce a single blade is typically between 5 to 7 days. The time it takes to produce a mold is typically between 3 to 6 months. The majority of the contract asset balance relates to materials procured based on customer specifications. The contract assets are recorded as current assets in the consolidated balance sheets. Contract liabilities consist of advance payments in excess of revenue earned. These amounts were historically recorded as customer deposits which usually relate toprimarily represent progress payments received as precision molding and assembly systems wereare being manufactured. The contract liabilities are recorded as current liabilities in the consolidated balance sheets and are reduced as we record revenue over time. These contract assets and liabilities are reported on the consolidated balance sheets net on a contract-by-contract basis at the end of each reporting period, as demonstrated in the table below. Contract assets and contract liabilities as of December 31 consisted of the following: | | December 31, | | | | | | | | | 2019 | | | 2018 | | | $ Change | | | 2020 | | | 2019 | | | $ Change | | | | (in thousands) | | | (in thousands) | | Gross contract assets | | $ | 170,973 | | | $ | 127,568 | | | $ | 43,405 | | | $ | 223,428 | | | $ | 170,973 | | | $ | 52,455 | | Less: reclassification from contract liabilities | | | (4,458 | ) | | | (10,860 | ) | | | 6,402 | | | | (6,500 | ) | | | (4,458 | ) | | | (2,042 | ) | Contract assets | | $ | 166,515 | | | $ | 116,708 | | | $ | 49,807 | | | $ | 216,928 | | | $ | 166,515 | | | $ | 50,413 | |
| | December 31, | | | | | | | | | 2019 | | | 2018 | | | $ Change | | | 2020 | | | 2019 | | | $ Change | | | | (in thousands) | | | (in thousands) | | Gross contract liabilities | | $ | 7,466 | | | $ | 18,003 | | | $ | (10,537 | ) | | $ | 7,114 | | | $ | 7,466 | | | $ | (352 | ) | Less: reclassification to contract assets | | | (4,458 | ) | | | (10,860 | ) | | | 6,402 | | | | (6,500 | ) | | | (4,458 | ) | | | (2,042 | ) | Contract liabilities | | $ | 3,008 | | | $ | 7,143 | | | $ | (4,135 | ) | | $ | 614 | | | $ | 3,008 | | | $ | (2,394 | ) |
Contracts assets increased by $49.8$50.4 million from December 31, 20182019 to December 31, 20192020 due to customer specific material purchases and incremental unbilled production during the year ended December 31, 2019.2020. Contracts liabilities decreased by $4.1$2.4 million from December 31, 20182019 to December 31, 20192020 due to the revenue earned related to precision molding and assembly systems and wind blades being produced exceeding the amounts billed to customers during the year ended December 31, 2019. The time it takes to produce a single blade is typically between 5 to 7 days. The time it takes to produce a mold is typically between 3 to 6 months.2020.
For the yearyears ended December 31, 2020, 2019 and 2018, we recognized revenue of $3.0 million, $7.1 million of revenueand $2.8 million, respectively, related to precision molding and assembly systems and wind blades, which was included in the corresponding contract liability balance at the beginning of the period. Performance Obligations Remaining performance obligations represent the transaction price for which work has not been performed and excludes any unexercised contract options. As discussed in Note 1, Summary of Operations and Significant Accounting Policies – (c) Revenue Recognition, the transaction price includes estimated variable consideration as determined based on the estimated production output within the range of the contractual guaranteed minimum volume obligations and production capacity. F-23F-21
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements For the year ended December 31, 2019, net revenue recognized from our performance obligations satisfied in previous periods decreased by $19.3 million. This primarily relates to changes in certain of our estimated total contract values and related percentage of completion estimates.
As of December 31, 2019,2020, the aggregate amount of the transaction price allocated to the remaining performance obligations to be satisfied in future periods was approximately $4.1$3.6 billion. We estimate that we will recognize the remaining performance obligations as revenue as follows: 38 percent in 2020, 31 percent in 2021, 18 percent in 2022 and the remaining 13 percent in 2023. | | $ | | | % of Total | | | | (in thousands) | | | | | | Year Ending December 31, | | | | | | | | | 2021 | | $ | 1,689,153 | | | | 47.1 | % | 2022 | | | 1,203,476 | | | | 33.5 | % | 2023 | | | 622,170 | | | | 17.3 | % | 2024 | | | 75,841 | | | | 2.1 | % | Total remaining performance obligations | | $ | 3,590,640 | | | | 100.0 | % |
The transaction price allocated to the remaining performance obligations excludes approximately $295.5$71.9 million of variable consideration over the contractual guaranteed minimum volume obligations under current contracts with customers which has been constrained primarily due to uncertainty associated with production volume during the remaining term of the agreements. We estimate the constraint will be resolved in subsequent periods when our customers provide additional information relevant to forecasted future production. For the year ended December 31, 2020, net revenue recognized from our performance obligations satisfied in previous periods increased by $23.7 million. The current year increase primarily relates to changes in certain of our estimated total contract values and related direct costs to complete the performance obligations. Pre-Production Investments We recognize an asset for deferred costs incurred to fulfill a contract when those costs meet all of the following criteria: (a) the costs relate directly to a contract or to an anticipated contract that we can specifically identify; (b) the costs generate or enhance our resources that will be used in satisfying performance obligations in the future; and, (c) the costs are expected to be recovered. We capitalize the costs related to training our workforce to execute the manufacturing services and other facility set-up costs related to preparing for production of a specific contract. We factor these costs into our estimated cost analysis for the overall contract. Costs capitalized are amortized over the number of units produced during the contract term. As of December 31, 2020, the cost and accumulated amortization of such assets totaled $6.6 million and $3.7 million, respectively. As of December 31, 2019, the cost and accumulated amortization of such assets totaled $5.6 million and $2.7 million, respectively. As of December 31, 2018, the cost and accumulated amortization of such assets totaled $5.6 million and $2.1 million, respectively. These amounts are included in intangible assets and deferred costs, net in the consolidated balance sheet. See Note 8, 7, Intangible Assets and Deferred Costs, Net. In applying the practical expedient as permitted under Topic 606, FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606), we recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. These costs are included in cost of goods sold. Note 3. Significant Risks and Uncertainties Our revenues and receivables are earned from a small number of customers. As such, our production levels are dependent on these customers’ orders. See Note 17, 18, Concentration of Customers. We have experienced extended startup delaysThe COVID-19 pandemic adversely affected our business and challenges with respect to our Newton, Iowa transportation facility, which had an adverse impact on our results of operations forduring the year ended December 31, 2019. See Note 20, Subsequent Events.2020. During the first quarter of 2020, our China manufacturing facilities were adversely impacted by the COVID-19 pandemic in the form of reduced production levels and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. During the second quarter of 2020, all of our manufacturing facilities with the exception of our China manufacturing facilities and our Rhode Island manufacturing facility were
F-22
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements required to temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. By the end of the second quarter of 2020, most of our manufacturing facilities had returned to operating at or near normal production levels. Although all of our manufacturing facilities currently are operating at or near normal production levels, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities or at our other locations to the extent there is a resurgence of COVID-19 cases in the regions where we operate or there is an outbreak of positive COVID-19 cases in any of our facilities. We maintain our U.S. cash in bank deposit and money market accounts that, at times, exceed U.S. federally insured limits. U.S. bank accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) in an amount up to $250,000 during 20192020 and 2018. At2019. U.S money market accounts are not guaranteed by the FDIC. As of December 31, 20192020 and 2018,2019, we had $45.8$68.9 million and $53.7$45.8 million, respectively, of cash in bank deposit and money market accounts in high quality U.S. banks, which was in excess of FDIC limits. We have not experienced losses in any such accounts. We also maintain cash in bank deposit accounts outside the U.S. with no insurance. AtAs of December 31, 2020, this included $47.4 million in China, $6.0 million in Turkey, $5.0 million in India, $2.1 million in Mexico and $0.5 million in other countries. As of December 31, 2019, this includesincluded $9.7 million in China, $9.9 million in Turkey, $9.7 million in China, $2.4 million in India, $2.1 million in Mexico and $0.4 million in Denmark.other countries. We have not experienced losses in these accounts. In addition, as of December 31, 2020 and 2019, we have short-term deposits in interest bearing accounts of $0.3 million and $1.0 million, respectively, in China, which are reported as restricted cash in our consolidated balance sheets. We also haveAs of December 31, 2019, we had long-term deposits in interest bearing accounts of $0.5 million in Iowa. This deposit was repaid to us in 2020. See Note 9, 8, Other Noncurrent Assets.Assets. F-24
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain of our debt agreements are either tied to LIBOR or EURIBORthe Euro Interbank Offered Rate (EURIBOR) and certain of them have associated interest rate hedges. Due to the relatively low LIBOR and EURIBOR rates in effect as of December 31, 2019,2020, a 10% change in the LIBOR or EURIBOR rate would not have had a material impact on our future earnings, fair values or cash flows. Note 4. Related-Party Transactions
Related party transactions include transactions between us and certain of our affiliates. The following transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the parties.
We have previously entered into several agreements with subsidiaries of General Electric Company and its consolidated affiliates (GE) relating to the operation of its business. As a result of these agreements, GE has been a debtor, creditor and holder of both our preferred and common shares. During the second quarter of 2017, GE reduced its holdings of our common shares to less than five percent of the total shares outstanding and then completely divested of our common shares during the third quarter of 2017. For the six months ended June 30, 2017, we recorded related-party sales with GE of $198.6 million.
We have entered into five separate supply agreements with GE to manufacture wind blades in Newton, Iowa; Taicang Port, China; Juárez, Mexico (2) and Izmir, Turkey. The supply agreements in Taicang Port, China and Izmir, Turkey expired on December 31, 2017.
In connection with our secondary offering in May 2017, certain entities associated with Element Partners, Angeleno Group, Landmark Partners and NGP Energy Technology Partners, L.P, as well as certain of our executive officers sold an aggregate of 5,075,000 shares of our common stock at the public offering price of $16.35 per share.
Note 5.4. Accounts Receivable Accounts receivable atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Trade accounts receivable | | $ | 180,051 | | | $ | 172,667 | | | $ | 127,765 | | | $ | 180,051 | | Other accounts receivable | | | 3,961 | | | | 4,148 | | | | 5,003 | | | | 3,961 | | Total accounts receivable | | $ | 184,012 | | | $ | 176,815 | | | $ | 132,768 | | | $ | 184,012 | |
Note 6.5. Other Current Assets Other current assets atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Refundable value-added tax | | $ | 22,687 | | | $ | 11,160 | | | $ | 18,961 | | | $ | 22,687 | | Deposits | | | 6,143 | | | | 5,659 | | | | 2,791 | | | | 6,143 | | Other current assets | | | 1,013 | | | | — | | | | 6,169 | | | | 1,013 | | Total current assets | | $ | 29,843 | | | $ | 16,819 | | | $ | 27,921 | | | $ | 29,843 | |
F-25
F-23
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 7.6. Property, Plant and Equipment, Net Property, plant and equipment, net atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Machinery and equipment | | $ | 159,176 | | | $ | 119,737 | | | $ | 204,917 | | | $ | 159,176 | | Buildings | | | 14,495 | | | | 15,080 | | | | 15,544 | | | | 14,495 | | Leasehold improvements | | | 56,414 | | | | 38,747 | | | | 61,947 | | | | 56,414 | | Office equipment and software | | | 32,284 | | | | 26,363 | | | | 35,194 | | | | 32,284 | | Furniture | | | 22,429 | | | | 19,579 | | | | 25,097 | | | | 22,429 | | Vehicles | | | 562 | | | | 287 | | | | 635 | | | | 562 | | Construction in progress | | | 20,677 | | | | 17,390 | | | | 8,725 | | | | 20,677 | | Total property, plant and equipment, gross | | | 306,037 | | | | 237,183 | | | | 352,059 | | | | 306,037 | | Accumulated depreciation | | | (101,030 | ) | | | (77,760 | ) | | | (143,058 | ) | | | (101,030 | ) | Total property, plant and equipment, net | | $ | 205,007 | | | $ | 159,423 | | | $ | 209,001 | | | $ | 205,007 | |
As of December 31, 2019,2020, the projects in construction in progress included the construction and outfittingcontinued investment in of our new manufacturing facility in Chennai, India and continued investments in our other existing manufacturing facilities. Total depreciation for the years ended December 31, 2020, 2019 and 2018 and 2017 was $48.6 million, $36.7 million $25.5 million and $20.8$25.5 million, respectively. As of December 31, 2020, the cost and accumulated depreciation of property, plant and equipment that we are leasing under finance lease arrangements is $28.5 million and $12.5 million, respectively. As of December 31, 2019, the cost and accumulated depreciation of property, plant and equipment that we are leasing under finance lease arrangements is $45.0 million and $17.0 million, respectively. As of December 31, 2018, the cost and accumulated depreciation of property, plant and equipment that we are leasing under finance lease arrangements is $41.3 million and $11.7 million, respectively. See Note 13, 12, Leases for more information related to finance leases. Note 8.7. Intangible Assets and Deferred Costs, Net Carrying values and estimated useful lives of intangible assets and deferred costs as of December 31, 2020, consisted of the following: | | Estimated Useful Life | | Cost | | | Accumulated Amortization | | | Net | | | | | | (in thousands) | | Pre-production investments (1) | | Various | | $ | 6,581 | | | $ | (3,723 | ) | | $ | 2,858 | | Patents | | 10 years | | | 123 | | | | (6 | ) | | | 117 | | Acquired development tools | | 10 years | | | 1,075 | | | | (54 | ) | | | 1,021 | | Trademarks | | Indefinite | | | 150 | | | | — | | | | 150 | | Total intangible assets and deferred costs, net | | | | $ | 7,929 | | | $ | (3,783 | ) | | $ | 4,146 | |
Carrying values and estimated useful lives of intangible assets and deferred costs as of December 31, 2019, consisted of the following: | | Estimated Useful Life | | Cost | | | Accumulated Amortization | | | Net | | | | | | (in thousands) | | Pre-production investments (1) | | Various | | $ | 5,639 | | | $ | (2,656 | ) | | $ | 2,983 | | Patents | | 10 years | | | 112 | | | | (6 | ) | | | 106 | | Acquired development tools | | 10 years | | | 980 | | | | (49 | ) | | | 931 | | Trademarks | | Indefinite | | | 150 | | | | — | | | | 150 | | Total intangible assets and deferred costs, net | | | | $ | 6,881 | | | $ | (2,711 | ) | | $ | 4,170 | |
Carrying values and estimated useful lives of intangible assets and deferred costs as of December 31, 2018, consisted of the following:
| | Estimated Useful Life | | Cost | | | Accumulated Amortization | | | Net | | | | | | (in thousands) | | Pre-production investments (1) | | Various | | $ | 5,598 | | | $ | (2,111 | ) | | $ | 3,487 | | License | | 5 years | | | 1,000 | | | | (179 | ) | | | 821 | | Trademarks | | Indefinite | | | 150 | | | | — | | | | 150 | | Total intangible assets and deferred costs, net | | | | $ | 6,748 | | | $ | (2,290 | ) | | $ | 4,458 | |
(1) | See Note 2, Revenue from Contracts with Customers, for a further discussion of these pre-production investments. |
F-26F-24
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1)
| See Note 2, Revenue From Contracts with Customers, for a further discussion of these pre-production investments.
|
During the years ended December 31, 2020, 2019 2018 and 2017,2018, we recorded amortization expense for the intangible assets and deferred costs of $1.9$1.1 million, $0.9$1.9 million and $0.9 million, respectively. Note 9.8. Other Noncurrent Assets Other noncurrent assets atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Deferred tax assets | | $ | 11,209 | | | $ | 15,296 | | | $ | 18,793 | | | $ | 11,209 | | Deposits | | | 8,437 | | | | 3,845 | | | | 10,004 | | | | 8,437 | | Land use right | | | 1,521 | | | | 2,378 | | | Land use right (50 year estimated useful life) | | | | 1,584 | | | | 1,521 | | Restricted cash | | | 475 | | | | 475 | | | | — | | | | 475 | | Other | | | 2,278 | | | | 1,976 | | | | 2,936 | | | | 2,278 | | Total other noncurrent assets | | $ | 23,920 | | | $ | 23,970 | | | $ | 33,317 | | | $ | 23,920 | |
The historical land use right asset was purchased during 2007 and permits us to use the land where the Taicang Port, China facility, owned by us, is situated. Amortization of the land use right began upon the opening of the plant in 2008. An additional land use right asset was purchased during 2018 which permits us to use additional land where the Taicang Port, China facility is situated. In the fourth quarter of 2019 we determined that we were not going to utilize this additional land use right asset and wrote off approximately $0.8 million to depreciation expense in our consolidated statement of operations. We are still amortizing the historical land use right asset on a straight-line basis over its 50 year life.
As of December 31, 2019 and 2018, we maintained long-term deposits in interest bearing accounts related to fully cash-collateralized letter of credit in connection with an equipment lessor in Iowa totaling approximately $0.5 million.
Note 10.9. Accrued Warranty Warranty accrual atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Warranty accrual at beginning of year | | $ | 36,765 | | | $ | 30,419 | | | $ | 21,089 | | | $ | 47,639 | | | $ | 36,765 | | | $ | 30,419 | | Accrual during the year | | | 22,345 | | | | 14,605 | | | | 15,443 | | | | 20,029 | | | | 23,710 | | | | 16,153 | | Cost of warranty services provided during the year | | | (6,220 | ) | | | (4,457 | ) | | | (1,986 | ) | | | (29,890 | ) | | | (6,220 | ) | | | (4,457 | ) | Reduction of reserves | | | (5,251 | ) | | | (3,802 | ) | | | (4,127 | ) | | Changes in estimate for pre-existing warranties, including expirations during the period | | | | 13,074 | | | | (6,616 | ) | | | (5,350 | ) | Warranty accrual at end of year | | $ | 47,639 | | | $ | 36,765 | | | $ | 30,419 | | | $ | 50,852 | | | $ | 47,639 | | | $ | 36,765 | |
Note 11.10. Share-Based Compensation Since 2015, we have granted awards of stock options, RSUs and PSUs to certain employees and non-employee directors under the 2015 Plan. Each award granted prior to the consummation of our IPO included a performance condition that required the completion of an initial public offering by us and a required vesting period of one to four years commencing upon achievement of the performance condition. As the IPO was consummated in July 2016, we began recording compensation expense in July 2016 for the requisite service period from the grant date through the IPO date with the balance of the share-based compensation to be expensed over the remaining vesting period.
F-27
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The share-based compensation expense recognized in the consolidated statements of operations for the years ended December 31 was as follows: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Cost of goods sold | | $ | 386 | | | $ | 1,281 | | | $ | 1,070 | | | $ | 1,979 | | | $ | 386 | | | $ | 1,281 | | General and administrative expenses | | | 5,295 | | | | 6,514 | | | | 6,054 | | | | 8,373 | | | | 5,295 | | | | 6,514 | | Total share-based compensation expense | | $ | 5,681 | | | $ | 7,795 | | | $ | 7,124 | | | $ | 10,352 | | | $ | 5,681 | | | $ | 7,795 | |
The share-based compensation expense recognized by award type for the years ended December 31 was as follows: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | RSUs | | $ | 3,658 | | | $ | 4,209 | | | $ | 2,808 | | | $ | 4,613 | | | $ | 3,658 | | | $ | 4,209 | | Stock options | | | 1,501 | | | | 2,463 | | | | 4,316 | | | | 3,589 | | | | 1,501 | | | | 2,463 | | PSUs | | | 522 | | | | 1,123 | | | | — | | | | 2,150 | | | | 522 | | | | 1,123 | | Total share-based compensation expense | | $ | 5,681 | | | $ | 7,795 | | | $ | 7,124 | | | $ | 10,352 | | | $ | 5,681 | | | $ | 7,795 | |
F-25
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Included in total share-based compensation expense for the year ended December 31, 2020 is $1.7 million of compensation expense associated with the modification of certain employee and non-employee awards during the period. The modifications primarily provided for the extension of the post termination exercise period of outstanding stock options, resulting in a one-time charge in the year ended December 31, 2020. The summary of activity for our incentive plans is as follows: | | | | | | Stock Options | | | RSUs | | | PSUs | | | | | | | Stock Options | | | RSUs | | | PSUs | | | | Shares Available for Grant | | | Shares | | | Weighted- Average Exercise Price | | | Options Exercisable | | | Shares | | | Weighted- Average Grant Date Fair Value | | | Shares | | | Weighted- Average Grant Date Fair Value | | | Shares Available for Grant | | | Shares | | | Weighted- Average Exercise Price | | | Options Exercisable | | | Units | | | Weighted- Average Grant Date Fair Value | | | Units | | | Weighted- Average Grant Date Fair Value | | Balance as of December 31, 2016 | | | 3,587,692 | | | | 3,331,418 | | | $ | 12.72 | | | | 25,828 | | | | 636,120 | | | $ | 10.90 | | | | — | | | | — | | | Increase in shares authorized | | | 1,349,475 | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | Granted | | | (433,700 | ) | | | 213,200 | | | | 19.70 | | | | | | | | 220,500 | | | | 22.42 | | | | — | | | | — | | | Exercised/vested | | | — | | | | (138,878 | ) | | | 10.83 | | | | | | | | (218,040 | ) | | | 10.95 | | | | — | | | | — | | | Forfeited/cancelled | | | 227,650 | | | | (202,450 | ) | | | 11.54 | | | | | | | | (25,200 | ) | | | 10.87 | | | | — | | | | — | | | Balance as of December 31, 2017 | | | 4,731,117 | | | | 3,203,290 | | | | 13.34 | | | | 890,433 | | | | 613,380 | | | | 15.02 | | | | — | | | | — | | | | 4,731,117 | | | | 3,203,290 | | | | 13.34 | | | | 890,433 | | | | 613,380 | | | | 15.02 | | | | 0 | | | | 0 | | Increase in shares authorized | | | 1,360,826 | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | 1,360,826 | | | | 0 | | | | 0 | | | | | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Granted | | | (451,212 | ) | | | 9,652 | | | | 22.67 | | | | | | | | 149,012 | | | | 23.37 | | | | 292,548 | | | | 22.67 | | | | (451,212 | ) | | | 9,652 | | | | 22.67 | | | | | | | | 149,012 | | | | 23.37 | | | | 292,548 | | | | 22.67 | | Exercised/vested | | | — | | | | (354,153 | ) | | | 12.10 | | | | | | | | (298,036 | ) | | | 13.03 | | | | — | | | | — | | | | 0 | | | | (354,153 | ) | | | 12.10 | | | | | | | | (298,036 | ) | | | 13.03 | | | | 0 | | | | 0 | | Forfeited/cancelled | | | 339,874 | | | | (258,095 | ) | | | 14.72 | | | | | | | | (38,480 | ) | | | 21.51 | | | | (43,299 | ) | | | 22.67 | | | | 339,874 | | | | (258,095 | ) | | | 14.72 | | | | | | | | (38,480 | ) | | | 21.51 | | | | (43,299 | ) | | | 22.67 | | Balance as of December 31, 2018 | | | 5,980,605 | | | | 2,600,694 | | | | 13.41 | | | | 1,415,948 | | | | 425,876 | | | | 18.75 | | | | 249,249 | | | | 22.67 | | | | 5,980,605 | | | | 2,600,694 | | | | 13.41 | | | | 1,415,948 | | | | 425,876 | | | | 18.75 | | | | 249,249 | | | | 22.67 | | Increase in shares authorized | | | 1,387,123 | | | | — | | | | — | | | | | | | | — | | | | — | | | | — | | | | — | | | | 1,387,123 | | | | 0 | | | | 0 | | | | | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Granted | | | (875,557 | ) | | | 397,170 | | | | 20.94 | | | | | | | | 196,418 | | | | 26.99 | | | | 281,969 | | | | 29.25 | | | | (875,557 | ) | | | 397,170 | | | | 20.94 | | | | | | | | 196,418 | | | | 26.99 | | | | 281,969 | | | | 29.25 | | Exercised/vested | | | — | | | | (345,475 | ) | | | 15.14 | | | | | | | | (236,187 | ) | | | 15.42 | | | | — | | | | — | | | | 0 | | | | (345,475 | ) | | | 15.14 | | | | | | | | (236,187 | ) | | | 15.42 | | | | 0 | | | | 0 | | Forfeited/cancelled | | | 129,341 | | | | (58,161 | ) | | | 15.23 | | | | | | | | (31,680 | ) | | | 24.91 | | | | (39,500 | ) | | | 25.60 | | | | 129,341 | | | | (58,161 | ) | | | 15.23 | | | | | | | | (31,680 | ) | | | 24.91 | | | | (39,500 | ) | | | 25.60 | | Balance as of December 31, 2019 | | | 6,621,512 | | | | 2,594,228 | | | | 14.29 | | | | 1,697,272 | | | | 354,427 | | | | 24.99 | | | | 491,718 | | | | 26.20 | | | | 6,621,512 | | | | 2,594,228 | | | | 14.29 | | | | 1,697,272 | | | | 354,427 | | | | 24.99 | | | | 491,718 | | | | 26.20 | | Increase in shares authorized | | | | 1,407,228 | | | | 0 | | | | 0 | | | | | | | | 0 | | | | 0 | | | | 0 | | | | 0 | | Granted | | | | (1,044,491 | ) | | | 261,181 | | | | 28.49 | | | | | | | | 461,732 | | | | 22.43 | | | | 321,578 | | | | 22.40 | | Exercised/vested | | | | 0 | | | | (1,195,405 | ) | | | 13.25 | | | | | | | | (117,683 | ) | | | 22.81 | | | | (131,924 | ) | | | 12.53 | | Forfeited/cancelled | | | | 221,289 | | | | (160,418 | ) | | | 20.40 | | | | | | | | (30,022 | ) | | | 25.06 | | | | (30,849 | ) | | | 26.89 | | Balance as of December 31, 2020 | | | | 7,205,538 | | | | 1,499,586 | | | | 16.94 | | | | 959,233 | | | | 668,454 | | | | 23.60 | | | | 650,523 | | | | 27.07 | |
F-28F-26
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The fair value of RSUs, based on the share price on the date of vesting, which vested during the years ended December 31, 2020, 2019 and 2018 was $10.4 million, $6.2 million and $8.4 million, respectively. In addition, during 2020, 2019 and 2018, we repurchased 61,920 shares, 79,040 shares and 100,891 shares for $2.2 million, $2.1 million and $2.9 million, respectively, related to tax withholding requirements on vested RSU awards. The following table summarizes the outstanding and exercisable stock option awards as of December 31, 2019:2020: | | Options Outstanding | | | Options Exercisable | | Range of Exercise Prices: | | Shares | | | Weighted- Average Remaining Contractual Life (in years) | | | Weighted- Average Exercise Price | | | Shares | | | Weighted- Average Exercise Price | | $8.49 | | | 16,397 | | | | 0.6 | | | $ | 8.49 | | | | 16,397 | | | $ | 8.49 | | $10.87 | | | 1,470,972 | | | | 5.4 | | | | 10.87 | | | | 1,169,598 | | | | 10.87 | | $11.00 to $16.53 | | | 320,001 | | | | 6.1 | | | | 15.95 | | | | 249,800 | | | | 16.02 | | $18.70 | | | 188,560 | | | | 6.5 | | | | 18.70 | | | | 150,081 | | | | 18.70 | | $18.77 to $29.26 | | | 598,298 | | | | 8.9 | | | | 20.59 | | | | 111,396 | | | | 19.99 | | $8.49 to $29.26 | | | 2,594,228 | | | | 6.4 | | | | 14.29 | | | | 1,697,272 | | | | 12.90 | |
| | Options Outstanding | | | Options Exercisable | | Range of Exercise Prices: | | Shares | | | Weighted- Average Remaining Contractual Life (in years) | | | Weighted- Average Exercise Price | | | Shares | | | Weighted- Average Exercise Price | | $10.87 | | | 720,590 | | | | 4.4 | | | | 10.87 | | | | 720,590 | | | | 10.87 | | $11.00 to $17.06 | | | 137,822 | | | | 5.2 | | | | 16.40 | | | | 130,740 | | | | 16.36 | | $18.70 | | | 8,797 | | | | 5.5 | | | | 18.70 | | | | 8,797 | | | | 18.70 | | $18.77 to $29.56 | | | 632,377 | | | | 8.9 | | | | 23.95 | | | | 99,106 | | | | 21.42 | | $10.87 to $29.56 | | | 1,499,586 | | | | 6.4 | | | | 16.94 | | | | 959,233 | | | | 12.78 | |
The following table contains additional information pertaining to stock options for the years ended December 31: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Total intrinsic value of stock options outstanding | | $ | 12,219 | | | $ | 29,045 | | | $ | 22,804 | | | $ | 53,741 | | | $ | 12,219 | | | $ | 29,045 | | Total intrinsic value of stock options exercisable | | | 9,718 | | | | 15,949 | | | | 6,688 | | | | 38,367 | | | | 9,718 | | | | 15,949 | | Cash received from the exercise of stock options | | | 5,223 | | | | 4,284 | | | | 1,430 | | | | 15,839 | | | | 5,223 | | | | 4,284 | | Fair value of stock options vested | | | 8,796 | | | | 4,566 | | | | 4,931 | | | | 4,669 | | | | 8,796 | | | | 4,566 | |
As of December 31, 2019,2020, the unamortized cost of the outstanding RSUs and PSUs was $4.2$7.0 million and $2.4$2.9 million, respectively, which we expect to recognize in the consolidated financial statements over weighted-average periods of approximately 1.81.9 years and 1.9 years, respectively. Additionally, the total unrecognized cost related to non-vested stock option awards was $2.3$3.3 million, which we expect to recognize in the consolidated financial statements over a weighted-average period of approximately 1.81.9 years. The fair value of the stock options granted during the years ended December 31 were calculated using the Black-Scholes option pricing model with the following assumptions: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Weighted-average fair value | | $ | 6.80 | | | $ | 10.36 | | | $ | 9.10 | | | $ | 13.11 | | | $ | 6.80 | | | $ | 10.36 | | Expected volatility | | | 28.0 | % | | | 42.8 | % | | | 45.0 | % | | | 48.5 | % | | | 28.0 | % | | | 42.8 | % | Expected life | | 6.3 years | | | 6.3 years | | | 6.3 years | | | 6.1 years | | | 6.3 years | | | 6.3 years | | Risk-free interest rate | | | 1.9 | % | | | 2.7 | % | | | 1.5 | % | | | 0.4 | % | | | 1.9 | % | | | 2.7 | % | Dividend yield | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % |
F-29F-27
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements
Note 12.11. Long-Term Debt, Net of Debt Issuance Costs and Current Maturities Long-term debt, net of debt issuance costs and current maturities, as of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Senior revolving loan—US | | $ | 112,414 | | | $ | 90,414 | | | $ | 171,154 | | | $ | 112,414 | | Accounts receivable financing—EMEAI | | | 3,805 | | | | 14,524 | | | Equipment financing—EMEAI | | | 7,903 | | | | 12,197 | | | Accounts receivable financing—EMEA | | | | — | | | | 3,805 | | Unsecured financing—EMEA | | | | 30,040 | | | | — | | Equipment financing—EMEA | | | | 4,335 | | | | 7,903 | | Equipment finance lease—Mexico | | | | 8,038 | | | | 11,919 | | Equipment finance lease—EMEA | | | | 4,119 | | | | 5,637 | | Equipment finance lease—U.S. | | | 288 | | | | 111 | | | | 132 | | | | 288 | | Equipment finance lease—EMEAI | | | 5,732 | | | | 6,738 | | | Equipment finance lease—Mexico | | | 11,919 | | | | 14,517 | | | Equipment finance lease—India | | | 100 | | | 95 | | Total debt - principal | | | 142,061 | | | | 138,501 | | | | 217,918 | | | | 142,061 | | Less: Debt issuance costs | | | (672 | ) | | | (878 | ) | | | (1,051 | ) | | | (672 | ) | Total debt, net of debt issuance costs | | | 141,389 | | | | 137,623 | | | | 216,867 | | | | 141,389 | | Less: Current maturities of long-term debt | | | (13,501 | ) | | | (27,058 | ) | | | (32,551 | ) | | | (13,501 | ) | Long-term debt, net of debt issuance costs and current maturities | | $ | 127,888 | | | $ | 110,565 | | | $ | 184,316 | | | $ | 127,888 | |
Senior Financing AgreementsRevolving Loan (U.S.): In April 2018, we entered into a new credit agreement the(the Credit Agreement,Agreement) with four4 lenders consisting of a multi-currency, revolving credit facility in an aggregate principal amount of $150.0 million, including a $25.0 million letter of credit sub-facility. On the closing date, we drew down $75.4 million on the revolving credit facility in connection with the closing of the transactions contemplated by the Credit Agreement and used the proceeds to pay all outstanding amounts due and payable under our previous credit agreement, various fees and expenses and accrued interest. All borrowings and amounts outstanding under the Credit Agreement are scheduled to mature in April 2023. In May 2019, the Credit Agreement was further amended to revise the definition of Consolidated EBITDA as utilized in certain of the financial covenants of the Credit Agreement. In connection with the Credit Agreement, in the second quarter of 2018, we expensed $2.0 million of deferred financing costs associated with the previous credit agreement and a $1.4 million prepayment penalty within the caption “Loss on extinguishment of debt” in the accompanying consolidated statements of operations. In addition, we incurred debt issuance costs related to the Credit Agreement totaling $1.0 million which will be amortized to interest expense over the five-year term of the Credit Agreement using the effective interest method. Interest accruesaccrued at a variable rate equal to LIBOR plus a margin of 1.75% (3.3%1.5% (4.0% as of December 31, 2019)2018), which may vary based on our total net leverage ratio as defined in the Credit Agreement. Interest is paid monthly and we are not obligated to make any principal repayments prior to the maturity date provided we are not in default under the Credit Agreement. We may prepay the borrowings under the Credit Agreement without penalty.
In April 2018, we also entered into an interest rate swap arrangement to fix a notional amount of $75.0 million of the Credit Agreement at an effective interest rate of 4.2% for a period of five years. See Note 1, Summary of Operations and Significant Accounting Policies - (s) 13, Financial Instruments, for more details on this interest rate swap arrangement. AsIn May 2019, the Credit Agreement was amended to revise the definition of December 31, 2019Consolidated EBITDA as utilized in certain of the financial covenants of the Credit Agreement. In February 2020, we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and 2018, there was $112.4 million and $90.4 million outstandingan additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement respectively.was increased from $150.0 million to $205.0 million. All other material terms and conditions of the Credit Agreement remained the same. In connection with this Incremental Facility Agreement, we incurred additional debt issuance costs totaling $0.2 million which will be amortized to interest expense over the remaining term of the Credit Agreement using the effective interest method.
F-30F-28
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements In June 2020, we entered into an amendment to our Credit Agreement which made certain adjustments to one of the financial covenants, added new covenants related to minimum liquidity and mandatory repayment triggers, provided for certain modifications to the affirmative and negative covenants and changed the interest rate during the Adjustment Period (as defined in the Credit Agreement) to a LIBOR floor of 0.75% plus a margin of 3.0% per annum (3.75% as of December 31, 2020). The interest rate following the end of the Adjustment Period would be equal to a LIBOR floor of 0.75% plus a margin ranging between 1.75% to 2.50% per annum. All other material terms and conditions of the Credit Agreement remained the same. As of December 31, 2020 and 2019, there was $171.2 million and $112.4 million outstanding under the Credit Agreement, respectively. Additionally, as of December 31, 2020 and 2019, there was $7.9 million and $5.1 million of letters of credit outstanding under the letter of credit sub-facility of the Credit Agreement, respectively. Due to the revolving credit facility’s variable interest rate of LIBOR plus a competitive spread, we estimate that fair-value approximates the face value of these notes. Accounts Receivable, Secured and Unsecured Financing: EMEAI: EMEA: In general, all of the credit agreements which the EMEA segment enters into have provisions which allow them to borrow in either U.S. dollars, Turkish Lira or Euro, regardless of the currency in which the agreement is denominated. In addition, none of the credit agreements have an expiration date, however each credit agreements’ limits are reviewed annually to establish available capacity, and every time we draw under one of the credit agreements a term is set for its repayment.
During 2014, we renewed a general credit agreement, as amended, with a Turkish financial institution in Turkey to provide up to 21.0$23.2 million Euro of short-term collateralized financing, which includes $21.0 million of unsecured financing and $2.2 million of letters of credit. Interest on invoiced accounts receivable of one of our customers in Turkey. Interest originally accrued annuallythe unsecured financing accrues at a fixed rate of 9.1%3.5% and was paid quarterly. In December 2014, and later amended, we obtained an additional $8.0 million of unsecured financing in Turkey under the credit agreement with interest accruing annually at a fixed rate of 2.0% andis payable at the end of the term when the loan is repaid. All otherInterest on the letters of credit agreement terms remainedaccrues at fixed rates of between 0.45% and 6.95% and is payable quarterly until the same. Theletter of credit agreement does not have a maturity date, however the limits are reviewed in September of each year. During the fourth quarter of 2018, we replaced the accounts receivable financing facility with the accounts receivable assignment agreement discussed below.is closed. As of December 31, 20192020 and 2018,2019, there were no0 amounts outstanding under the unsecured financing facility. In 2014, we entered into a credit agreement with a As of December 31, 2020, there was approximately 12.5 million Turkish financial institution to provide up to $16.0 million of short-term financing of which $10.0 million is collateralized financing on invoiced accounts receivable of one of our customers in Turkey, $5.0 million is unsecured financingLira (approximately $1.7 million) and $1.0 million is related to letters of guarantee. Interest accrues at a variable rate of the three month Euro Interbank Offered Rate (EURIBOR) plus 6.5%. During the first quarter of 2018, the collateralized financing on invoiced accounts receivables and unsecured financing facilities were retired and the letters of guarantee limit was adjusted, later amended to 1.40.4 million Euro (approximately $1.6 million as$0.5 million) of December 31, 2019). No amounts wereletters of credit outstanding under thisthe letter of guarantee agreement ascredit facility. As of December 31, 2019, or 2018. there were approximately 7.6 million Turkish Lira (approximately $1.0 million) of letters of credit outstanding under the letter of credit facility.
In 2016, we entered into a general credit agreement, as amended, with a Turkish financial institution to provide up to 39.031.0 million Euro (approximately $43.7$38.1 million as of December 31, 2019)2020) of short-term financing, of which 28.020.0 million Euro (approximately $31.4$24.6 million as of December 31, 2019)2020) includes amounts related to our previous financing of capital expenditures facility and an unsecured revolving credit facility and 11.0 million Euro (approximately $13.5 million as of December 31, 2020) relates to unsecured financing, letters of credit and other non-cash items. Interest on the portion of the 20.0 million Euro facility related to financing of capital expenditures was determined based upon the term of the loan utilizing the one-month EURIBOR plus 6.75% (6.75% as of December 31, 2020 and is payable monthly. The maturity date for amounts currently outstanding under the 20.0 million Euro facility is December 2021. Interest on the portion of the 11.0 million Euro facility related to unsecured financing was determined based upon the term of the loan utilizing the one-month EURIBOR plus 1.5% (1.5% as of December 31, 2020) and was fully paid on the origination date. Interest on the portion of the 11.0 million Euro facility related to letters of credit accrues at fixed rates of between 0.5% and 2.0%, and is payable quarterly until the letter of credit is closed. The maturity date for amounts currently outstanding under the 11.0 million Euro facility is April 2021. As of December 31, 2020, there was approximately 9.1 million Euro (approximately $11.2 million) outstanding under the 11.0 million Euro facility, specifically related to unsecured financing, with 0 corresponding amount outstanding as of December 31, 2019. In addition, as of December 31, 2020 and 2019, there was approximately 3.5 million Euro (approximately $4.3 million) and approximately 7.1 million Euro (approximately $7.9 million), respectively, outstanding under the 20.0 million Euro facility, specifically related to financing of capital expenditures. Additionally, as of December 31, 2020, there was approximately 1.1 million Turkish Lira (approximately $0.2 million) and 0.25 million Euro (approximately $0.3 million) of letters of credit outstanding under the 11.0 million Euro facility. As of December 31, 2019, there was approximately 0.6 million Turkish Lira (approximately $0.1 million) and 0.25 million Euro (approximately $0.3 million) of letters of credit outstanding under the 11.0 million Euro facility. In 2020, the former facility related to the collateralized financing based on F-29
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements invoiced accounts receivables of one of our customers in Turkey 10.0was cancelled. The $3.8 million Euro (approximately $11.2 million as of December 31, 2019) for the collateralized financing of capital expenditures and 1.0 million Euro (approximately $1.1 million as of December 31, 2019) related to letters of guarantee. Interest on the collateralized financing based on invoiced accounts receivables of one of our customers in Turkey accrues at a fixed rate of 2.75%balance outstanding under this facility as of December 31, 2019 and is paid quarterly with a maturity date equal to four months from the applicable invoice date. Interest on the collateralized capital expenditures financing accrues at the one month EURIBOR plus 6.75% (6.75% as of December 31, 2019) with monthly principal repayments beginningwas repaid in October 2017 with a final maturity date of December 2021. Interest on the letters of guarantee accrues at 2.00% annually with an amended final maturity date of July 2020. As of December 31, 2019 and 2018, there was $7.9 million and $12.2 million outstanding under the collateralized financing of capital expenditures line, respectively. Additionally, as of December 31, 2019 and 2018, there was $3.8 million and $14.5 million, respectively, outstanding under the collateralized financing based on invoiced accounts receivables. In the fourth quarter of 2018, we entered into a credit agreement, as amended, with a Turkish financial institution to provide up to 118.665.0 million Turkish Lira (approximately $20.6$8.9 million as of June 30, 2019)December 31, 2020) of collateralized financing, of which 50.0 million Turkish Lira (approximately $6.8 million as of December 31, 2020) relates to unsecured financing and 15.0 million Turkish Lira (approximately $2.1 million as of December 31, 2020) relates to letters of credit and other non-cash items. Interest on invoiced accounts receivable of one of our customers in Turkey. Interest accruedthe unsecured financing accrues at a fixed rate of 3.9%2.0% and was to beis payable at the end the end of the term when the loan is repaid. Interest on the letters of credit and other non-cash items accrues at a fixed rate of 1.5 % and is paid quarterly. The credit agreement did not have a maturity date, however the limit would be reviewed in OctoberAs of each year. In SeptemberDecember 31, 2020 and 2019, this credit agreement was cancelled. Nothere were 0 amounts wereof unsecured financing outstanding under this agreement asagreement. As of December 31, 2018.2020 and 2019, there was 0.35 million Euro (approximately $0.4 million) of letters of credit outstanding in both periods under this agreement. In the fourth quarter of 2019, we entered into a credit agreement with a Turkish financial institution, as amended, to provide up to $10.0125.0 million EuroTurkish Lira (approximately $11.2$17.0 million as of December 31, 2019)2020), of which up to 100.0 million Turkish Lira (approximately $13.6 million as of December 31, 2020) relates to unsecured financing and 25.0 million Turkish Lira (approximately $3.4 million as of December 31, 2020) relates to letters of credit and other non-cash items. Interest on the unsecured financing accrues at a fixedrate of 2.15% and is payable at the end of the term of the loan when the loan is repaid. Interest on the letters of credit and other non-cash items accrues at a fixed rate of 0.5%and is paid quarterly. As of December 31, 2020, there was approximately 4.0 million Euro (approximately $4.9 million) of unsecured financing outstanding under this agreement. In addition, as of December 31, 2020, there was approximately 1.6 million Turkish Lira (approximately $0.2 million) of letters of credit outstanding under this facility. As of December 31, 2019, there were 0 amounts outstanding under this agreement. In the first quarter of 2020, we entered into a credit agreement, as amended, with a Turkish financial institution to provide up to $18.0 million of unsecured financing, letters of credit and other non-cash items. Interest on the unsecured financing accrues at a fixed rate of 2.4% and is payable quarterly. Interest on the letters of credit and other non-cash items accrues at a fixed rate of 0.35% and is paid quarterly.The maturity date for amounts currently outstanding is March 2023. As of December 31, 2020, there was $13.9 million of unsecured financing outstanding and $0.1 million of letters of credit outstanding under this credit agreement. In the first quarter of 2020, we entered into a credit agreement with a Turkish financial institution to provide up to 5.0 million Euro (approximately $6.1 million as of December 31, 2020) of unsecured financing. Interest accrues at a fixed rate of 2.5%7.0% and is payable at the end of the term when the loan is repaid. NoAs of December 31, 2020, there were 0 amounts were outstanding under this agreement as of December 31, 2019.credit agreement. Due to the short-term nature of the unsecured financings in the EMEAIEMEA segment, we estimate that fair-value approximates the face value of the notes. F-31
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Asia: In February 2017,August 2019, we entered into a credit agreement, as amended, with a Chinese financial institution to provide an unsecured credit line of up to 210.090.0 million Renminbi (approximately $30.5 million as of June 30, 2019) which can be used for the purpose of domestic and foreign currency loans, issuing customs letters of guarantee or other transactions approved by the lender. Interest on the credit line accrues at the Chinese central bank interest rate plus an applicable margin (4.8% as of June 30, 2019) and can be paid monthly, quarterly or at the time of the debt’s maturity (extended to January 2020). In August 2019, except as noted below, we replaced this credit agreement with the credit agreement discussed below. In connection with the August 2019 transaction, the financial institution agreed to allow the working capital loans which were then outstanding, totaling 5.0 million Renminbi (or approximately $0.7 million as of September 30, 2019) to be repaid on their due date of October 1, 2019. As of December 31, 2018, there were 92.8 million Renminbi (approximately $13.5 million) of letters of guarantee used for customs clearance outstanding. As of December 31, 2018, there were no working capital loan amounts outstanding. In August 2019, we entered into a credit agreement with a Chinese financial institution to provide an unsecured credit line of up to 315.0 million Renminbi (approximately $45.2$13.8 million as of December 31, 2019)2020) related to two of our China facilities which can be used for the purpose of working capital, issuing customs letters of guarantee and covering the related deposits on such letters of guarantee, project financing and certain other transactions approved by the lender. Interest on the credit line accrues at the Chinese central bank interest rate plus an applicable margin (4.8%(4.4% as of December 31, 2019)2020) and can be paid monthly, quarterly or at the time of the debt’s maturity (August 2021). As of December 31, 2020, there were no amounts outstanding under this credit agreement. As of December 31, 2019, there were 25.7 million Renminbi (approximately $3.7 million) of letters of guarantee and related deposits used for customs clearance outstanding.outstanding under this credit agreement.
In March 2018, we entered into a credit agreement, as amended, with a Chinese financial institution to provide an unsecured credit line of up to 100.0 million Renminbi (approximately $14.3$15.3 million as of December 31, 2019)2020) which can be used asfor the purpose of issuing customs letters of guarantee.guarantee and working capital. Interest on the credit line accrues at the Chinese central bank interest rate plus an applicable margin (4.8% at(4.4% as of December 31, 2019)2020) and can be paid monthly, quarterly or at the time of the debt’s maturity (in March 2023)2023). As of December 31, 2020, there were 40.5 million Renminbi (approximately $6.2 million) of letters of guarantee used for customs clearance outstanding under this credit agreement. As of December 31, 2019, there were 71.9 million Renminbi (approximately $10.3 million) of letters of guarantee used for customs clearance outstanding. As of December 31, 2018, there were no amounts outstanding under this credit agreement. F-30
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Equipment Leases and Other Arrangements: U.S.Mexico: In 2014,March 2018, we entered into a leasesale-lease agreement as amended, with a leasing company for the initial lease of up to $5.4$15.0 million of machinery and equipment at our IowaMatamoros, Mexico facility. The lease includedincludes an implied effective interest rate of 4.3%6.7% annually and requiredrequires monthly payments during each 2448 month term. The amountsamount outstanding under this agreement as of December 31, 2020 and 2019 and 2018, were $0.1was $7.1 million and $0.1$10.9 million, respectively.
EMEAIEMEA:In 2013, we entered into a finance lease agreement with a financial institution in Turkey for the initial lease of up to $4.9 million of machinery, equipment and building improvements at our first Turkey facility. The term of the lease was for four years at an effective interest rate of 6.0%. The loan was to be repaid in monthly installments through 2017. The financing agreement was subsequently amended in 2017 to include our second Turkey facility and increase the amount of machinery, equipment and building improvements available for lease to $10.0 million. As a result of the amendment, and subsequent amendments, the loan is to be repaid in monthly installments through 2023 at an effective interest rate of 8.0%. All other financing agreement terms remained the same. The balance outstanding as of December 31, 2020 and 2019 was $3.5 million and 2018 was $5.6 million, and $6.7 million, respectively.
Mexico: In 2016, we entered into a lease agreement, as amended, with a leasing company for the lease of up to $10.0 million of machinery and equipment at our second Mexico facility. The lease includes an implied effective interest rate of 4.3% annually and requires monthly payments during each 24 month term. There were no amounts outstanding under this agreement as of December 31, 2019. The amount outstanding under this agreement as of December 31, 2018 was $0.7 million.
In March 2017, we entered into a sale-lease agreement with a leasing company for the initial lease of up to $12.0 million of machinery and equipment at our third Mexico facility. The lease includes an implied effective interest rate of 4.3% annually and requires monthly payments during each 24 month term. There were no amounts outstanding under this agreement as of December 31, 2019. The amount outstanding under this agreement as of December 31, 2018 was $3.2 million.
F-32
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March 2018, we entered into a sale-lease agreement with a leasing company for the initial lease of up to $15.0 million of machinery and equipment at our Matamoros, Mexico facility. The lease includes an implied effective interest rate of 6.7% annually and requires monthly payments during each 48 month term. The amount outstanding under this agreement as of December 31, 2019 and 2018 was $10.9 million and $10.5 million, respectively.
Costs associated with the issuance of debt are presented net of the related debt and are amortized over the term of the debt using the effective interest rate method. For the years ended December 31, 2019, 2018 and 2017, $0.2 million, $0.3 million and $0.6 million of debt issuance costs were amortized to interest expense in our consolidated statements of operations, respectively.
The average interest rate on our short-term borrowings as of December 31, 20192020 and 20182019 was approximately 5.7%3.3% and 7.7%5.7%, respectively. The future aggregate annual principal maturities of debt atas of December 31, 2019,2020 are as follows (in thousands):follows: 2020 | | $ | 13,501 | | | | | | (in thousands) | | Year Ending December 31, | | | | | | 2021 | | | 9,519 | | | $ | 32,551 | | 2022 | | | 5,130 | | | | 13,271 | | 2023 | | | 113,720 | | | | 171,879 | | 2024 | | | 191 | | | | 213 | | 2025 | | | | 4 | | Total debt - principal | | $ | 142,061 | | | $ | 217,918 | |
Note 13.12. Leases We have operating and finance leases for our manufacturing facilities, warehouses, offices, automobiles and certain of our machinery and equipment. Our leases have remaining lease terms of between one and 15 years, some of which may include options to extend the leases up to five years. The components of lease cost for the years ended December 31 were as follows: | | 2019 | | | 2020 | | | 2019 | | | | (in thousands) | | | (in thousands) | | Operating lease cost | | $ | 30,957 | | | Total operating lease cost | | | $ | 36,958 | | | $ | 30,957 | | | | | | | | | | | | | | | Finance lease cost | | | | | | | | | | | | | Amortization of assets under finance leases | | $ | 6,351 | | | $ | 5,973 | | | $ | 6,351 | | Interest on finance leases | | | 1,414 | | | | 985 | | | | 1,414 | | Total finance lease cost | | $ | 7,765 | | | $ | 6,958 | | | $ | 7,765 | |
Future minimum lease payments under noncancelable leases as of December 31, 2019 were as follows:
F-33F-31
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements | | Operating | | | Finance | | | | Leases | | | Leases | | | | (in thousands) | | Year Ending December 31, | | | | | | | | | 2020 | | $ | 25,425 | | | $ | 6,744 | | 2021 | | | 22,669 | | | | 6,419 | | 2022 | | | 21,618 | | | | 5,653 | | 2023 | | | 20,978 | | | | 822 | | 2024 | | | 17,519 | | | | 200 | | Thereafter | | | 66,584 | | | | — | | Total future minimum lease payments | | | 174,793 | | | | 19,838 | | Less: interest | | | (44,281 | ) | | | (1,900 | ) | Total lease liabilities | | $ | 130,512 | | | $ | 17,938 | |
Total lease liabilities as of December 31 2019 were as follows: | | | 2020 | | | 2019 | | | | Operating | | | Finance | | | Operating | | | Finance | | | Operating | | | Finance | | | | Leases | | | Leases | | | Leases | | | Leases | | | Leases | | | Leases | | | | (in thousands) | | | (in thousands) | | Current operating lease liabilities | | $ | 16,629 | | | $ | — | | | $ | 26,099 | | | $ | — | | | $ | 16,629 | | | $ | — | | Current maturities of long-term debt | | | — | | | | 5,744 | | | | — | | | | 6,018 | | | | — | | | | 5,744 | | Noncurrent operating lease liabilities | | | 113,883 | | | | — | | | | 155,925 | | | | — | | | | 113,883 | | | | — | | Long-term debt, net of debt issuance costs and current maturities | | | — | | | | 12,194 | | | | — | | | | 6,371 | | | | — | | | | 12,194 | | Total lease liabilities | | $ | 130,512 | | | $ | 17,938 | | | $ | 182,024 | | | $ | 12,389 | | | $ | 130,512 | | | $ | 17,938 | |
The future minimum lease payments under noncancelable leases as of December 31, 2020 were as follows: | | Operating | | | Finance | | | | Leases | | | Leases | | | | (in thousands) | | Year Ending December 31, | | | | | | | | | 2021 | | $ | 34,798 | | | $ | 6,319 | | 2022 | | | 32,245 | | | | 5,859 | | 2023 | | | 30,399 | | | | 891 | | 2024 | | | 27,060 | | | | 225 | | 2025 | | | 26,944 | | | | 7 | | Thereafter | | | 98,764 | | | | — | | Total future minimum lease payments | | | 250,210 | | | | 13,301 | | Less: interest | | | (68,186 | ) | | | (912 | ) | Total lease liabilities | | $ | 182,024 | | | $ | 12,389 | |
See Note 7, 6, Property, Plant and Equipment, Net for a discussion of the cost and accumulated depreciation of assets financed through finance leases. Supplemental cash flow information related to leases for the years ended December 31 was as follows: | | 2020 | | | 2019 | | | | (in thousands) | | Supplemental Cash Flow Information: | | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | Operating cash flows from operating leases | | $ | 31,478 | | | $ | 29,845 | | Operating cash flows from finance leases | | | 985 | | | | 1,414 | | Financing cash flows from finance leases | | | 6,116 | | | | 9,128 | | | | | | | | | | | Right of use assets obtained in exchange for new lease obligations: | | | | | | | | | Operating leases | | | 61,455 | | | | 15,855 | | Finance leases | | | 163 | | | | 5,811 | |
F-32
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Other information related to leases as of December 31 was as follows: | | 2019 | | | | | (in thousands) | | | Supplemental Cash Flow Information | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | Operating cash flows from operating leases | | $ | 29,845 | | | Operating cash flows from finance leases | | | 1,414 | | | Financing cash flows from finance leases | | | 9,128 | | | | | | | | | Right of use assets obtained in exchange for new lease obligations: | | | | | | Operating leases | | | 15,855 | | | Finance leases | | | 5,811 | | | | | | | | | | | December 31, | | | | | 2019 | | | 2020 | | | 2019 | | Weighted-Average Remaining Lease Term (In Years): | | | | | | | | | | | | | Operating leases | | | 7.6 | | | | 7.7 | | | | 7.6 | | Finance leases | | | 3.2 | | | | 2.2 | | | | 3.2 | | | | | | | | | | | | | | | Weighted-Average Discount Rate: | | | | | | | | | | | | | Operating leases | | | 7.5 | % | | | 7.9 | % | | | 7.5 | % | Finance leases | | | 6.4 | % | | | 6.4 | % | | | 6.4 | % |
As of December 31, 2020, there were 0 additional leases related to our manufacturing facilities, warehouses, offices, automobiles or our machinery and equipment which have not yet commenced. Note 13. Financial Instruments Interest Rate Swap We use interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with our Credit Agreement which we entered into in April 2018. We do not use such swap contracts for speculative or trading purposes. To offset the variability of future interest payments on the Credit Agreement arising from changes in LIBOR, in April 2018, we entered into an interest rate swap agreement with a financial institution for a notional amount of $75.0 million with an expiration date of April 2023. This interest rate swap effectively hedges $75.0 million of the future variable rate LIBOR interest expense to a fixed rate interest expense. The derivative instrument qualified for accounting as a cash flow hedge in accordance with FASB ASC Topic 815, Derivatives and Hedging, and we designated it as such. Foreign Exchange Forward Contracts We use foreign exchange forward contracts to mitigate our exposure to fluctuations in exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact. We do not use such forward contracts for speculative or trading purposes. Mexican Peso In September 2019, we entered into the first of these foreign exchange forward contracts. We expect certain of our subsidiaries to have future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of December 31, 2020, these foreign exchange forward contracts hedged our forecasted cash flows for a three-month period. These foreign exchange forward contracts qualified for accounting as cash flow hedges in accordance with ASC Topic 815, and we designated them as such. In October 2020, we purchased a series of call option contracts to further mitigate cash flow variability associated with the forecasted expenses against changes in exchange rates. A premium of $0.7 million was paid in a single transaction at hedge initiation and recorded within other current assets on our consolidated balance sheet. The premium is amortized against our earnings on a straight-line basis over the period of nine months, the period in which we had executed call option contracts, through cost of sales within our consolidated statements of operations. These foreign exchange call option contracts qualified for accounting as cash flow hedges in accordance with ASC Topic 815, and we designated them as such. F-33
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Chinese Renminbi In October 2020, we entered into our first monthly forward contract to hedge our exposure to exchange rate fluctuations on certain balance sheet amounts recorded on our Chinese entities that are not the entities’ functional currency. In executing this hedge strategy, as a result of our organizational structure, we also entered into certain foreign currency forward contracts to hedge the exposure to a portion of our net investments in certain non-U.S. subsidiaries against the effect of exchange rate fluctuations on the translation of foreign currency balances to the U.S. dollar. For the derivative instruments that are designated and qualify as net investment hedges, gains and losses are reported in other comprehensive income (loss) where they offset gains and losses recorded on our net investments in our non-U.S. subsidiaries. These contracts are entered into and settled monthly. These hedges are determined to be effective. Hedge accounting was not elected on the balance sheet hedge and as a result, all gains and losses on these contracts are recorded through foreign currency loss, net on our consolidated statement of operations. For the year ended December 31, 2020, $1.8 million in gains on the balance sheet hedge were realized. Intercompany Debt In August 2018, we provided a Turkish Lira denominated intercompany loan to an EMEA subsidiary of $15.0 million converted at the spot rate on the transaction date to 96.6 million Turkish Lira to fund their working capital requirements. We entered into a forward contract, with the same expiration as that of the intercompany loan’s maturity in October 2018, for a notional amount of 101.5 million Turkish Lira to reduce our exposure to currency fluctuations from the settlement of this Turkish Lira denominated intercompany loan. The derivative instrument qualifies for accounting as a cash flow hedge in accordance with ASC Topic 815, and we designated it as such. The forward contract was settled in October 2018. All of our derivative assets and liabilities measured at fair value are classified as Level 2 within the fair value hierarchy. For a detailed discussion of the fair value hierarchy, refer to the discussion in Note 1, Summary of Operations and Summary of Significant Accounting Policies – Fair Value of Financial Instruments. As of December 31, 2020, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were approximately 0.3 billion Mexican Peso (approximately $14.0 million). As of December 31, 2019, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were approximately 1.1 billion Mexican Peso (approximately $54.8 million). As of December 31, 2020, the notional values associated with our foreign exchange call option contracts qualifying as cash flow hedges were approximately 0.4 billion Mexican Peso (approximately $17.3 million). The fair values and location of financial instruments in our consolidated balance sheets as of December 31, were as follows: | | Consolidated Balance | | | | | | | | | Financial Instrument | | Sheet Line Item | | 2020 | | | 2019 | | | | | | (in thousands) | | Foreign exchange forward contracts | | Other current assets | | $ | 5,832 | | | $ | 820 | | Foreign exchange forward contracts | | Accounts payable and accrued expenses | | | 2,096 | | | | 124 | | Interest rate swap | | Other noncurrent liabilities | | | 4,414 | | | | 2,723 | |
For cash flow hedges, the gain or loss is reported as a component of accumulated other comprehensive loss in our consolidated statements of changes in stockholders’ equity and reclassified into earnings in our consolidated statements of operations in the same period or periods during which the hedged transaction affects earnings. The net income (loss) recognized in accumulated other comprehensive loss in our consolidated statements of changes in stockholders’ equity for our foreign exchange forward contracts is expected to be recognized in cost of sales in our consolidated statements of operations during the next six months. The gain or loss on our interest rate swap is recorded in accumulated other comprehensive loss and subsequently reclassified into interest expense in our consolidated statements of operations in the period in which the hedged transaction affects earnings. As of F-34
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements AsDecember 31, 2020, 0 interest rate swaps originally designated for hedge accounting were de-designated or terminated. No ineffectiveness on our interest rate swaps was recognized as of December 31, 2019, we have an additional lease related to our new manufacturing facility in Chennai, India of approximately $60 million which has not yet commenced, but which we expect will commence in2020, and none is anticipated over the first half of 2020 with an initial term of ten years.the agreement.
The following table presents the pretax amounts reclassified from accumulated other comprehensive loss into our consolidated statements of operations: Comprehensive Income | | Consolidated Statement of | | | | | | | | | | | | | (Loss) Component | | Operations Line Item | | 2020 | | | 2019 | | | 2018 | | | | | | (in thousands) | | Foreign exchange forward contracts | | Cost of sales | | $ | 996 | | | $ | — | | | $ | — | |
Note 14. Commitments and Contingencies (a) Operating Leases We lease various facilities and equipment under noncancelable operating leases with terms ranging from 12 months to 120 months. Scheduled rent increases are recorded on a straight-line basis over the entire term of the lease. Rental expense charged under all operating leases (including leases with terms of less than one year) was $37.0 million, $31.0 million $25.5 million and $19.3$25.5 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. See Note 13, 12, Leases for a listing of the future minimum lease payments under noncancelable operating leases with terms of one year or more as of December 31, 2019.2020. (b) Legal Proceedings From time to time, we may be involved in disputes or litigation relating to claims arising out of its operations. In January 2021, we received a complaint that was filed by the administrator for the Senvion Gmbh (Senvion) insolvency estate in German insolvency court. The complaint asserts voidance against us in the aggregate amount of $13.3 million. The alleged voidance claims relate to payments that Senvion made to us for wind blades that we produced prior to Senvion filing for insolvency protection. We plan to file a response to these alleged voidance claims in the coming months and we believe we have meritorious defenses to the alleged voidance claims. Due to the early stage of this claim, we have determined that the ultimate outcome cannot be estimated at this time. From time to time, we are party to various lawsuits, claims, and other legal proceedings that arise in the ordinary course of business, some of which are covered by insurance. Upon resolution of any pending legal matters, we may incur charges in excess of presently established reserves. Our management does not believe that any such charges would, individually or in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. (c) Insurance/Self-Insurance We use a combination of insurance and self-insurance for a number of risks, including claims related to our employee health care, workers’ compensation and general liability. Liabilities associated with these risks are estimated based on, among other things, historical claims experience, severity factors, and other actuarial assumptions. Our loss exposure related to self-insurance is limited by stop loss coverage on a per occurrence and aggregate basis. We regularly analyze our reserves for incurred but not reported claims, and for reported but not paid claims related to our self-funded insurance programs. While we believe our reserves are adequate, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known. F-35
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (d) Dividend Restrictions Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of the People’s Republic of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.526.6 million) of registered capital is contributed to a surplus reserve, our ChineseChina operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, weour China operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. AtAs of December 31, 2019,2020, the amount of the surplus reserve fund was $6.6$7.0 million. (e) Collective Bargaining Agreements In 2016, we entered into a three-year collective bargaining agreement with certain of our employees at our first Turkey facility. The agreement resulted in an average increase in pay of approximately 20% for employees covered by the agreement. In addition, beginning in July 2017, this collective bargaining arrangement also covered similarly situated employees at our second Turkey facility. In 2019, the collective bargaining agreement with the Turkey facilities was renewed.renewed through 2020 and we are in the process of negotiating an amendment for calendar year 2021. In March 2018, we entered into a collective bargaining agreement with a labor union for certain of our employees at the Matamoros, Mexico facility. In the first quarter of 2020, weWe recently amended our F-35
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Matamoros collective bargaining agreement to adjust the salaries and bonuses payable to our associates for calendar year 20202021 that are covered by this agreement. Currently, there are no0 other employees covered by collective bargaining agreements. We believe that our relations with employees are generally good. (f) Escheat Audit In November 2020, we were notified by the state of Delaware that they intend to examine our books and records to determine compliance with Delaware escheat laws. Since that date, additional states have joined with Delaware in the audit process and additional states may join in the audit process. The audit is conducted by an outside firm on behalf of the states and covers the period from 2005 to 2019. We believe that the audits may take several years to complete. Due to the preliminary stage of this audit, we have determined that the ultimate outcome cannot be reasonably estimated at this time. Any claims or liabilities resulting from these audits could have a material impact on our financial condition, results of operations and cash flows. Note 15. Defined Contribution Plan We maintain a 401(k) plan for all of our U.S. employees. Under the 401(k) plan, eligible employees may contribute, subject to statutory limitations, a percentage of their salaries. We currently match 50 percent of the participants’ contributions up to eight percent of eligible compensation.
Participant vesting occurs in our matching contributions according to the schedule below:
Years of service
| | Vesting
Percentage
| | 1-year anniversary
| | | 34
| %
| 2-year anniversary
| | | 66
| %
| 3-year anniversary
| | | 100
| %
|
Our matching contributions to the 401(k) plan were $0.6 million, $0.6 million and $0.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. Our matching contributions are accrued and recorded as expense during each payroll period. Effective January 1, 2017, we changed the 401(k) plan to include an auto enrollment feature, increased our match from 25% of the first 8% to 50% of the first 8% and reduced the vesting period from six years to three years.
In Mexico, we maintain an annual savings fund, which matches the employee contribution each week, based on the Mexican statutory maximum of 13% of actual minimum salary rates. The savings fund period runs from November to October each year, and is distributed to employees in full, during the first week of November each year. For the years ended December 31, 2019, 2018 and 2017, we incurred matched savings expense of $2.7 million, $1.8 million and $1.3 million, respectively.
In Turkey, we maintain a retirement fund that is based on a formula of annual salary multiplied by the number of years of service with us. We accrue a retirement fund liability for this each month. As of December 31, 2019 and 2018, we accrued $2.0 million and $1.0 million, respectively, based on the service periods of eligible employees greater than one year.
Note 16. Income Taxes
Geographic sources of income (loss) before income taxes are as follows for the years ended December 31: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | United States | | $ | (41,255 | ) | | $ | (33,034 | ) | | $ | 6,272 | | | $ | 4,913 | | | $ | (41,255 | ) | | $ | (33,034 | ) | China | | | (3,777 | ) | | | (4 | ) | | | 44,563 | | | | 16,232 | | | | (3,777 | ) | | | (4 | ) | Turkey | | | 47,579 | | | | 31,955 | | | | 56 | | | | (26,566 | ) | | | 47,579 | | | | 31,955 | | Mexico | | | 8,434 | | | | 3,329 | | | | 3,641 | | | | 8,509 | | | | 8,434 | | | | 3,329 | | India | | | (3,970 | ) | | | — | | | | — | | | | (13,810 | ) | | | (3,970 | ) | | | — | | Other | | | 396 | | | | — | | | | — | | | | 2,979 | | | | 396 | | | | — | | Total income before income taxes | | $ | 7,407 | | | $ | 2,246 | | | $ | 54,532 | | | Total income (loss) before income taxes | | | $ | (7,743 | ) | | $ | 7,407 | | | $ | 2,246 | |
2017 Tax Reform
During the fourth quarter of 2017, we recorded a net tax expense of $0.1 million (net of valuation allowance) related to the enactment of the Tax Cuts and Jobs Act (Tax Reform). The expense was primarily related to applying the federal income tax rate change to certain of our deferred tax liabilities, and the realization of a benefit from our
F-36
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
alternative minimum tax credit carryover. This provisional amount was subject to adjustment during the measurement period of up to one year following the December 2017 enactment of Tax Reform, as provided by SEC guidance.
As of December 31, 2018, we completed the accounting for the enactment-date income tax effects of the Tax Reform,Cuts and Jobs Act (Tax Reform), which resulted in an immaterial impact to our financial statements. Upon further analyses of certain aspects of Tax Reform, and refinement of calculations during 2018, we increased our provisional amount of previously untaxed foreign earnings by $13.8 million, to $88.1 million. This resulted in no change to our U.S. federal income tax expense due to the impact of foreign tax credits. In addition, the provisional net tax expense discussed above was unchanged. F-36
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Tax Reform enacted a new minimum tax on U.S. companies’ foreign operations called Global Intangible Low Tax Incomeglobal intangible low tax income (GILTI). Beginning in 2018, GILTI provisions will be applied providing an incremental tax on low taxed foreign income. Thethe GILTI provisions require us to include in our U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. We have made a policy election to account for any ongoing impacts of GILTI tax in the period in which it is incurred. At The Internal Revenue Service published final regulations in July 2020 to address the application of the high-tax exclusion from GILTI under the Tax Reform allowing us to make an annual election to exclude GILTI of our foreign subsidiaries with an effective tax rate greater than 90% of the U.S. corporate rate. We recognized $10.6 million of tax benefits related to current and prior years as a result of this change in legislation. We do not provide deferred taxes related to U.S. GAAP basis in excess of outside tax basis in the investment in our foreign subsidiaries to the extent such amounts relate to indefinitely reinvested earnings and profits of such foreign subsidiaries. As of December 31, 2019, we recorded $15.7 million of federal income tax impacts of GILTI. Undistributed2020, our undistributed earnings of certain of our foreign subsidiaries amounted to approximately $181.9$95.2 million, at December 31, 2019, and we consider those earnings reinvested indefinitely. As a result of the deemed mandatory repatriation provision pursuant to Tax Reform, we included undistributed earnings in income subject to U.S. tax at reduced tax rates in 2017. In addition, we recognized GILTI income reduced by net operating losses in 2018 and 2019 as part of the changes from Tax Reform. As a result, we do not have material basis differences related to cumulative unremitted earnings for U.S. income tax purposes.
The income tax provision includes U.S. federal, state, and local taxes, Turkey, China, Mexico and MexicoIndia taxes currently payable and those deferred because of temporary differences between the financial statement and the tax bases of assets and liabilities. The components of the income tax provision (benefit) for the years ended December 31 are as follows: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Current: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. federal | | $ | — | | | $ | — | | | $ | (49 | ) | | $ | — | | | $ | — | | | $ | — | | U.S. state and local taxes | | | (7 | ) | | | 4 | | | | (3 | ) | | | 32 | | | | (7 | ) | | | 4 | | Foreign | | | 18,171 | | | | 11,875 | | | | 14,200 | | | | 19,234 | | | | 18,171 | | | | 11,875 | | Total current | | | 18,164 | | | | 11,879 | | | | 14,148 | | | | 19,266 | | | | 18,164 | | | | 11,879 | | Deferred: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. federal | | | 6,277 | | | | (7,596 | ) | | | (20 | ) | | | (1,909 | ) | | | 6,277 | | | | (7,596 | ) | U.S. state and local taxes | | | (950 | ) | | | (36 | ) | | | — | | | | (1,385 | ) | | | (950 | ) | | | (36 | ) | Foreign | | | (376 | ) | | | (7,280 | ) | | | 1,670 | | | | (4,688 | ) | | | (376 | ) | | | (7,280 | ) | Total deferred | | | 4,951 | | | | (14,912 | ) | | | 1,650 | | | | (7,982 | ) | | | 4,951 | | | | (14,912 | ) | Total income tax provision (benefit) | | $ | 23,115 | | | $ | (3,033 | ) | | $ | 15,798 | | | $ | 11,284 | | | $ | 23,115 | | | $ | (3,033 | ) |
F-37
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following is a reconciliation from the U.S. statutory income tax rate to our effective income tax rate for the years ended December 31: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | United States statutory income tax rate | | | 21.0 | % | | | 21.0 | % | | | 35.0 | % | | | 21.0 | % | | | 21.0 | % | | | 21.0 | % | Foreign rate differential | | | (40.8 | ) | | | (14.4 | ) | | | (7.2 | ) | | | (189.1 | ) | | | (40.8 | ) | | | (14.4 | ) | Foreign permanent differences | | | 2.9 | | | | 31.7 | | | | 1.2 | | | | (19.4 | ) | | | 2.9 | | | | 31.7 | | Tax rate change | | | (0.3 | ) | | | — | | | | 10.3 | | | | (6.9 | ) | | | (0.3 | ) | | | — | | Withholding taxes | | | 24.5 | | | | 27.3 | | | | 5.2 | | | | (20.1 | ) | | | 24.5 | | | | 27.3 | | Foreign tax credits | | | — | | | | — | | | | (5.2 | ) | | Subpart F / GILTI income | | | 212.3 | | | | 539.8 | | | | — | | | | 137.6 | | | | 212.3 | | | | 539.8 | | IRC Section 965 dividend | | | — | | | | — | | | | 21.1 | | | Foreign tax credits - 965 dividend | | | — | | | | — | | | | (13.7 | ) | | Unrecognized tax benefits | | | | (91.6 | ) | | | — | | | | — | | Share-based compensation | | | (9.1 | ) | | | (89.0 | ) | | | — | | | | 3.5 | | | | (9.1 | ) | | | (89.0 | ) | Valuation allowance | | | 115.5 | | | | (483.1 | ) | | | (16.6 | ) | | | 0.7 | | | | 115.5 | | | | (483.1 | ) | State taxes | | | (10.2 | ) | | | (1.7 | ) | | | — | | | | 13.7 | | | | (10.2 | ) | | | (1.7 | ) | Deferred tax adjustments | | | 2.1 | | | | 4.6 | | | | 3.8 | | | | 11.8 | | | | 2.1 | | | | 4.6 | | Research and development | | | (13.4 | ) | | | (59.8 | ) | | | (1.2 | ) | | | 11.2 | | | | (13.4 | ) | | | (59.8 | ) | Turkey incentive credits | | | — | | | | — | | | | (5.5 | ) | | Foreign currency / inflationary adjustments | | | (0.5 | ) | | | (90.6 | ) | | | — | | | | 5.6 | | | | (0.5 | ) | | | (90.6 | ) | Other | | | 8.1 | | | | (20.8 | ) | | | 1.8 | | | | (23.7 | ) | | | 8.1 | | | | (20.8 | ) | Effective income tax rate | | | 312.1 | % | | | (135.0 | )% | | | 29.0 | % | | | (145.7 | )% | | | 312.1 | % | | | (135.0 | )% |
F-37
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following is a summary of the components of deferred tax assets and liabilities atas of December 31: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Deferred tax assets: | | | | | | | | | | | | | | | | | | | | | | | | | Net operating loss and credit carry forwards | | $ | 23,065 | | | $ | 17,360 | | | $ | 18,913 | | | $ | 36,754 | | | $ | 23,065 | | | $ | 17,360 | | Deferred revenue | | | 1,792 | | | | 149 | | | | 178 | | | | 180 | | | | 1,792 | | | | 149 | | Non-deductible accruals | | | 16,111 | | | | 10,850 | | | | 9,860 | | | | 12,360 | | | | 16,111 | | | | 10,850 | | Equity compensation | | | 3,274 | | | | 3,607 | | | | 3,489 | | | | 3,298 | | | | 3,274 | | | | 3,607 | | Lease assets and liabilities | | | 1,062 | | | | — | | | | — | | | Equity investment | | | — | | | | — | | | | 390 | | | Amortization of intangible assets | | | — | | | | — | | | | 320 | | | Lease liabilities | | | | 23,271 | | | | 1,062 | | | | — | | Non-deductible interest | | | — | | | | 1,452 | | | | — | | | | 3,302 | | | | — | | | | 1,452 | | Tax credits | | | 1,931 | | | | 2,212 | | | | 4,760 | | | | 1,931 | | | | 1,931 | | | | 2,212 | | Other | | | 4,480 | | | | 4,548 | | | | 3,424 | | | | 6,760 | | | | 4,480 | | | | 4,548 | | Gross deferred tax assets | | | 51,715 | | | | 40,178 | | | | 41,334 | | | | 87,856 | | | | 51,715 | | | | 40,178 | | Valuation allowance | | | (18,505 | ) | | | (8,520 | ) | | | (18,680 | ) | | | (18,903 | ) | | | (18,505 | ) | | | (8,520 | ) | Total deferred tax assets | | | 33,210 | | | | 31,658 | | | | 22,654 | | | | 68,953 | | | | 33,210 | | | | 31,658 | | | | | | | | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | Deferred revenue | | | (17,081 | ) | | | (13,781 | ) | | | (15,564 | ) | | | (24,294 | ) | | | (17,081 | ) | | | (13,781 | ) | Depreciation | | | (4,196 | ) | | | (2,636 | ) | | | (3,489 | ) | | | (3,446 | ) | | | (4,196 | ) | | | (2,636 | ) | Lease assets and liabilities | | | (32 | ) | | | — | | | | — | | | Lease assets | | | | (22,453 | ) | | | (32 | ) | | | — | | Other | | | (827 | ) | | | (406 | ) | | | (1,972 | ) | | | 33 | | | | (827 | ) | | | (406 | ) | Total deferred tax liabilities | | | (22,136 | ) | | | (16,823 | ) | | | (21,025 | ) | | | (50,160 | ) | | | (22,136 | ) | | | (16,823 | ) | Net deferred tax assets | | $ | 11,074 | | | $ | 14,835 | | | $ | 1,629 | | | $ | 18,793 | | | $ | 11,074 | | | $ | 14,835 | |
F-38
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The deferred tax valuation allowance atas of December 31 consisted of the following: | | 2019 | | | 2018 | | | 2017 | | | | (in thousands) | | Allowance at beginning of year | | $ | (8,520 | ) | | $ | (18,680 | ) | | $ | (23,618 | ) | Benefits obtained (costs accumulated) | | | (9,985 | ) | | | 10,160 | | | | 4,938 | | Allowance at end of year | | $ | (18,505 | ) | | $ | (8,520 | ) | | $ | (18,680 | ) |
| | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Valuation allowance at beginning of year | | $ | (18,505 | ) | | $ | (8,520 | ) | | $ | (18,680 | ) | Benefits obtained (costs accumulated) | | | (398 | ) | | | (9,985 | ) | | | 10,160 | | Valuation allowance at end of year | | $ | (18,903 | ) | | $ | (18,505 | ) | | $ | (8,520 | ) |
The valuation allowance as of December 31, 20192020 primarily relates to certain state and foreign net operating losses (NOLs) that we believe do not meet the more-likely-than-not criteria for recording the related benefits. During 2018, we released the valuation allowance recorded against deferred tax assets reported in the United States. The release of this valuation allowance resulted in the recognition of a non-cash tax benefit of $10.8 million for the year. Additionally, during 2018, there was an increase in the valuation allowance of $0.6 million primarily related to state NOLs. During 2019, we increased the valuation allowance recorded against deferred tax assets in Taicang, China and India. The increase of this valuation allowance resulted in tax expense of $8.5 million for the year. During 2020, we recognized $0.6 million tax benefits from the release of valuation allowance against deferred tax assets in India and changes to realizability of certain attributes in the U.S. WeAs of December 31, 2020, we have U.S. federal and state NOL carryforwards of $103.0 million and $253.2 million, respectively, with foreign NOL carryforwards of approximately $20.9 million, state NOLs of approximately $158.0 million, foreign NOLs of approximately $31.3$41.0 million and foreign tax credits of approximately $1.9 million available to offset future U.S., China and India taxable income. The U.S. federal and state net operating lossNOL carryforwards expire in varying amounts through 2039 and the foreign tax credits expire in 2026. We also have foreign NOLsNOL carryforwards that expire in varying amounts through 2027.
Sections2028 and some U.S. federal and foreign NOL carryforwards with indefinite lives. The utilization of our NOLs is also subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, contain rules that limit the ability of a company that undergoes an “ownership change”due to utilize its net operating loss and tax credit carry forwards and certain built-in losses recognizedchanges in years after the “ownership change.” An “ownership change” is generally defined as any change in ownership of more than 50% of a corporation’s stock over a rolling three-year period by stockholders that own (directly or indirectly) 5% or more of the stock of a corporation, or arising from a new issuance of stock by a corporation. If an ownership change occurs, Section 382 generally imposes an annual limitationownership. Based on the use of pre-ownership change NOLs to offset taxable income earned after the ownership change. The annual limitation is equal to the product of the applicable long-term tax exempt rate and the value of our stock immediately before the ownership change. This annual limitation may be adjusted to reflect any unused annual limitation for prior years and certain recognized built-in gains and losses for the year. In addition, Section 383 generally limits the amount of tax liability in any post-ownership change year that can be reduced by pre-ownership change tax credit carryforwards.
In June of 2018,analysis, we experienced an ownership change. The pre-ownership change NOLs existing at the date of change of $47.7 million are subject to an annual limitation. We do not believe that the Section 382 and 383 annualsuch limitation will materially impact our ability to utilize the tax attributes that existed asrealization of the date of the ownership change. Certain of these NOLs may be at risk of limitation in the event of a future ownership change.NOL carryforwards as we anticipate utilizing them prior to expiration.
F-38
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements We recognize the impact of a tax position in itsthe financial statements if that position is more-likely-than-not to be sustained on audit, based on the technical merits of the position. We disclose all unrecognized tax benefits, which includesinclude the reserves recorded for uncertain tax positions on filed tax returns and the unrecognized portion of affirmative claims. Our policy regarding uncertainIncluded in the balance of unrecognized tax positions is to recognize potential accrued interest and penalties relatedbenefits as of December 31, 2020 are $7.0 million, of tax benefits that, if recognized, would reduce our annual effective rate. We do 0t anticipate any decreases to unrecognized tax benefits in the coming year. Our policy is to recognize any interest and penalties that we may incur related to our tax positions as a component of our income tax expense. As of December 31, 2019, we had not identifiedprovision or benefit. We did 0t accrue any penalties or interest during 2020 related to the unrecognized tax benefits.benefit noted above. We did not record any uncertain tax positions in 2019 or 2018. The following is a reconciliation of the beginning and ending amount of total unrecognized tax benefits for the years ended December 31: | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Unrecognized tax benefits at beginning of year | | $ | — | | | $ | — | | | $ | — | | Increases related to prior year tax positions | | | 5,220 | | | | — | | | | — | | Decreases related to prior year tax positions | | | — | | | | — | | | | — | | Increases related to current year tax positions | | | 2,268 | | | | — | | | | — | | Increases (decreases) due to currency translation | | | — | | | | — | | | | — | | Decreases relating to settlements with authorities | | | (496 | ) | | | — | | | | — | | Decreases from laps in statute of limitations | | | — | | | | — | | | | — | | Unrecognized tax benefits at end of year | | $ | 6,992 | | | $ | — | | | $ | — | |
We operate in and file income tax returns in various jurisdictions in China, Mexico, Turkey, India, U.S., Denmark, Germany, Spain and Switzerland, which are subject to examination by tax authorities. In the U.S., the federal tax returns for 2017 and 2018through 2019 remain open to examination. For U.S. state and local taxes as well as in non-U.S. jurisdictions, the statute of limitations generally varies between three and ten years. However, to the extent allowable by law, the tax authorities may have a right to examine and make adjustment to prior periods when amended returns have been filed, or when net operating lossesNOLs or tax credits were generated and carried forward for subsequent utilization. Note 16. Net Income (Loss) Per Common Share Basic net income (loss) per common share is computed by dividing the net income (loss) by the weighted-average number of common shares outstanding during a period. Diluted net income per common share is computed by giving effect to all potentially dilutive securities, unless there is a net loss for the period and/or performance-based awards which are not included until performance conditions are met. In computing diluted net income per common share, we use the treasury stock method. The table below reflects the calculation of the weighted-average number of common shares outstanding, using the treasury stock method, used in computing basic and diluted net income (loss) per common share for the years ended December 31: | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Basic weighted-average shares outstanding | | | 35,532 | | | | 35,062 | | | | 34,311 | | Effect of dilutive awards | | | — | | | | — | | | | 1,691 | | Diluted weighted-average shares outstanding | | | 35,532 | | | | 35,062 | | | | 36,002 | |
Since there were net losses for the years ended December 31, 2020 and 2019, approximately 1,674,000and 1,176,000 potentially dilutive shares, respectively, were excluded from the calculation. In addition, the table below summarizes the approximate number of share-based compensation awards which were excluded from the computation of net income (loss) per common share because their effect would be anti-dilutive: F-39
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | Anti-dilutive shares | | | 17 | | | | 28 | | | | 30 | |
In addition, since 2018, certain performance-based restricted stock units have been excluded from the computation of diluted shares outstanding for the 2020, 2019 and 2018 periods presented as the performance conditions had not yet been met. Note 17. Stockholders’ Equity Accumulated Other Comprehensive Loss The following table presents the changes in accumulated other comprehensive loss (AOCL) by component for the years ended December 31, 2020, 2019 and 2018: | | Foreign | | | | | | | Foreign | | | | | | | | currency | | | | | | | exchange | | | | | | | | translation | | | Interest rate | | | forward | | | Total | | | | adjustments | | | swap | | | contracts | | | AOCL | | | | (in thousands) | | Balance at December 31, 2017 | | $ | (558 | ) | | $ | — | | | $ | — | | | $ | (558 | ) | Other comprehensive income (loss) before reclassifications | | | (14,428 | ) | | | 752 | | | | — | | | | (13,676 | ) | Amounts reclassified from AOCL | | | — | | | | — | | | | — | | | | — | | Net tax effect | | | — | | | | (158 | ) | | | — | | | | (158 | ) | Net current period other comprehensive income (loss) | | | (14,428 | ) | | | 594 | | | | — | | | | (13,834 | ) | Balance at December 31, 2018 | | | (14,986 | ) | | | 594 | | | | — | | | | (14,392 | ) | Other comprehensive income (loss) before reclassifications | | | (7,026 | ) | | | (3,469 | ) | | | 518 | | | | (9,977 | ) | Amounts reclassified from AOCL | | | — | | | | — | | | | 172 | | | | 172 | | Net tax effect | | | — | | | | 730 | | | | (145 | ) | | | 585 | | Net current period other comprehensive income (loss) | | | (7,026 | ) | | | (2,739 | ) | | | 545 | | | | (9,220 | ) | Balance at December 31, 2019 | | | (22,012 | ) | | | (2,145 | ) | | | 545 | | | | (23,612 | ) | Other comprehensive income (loss) before reclassifications | | | (8,099 | ) | | | (1,698 | ) | | | (777 | ) | | | (10,574 | ) | Amounts reclassified from AOCL | | | — | | | | — | | | | 996 | | | | 996 | | Net tax effect | | | — | | | | 400 | | | | (200 | ) | | | 200 | | Net current period other comprehensive income (loss) | | | (8,099 | ) | | | (1,298 | ) | | | 19 | | | | (9,378 | ) | Balance at December 31, 2020 | | $ | (30,111 | ) | | $ | (3,443 | ) | | $ | 564 | | | $ | (32,990 | ) |
Note 17.18. Concentration of Customers Revenues from certain customers (in thousands) in excess of 10 percent of total consolidated Company revenues for the years ended December 31 are as follows: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | Customer | | Revenues | | | % of Total | | | Revenues | | | % of Total | | | Revenues | | | % of Total | | | Revenues | | | % of Total | | | Revenues | | | % of Total | | | Revenues | | | % of Total | | Customer 1 - Vestas | | $ | 662,302 | | | | 46.1 | % | | $ | 329,472 | | | | 32.0 | % | | $ | 266,276 | | | | 27.9 | % | | $ | 830,302 | | | | 49.7 | % | | $ | 662,302 | | | | 46.1 | % | | $ | 329,472 | | | | 32.0 | % | Customer 2 - GE | | | 369,067 | | | | 25.7 | % | | | 325,962 | | | | 31.7 | % | | | 426,133 | | | | 44.6 | % | | | 391,533 | | | | 23.4 | % | | | 369,067 | | | | 25.7 | % | | | 325,962 | | | | 31.7 | % | Customer 3 - Nordex | | | 230,563 | | | | 16.1 | % | | | 195,156 | | | | 19.0 | % | | | 153,227 | | | | 16.0 | % | | | 255,912 | | | | 15.3 | % | | | 230,563 | | | | 16.1 | % | | | 195,156 | | | | 19.0 | % | Customer 4 - Siemens Gamesa | | | 73,426 | | | | 5.1 | % | | | 115,779 | | | | 11.2 | % | | | 92,394 | | | | 9.7 | % | | | 78,137 | | | | 4.7 | % | | | 73,426 | | | | 5.1 | % | | | 115,779 | | | | 11.2 | % |
F-40
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Trade accounts receivable from certain customers in excess of 10 percent of total consolidated Company trade accounts receivable atas of December 31 are as follows: | | 2019 | | | 2018 | | | 2020 | | | 2019 | | Customer | | % of Total | | | % of Total | | | % of Total | | | % of Total | | Customer 1 - Vestas | | | 41.9 | % | | | 46.7 | % | | | 35.0 | % | | | 41.9 | % | Customer 3 - Nordex | | | 31.3 | % | | | 25.7 | % | | | 40.8 | % | | | 31.3 | % |
Note 18.19. Segment Reporting FASB ASC Topic 280, Segment Reporting, establishes standards for the manner in which companies report financial information about operating segments, products, services, geographic areas and major customers. In managing our business, management focuses on growing our revenues and earnings in select geographic areas serving primarily the wind energy market. We have operations in the United States, China, Mexico, Turkey and India. During the fourth quarter of 2020, the Company modified its system of reporting, resulting from changes to its internal management and organizational structure, which changed its reportable segments from (1) the United States (U.S.), (2) Asia, (3) Mexico and (4) Europe, the Middle East, Africa and India (EMEAI) to (1) the United States, (2) Asia, (3) Mexico, (4) Europe, the Middle East and Africa (EMEA) and (5) India. OurAs of December 31, 2020, these reportable segments are reflective of how the Company’s chief operating decision maker reviews operating results for the purposes of allocating resources and assessing performance. Disclosures for the years ended December 31, 2019 and 2018 have been adjusted to reflect the change in reportable segments. As further described below, our operating segments are defined geographically as the United States,U.S., Asia, EMEAIMexico, EMEA and Mexico. Financial results are aggregated into four reportable segments based on quantitative thresholds.India. All of our segments operate in their local currency except for the Mexico and Asia segments, which both include a U.S. parent company.company, and India, which operate in the U.S. dollar. F-40We divide our business operations into 5 geographic operating segments as follows:
Our U.S. segment includes (1) the manufacturing of wind blades at our Newton, Iowa facility, (2) the manufacturing of precision molding and assembly systems used for our transportation business at our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which we also conduct at our Warren, Rhode Island facility, (4) wind blade inspection and repair services, (5) our advanced engineering center in Kolding, Denmark, which provides technical and engineering resources to our manufacturing facilities, (6) our engineering center in Berlin, Germany and (7) our corporate headquarters, the costs of which are included in general and administrative expenses. Our Asia segment includes (1) the manufacturing of wind blades at our facilities in Dafeng, China and Yangzhou, China, (2) the manufacturing of precision molding and assembly systems at our Taicang Port, China facility and (3) wind blade inspection and repair services. Our Mexico segment includes (1) the manufacturing of wind blades at our three facilities in Juárez, Mexico and a facility in Matamoros, Mexico, (2) the manufacturing of precision molding and assembly systems and composite solutions for the transportation industry at our fourth Juárez, Mexico facility and (3) wind blade inspection and repair services. Our EMEA segment manufactures wind blades from our 2 facilities in Izmir, Turkey and also performs wind blade inspection and repair services. Our India segment manufactures wind blades from our new manufacturing facility in Chennai, India, which commenced operations in the first quarter of 2020. F-41
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following tables set forth certain information regarding each of our segments as of or for the years ended December 31: | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | | | (in thousands) | | | (in thousands) | | Net sales by segment: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | 169,317 | | | $ | 163,716 | | | $ | 191,025 | | | $ | 181,941 | | | $ | 169,317 | | | $ | 163,716 | | Asia | | | 393,809 | | | | 306,255 | | | | 372,520 | | | | 527,083 | | | | 393,809 | | | | 306,255 | | Mexico | | | 435,606 | | | | 268,756 | | | | 206,563 | | | | 495,839 | | | | 435,606 | | | | 268,756 | | EMEAI | | | 437,768 | | | | 290,897 | | | | 185,090 | | | EMEA | | | | 373,545 | | | | 437,081 | | | | 290,897 | | India | | | | 91,729 | | | | 687 | | | | — | | Total net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 1,029,624 | | Net sales by geographic location(1): | | | | | | | | | | | | | | | | | | | | | | | | | United States | | $ | 169,317 | | | $ | 163,716 | | | $ | 191,025 | | | $ | 181,941 | | | $ | 169,317 | | | $ | 163,716 | | China | | | 393,809 | | | | 306,255 | | | | 372,520 | | | | 527,083 | | | | 393,809 | | | | 306,255 | | Mexico | | | 435,606 | | | | 268,756 | | | | 206,563 | | | | 495,839 | | | | 435,606 | | | | 268,756 | | Turkey and India | | | 437,768 | | | | 290,897 | | | | 185,090 | | | Turkey | | | | 373,545 | | | | 437,081 | | | | 290,897 | | India | | | | 91,729 | | | | 687 | | | | — | | Total net sales | | $ | 1,436,500 | | | $ | 1,029,624 | | | $ | 955,198 | | | $ | 1,670,137 | | | $ | 1,436,500 | | | $ | 1,029,624 | | Depreciation and amortization: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | 9,223 | | | $ | 6,795 | | | $ | 4,822 | | | $ | 7,193 | | | $ | 9,223 | | | $ | 6,795 | | Asia | | | 10,699 | | | | 6,765 | | | | 6,272 | | | | 15,692 | | | | 10,699 | | | | 6,765 | | Mexico | | | 12,577 | | | | 7,891 | | | | 5,994 | | | | 18,587 | | | | 12,577 | | | | 7,891 | | EMEAI | | | 6,081 | | | | 4,978 | | | | 4,610 | | | EMEA | | | | 6,217 | | | | 6,081 | | | | 4,978 | | India | | | | 1,978 | | | | — | | | | — | | Total depreciation and amortization | | $ | 38,580 | | | $ | 26,429 | | | $ | 21,698 | | | $ | 49,667 | | | $ | 38,580 | | | $ | 26,429 | | Capital expenditures | | | | | | | | | | | | | | U.S. | | $ | 8,321 | | | $ | 21,305 | | | $ | 10,575 | | | Asia | | | 22,471 | | | | 11,218 | | | | 7,000 | | | Mexico | | | 25,842 | | | | 18,928 | | | | 20,033 | | | EMEAI | | | 17,774 | | | | 1,237 | | | | 7,220 | | | Total capital expenditures | | $ | 74,408 | | | $ | 52,688 | | | $ | 44,828 | | | Income (loss) from operations: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | (78,278 | ) | | $ | (67,357 | ) | | $ | (33,231 | ) | | $ | (40,991 | ) | | $ | (78,278 | ) | | $ | (67,357 | ) | Asia | | | 24,132 | | | | 28,147 | | | | 76,332 | | | | 62,869 | | | | 24,132 | | | | 28,147 | | Mexico | | | 3,533 | | | | 12,154 | | | | 14,430 | | | | (9,611 | ) | | | 3,533 | | | | 12,154 | | EMEAI | | | 66,501 | | | | 51,774 | | | | 12,567 | | | EMEA | | | | 23,331 | | | | 70,449 | | | | 51,774 | | India | | | | (16,832 | ) | | | (3,948 | ) | | | — | | Total income from operations | | $ | 15,888 | | | $ | 24,718 | | | $ | 70,098 | | | $ | 18,766 | | | $ | 15,888 | | | $ | 24,718 | | Capital expenditures: | | | | | | | | | | | | | | U.S. | | | $ | 6,949 | | | $ | 8,321 | | | $ | 21,305 | | Asia | | | | 13,135 | | | | 22,471 | | | | 11,218 | | Mexico | | | | 15,624 | | | | 25,842 | | | | 18,928 | | EMEA | | | | 10,887 | | | | 11,023 | | | | 1,237 | | India | | | | 19,071 | | | | 6,751 | | | | — | | Total capital expenditures | | | $ | 65,666 | | | $ | 74,408 | | | $ | 52,688 | | Tangible long-lived assets: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | 36,410 | | | $ | 34,825 | | | | | | | $ | 31,811 | | | $ | 36,410 | | | | | | Asia (China) | | | 50,603 | | | | 31,924 | | | | | | | | 46,075 | | | | 50,603 | | | | | | Mexico | | | 81,654 | | | | 65,981 | | | | | | | | 78,813 | | | | 81,654 | | | | | | EMEAI (Turkey and India) | | | 36,340 | | | | 26,693 | | | | | | | EMEA (Turkey) | | | | 28,312 | | | | 29,589 | | | | | | India | | | | 23,990 | | | | 6,751 | | | | | | Total tangible long-lived assets | | $ | 205,007 | | | $ | 159,423 | | | | | | | $ | 209,001 | | | $ | 205,007 | | | | | | Total assets: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. | | $ | 107,918 | | | $ | 115,435 | | | | | | | $ | 118,456 | | | $ | 107,918 | | | | | | Asia | | | 210,438 | | | | 194,088 | | | | | | | Asia (China) | | | | 250,582 | | | | 210,438 | | | | | | Mexico | | | 275,646 | | | | 142,412 | | | | | | | | 251,764 | | | | 275,646 | | | | | | EMEAI | | | 232,675 | | | | 152,920 | | | | | | | Total assets | | $ | 826,677 | | | $ | 604,855 | | | | | | |
F-42
TPI COMPOSITES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements EMEA (Turkey) | | | 201,691 | | | | 218,244 | | | | | | India | | | 133,764 | | | | 14,431 | | | | | | Total assets | | $ | 956,257 | | | $ | 826,677 | | | | | |
(1) | Net sales are attributable to countries based on the location where the product is manufactured or the services are performed. |
F-41
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 19.20. Selected Quarterly Financial Data (Unaudited) The following tables set forth certain unaudited financial information for each quarter of 20192020 and 2018.2019. The unaudited quarterly information includes all normal recurring adjustments that, in the opinion of management, are necessary for the fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of the results for any future period. The unaudited quarterly results are as follows: | | 2019 | | | 2020 | | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | | (in thousands, except per share data) | | | (in thousands, except per share data) | | Net sales | | $ | 299,780 | | | $ | 330,771 | | | $ | 383,836 | | | $ | 422,113 | | | $ | 356,636 | | | $ | 373,817 | | | $ | 474,113 | | | $ | 465,571 | | Gross profit (loss) | | | (1,436 | ) | | | 22,551 | | | | 25,931 | | | | 30,802 | | | | (3,873 | ) | | | (4,747 | ) | | | 40,473 | | | | 32,246 | | Net income (loss) | | | (12,104 | ) | | | 1,828 | | | | (4,571 | ) | | | (861 | ) | | | (492 | ) | | | (66,101 | ) | | | 42,382 | | | | 5,184 | | Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic(1) | | $ | (0.35 | ) | | $ | 0.05 | | | $ | (0.13 | ) | | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (1.87 | ) | | $ | 1.19 | | | $ | 0.14 | | Diluted(1) | | $ | (0.35 | ) | | $ | 0.05 | | | $ | (0.13 | ) | | $ | (0.02 | ) | | $ | (0.01 | ) | | $ | (1.87 | ) | | $ | 1.13 | | | $ | 0.14 | |
| | 2018 | | | 2019 | | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | First Quarter | | | Second Quarter | | | Third Quarter | | | Fourth Quarter | | | | (in thousands, except per share data) | | | (in thousands, except per share data) | | Net sales | | $ | 253,981 | | | $ | 230,610 | | | $ | 254,976 | | | $ | 290,057 | | | $ | 299,780 | | | $ | 330,771 | | | $ | 383,836 | | | $ | 422,113 | | Gross profit | | | 28,258 | | | | 15,051 | | | | 16,967 | | | | 12,565 | | | Gross profit (loss) | | | | (1,436 | ) | | | 22,551 | | | | 25,931 | | | | 30,802 | | Net income (loss) | | | 8,648 | | | | (4,053 | ) | | | 9,532 | | | | (8,848 | ) | | | (12,104 | ) | | | 1,828 | | | | (4,571 | ) | | | (861 | ) | Net income (loss) per common share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic(1) | | $ | 0.25 | | | $ | (0.12 | ) | | $ | 0.28 | | | $ | (0.26 | ) | | $ | (0.35 | ) | | $ | 0.05 | | | $ | (0.13 | ) | | $ | (0.02 | ) | Diluted(1) | | $ | 0.24 | | | $ | (0.12 | ) | | $ | 0.26 | | | $ | (0.26 | ) | | $ | (0.35 | ) | | $ | 0.05 | | | $ | (0.13 | ) | | $ | (0.02 | ) |
| (1) | The sum of the quarterly net income (loss) per common share amounts may not equal the annual net income (loss) per common share amount due to rounding. |
Note 20 – Subsequent Events
In January 2020, we announced that we are planning to close our Newton, Iowa bus body manufacturing facility and plan to consolidate our bus body manufacturing operations into our Warren, Rhode Island manufacturing facility. In connection with these plans, we assessed the recoverability of the carrying value of assets associated with the Newton, Iowa facility as of December 31, 2019. As a result of this assessment, we recorded $4.4 million in impairment charges for the year ended December 31, 2019 as follows; $1.7 million associated with property, plant and equipment, $1.2 million in impairment of the right of use asset for the manufacturing facility lease and certain leased equipment and a $1.5 million write-off of the pre-production related assets. The impairment charges are included in realized loss on sale of assets and asset impairments within the consolidated statement of operations.
In February 2020, we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement was increased from $150.0 million to $205.0 million. All other material terms and conditions of the Credit Agreement remained the same. We did not make any draw downs on the revolving credit facility in connection with the execution of the Incremental Facility Agreement.
Exhibit Index Number | | Description | | | | 3.1 | | Amended and Restated Certificate of Incorporation of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on July 11, 2016) | | | | 3.2 | | Second Amended and Restated By-laws of the Registrant, as currently in effect (incorporated by reference to Exhibit 3.4 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on July 11, 2016) | | | | 4.1 | | Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on July 11, 2016) | | | | 4.2 | | Third Amended and Restated Investor Rights Agreement by and among the Registrant and the investors named therein, dated June 17, 2010, as amended (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 4.3 | | Form of senior indenture, to be entered into between the Registrant and the trustee designated therein (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S-3 (File No. 333-220307) filed on September 1, 2017) | | | | 4.4 | | Form of subordinated indenture, to be entered into between the Registrant and the trustee designated therein (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-3 (File No. 333-220307) filed on September 1, 2017) | | | | 4.5*4.5 | | Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Act of 1934 (incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 001-37839) filed on March 2, 2020) | | | | 10.1‡ | | 2008 Stock Option and Grant Plan, as amended by Amendment No. 1, dated August 14, 2008 and Amendment No. 2, dated December 30, 2008, and forms of award agreements thereunder (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2‡ | | Amended and Restated 2015 Stock Option and Incentive Plan and forms of award agreements thereunder (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.3† | | Amendment No. 5 to Financing Agreement dated as of August 19, 2014, entered into as of December 30, 2016, by and among the Registrant, certain of its domestic subsidiaries, HPS Investment Partners, LLC as Administrative Agent and Collateral Agent, Capital One, N.A., as Revolving Loan Representative and the lenders from time to time party thereto, as amended (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K/A (File No. 001-37839) filed on May 5, 2017) | | | | 10.4† | | Amended and Restated Financing Agreement entered into as of December 30, 2016, by and among the Registrant, certain of its domestic subsidiaries, HPS Investment Partners, LLC as Administrative Agent and Collateral Agent, Capital One, N.A., as Revolving Loan Representative and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A (File No. 001-37839) filed on April 20, 2017)
| | | | 10.5†
| | Supply Agreement between General Electric International, Inc. and TPI Mexico III, LLC, entered into as of October 4, 2016 (incorporated by reference to Exhibit 10.310.4 of the Registrant’s Current Report on Form 8-K/A8-K (File No. 001-37839) filed on April 20, 2017)December 30, 2020) | | | | 10.6†10.5† | | Amended and Restated Supply Agreement between General Electric International, Inc. and TPI Iowa, LLC, entered into as of October 4, 2016 (incorporated by reference to Exhibit 10.110.3 of the Registrant’s Current Report on Form 8-K/A8-K (File No. 001-37839) filed on April 20, 2017)December 30, 2020) | | | | 10.6† | | Supply Agreement between General Electric International, Inc. and TPI Mexico, LLC, entered into as of October 18, 2013, as amended (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37839) filed on December 30, 2020) | | | |
Number | | Description | | | | 10.7† | | Supply Agreement between General Electric International, Inc. and TPI Mexico, LLC, entered into as of October 18, 2013, as amended (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016)
| | | | 10.8†
| | First Amendment to Supply Agreement between General Electric International, Inc. and TPI Mexico, LLC, entered into as of October 4, 2016 (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K/A8-K (File No. 001-37839) filed on April 20, 2017)December 30, 2020) | | | | 10.910.8 | | Lease between TPI Iowa, LLC and Opus Northwest L.L.C., dated November 13, 2007, as amended (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1010.9 | | Commencement Date Memorandum between TPI Iowa LLC and Opus Northwest, L.L.C., entered into as of July 25, 2008 (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1110.10 | | Lease between TPI Kompozit Kanat Sanayi ve Ticaret A.S. and Med Union Containers A.S., dated March 16, 2012 (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1210.11 | | Lease between TPI Wind Blade Dafeng Company Limited and Jiangsu Erhuajie Energy Equipment Co., Ltd, dated November 27, 2013, as amended (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1310.12 | | Lease between the Registrant (f/k/a LCSI Holding, Inc.) and Gainey Center II LLC, dated June 12, 2007, as amended (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1410.13 | | Lease between TPI, Inc. (f/k/a TPI Composites, Inc.) and Borden & Remington Fall River LLC, dated as of December 1, 2008, as superseded by Standard Industrial Lease between TPI, Inc. and Borden & Remington Fall River LLC, dated June 28, 2010, as amended (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1510.14 | | Lease between Composite Solutions, Inc. and TN Realty, LLC, dated September 30, 2004, as amended (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1610.15 | | Lease between TPI-Composites S. de R.L. de C.V. and Deutsche Bank México, S.A. Institución de Banca Múltiple, Division Fiduciaria, as Trustee of Trust F/1638, dated April 15, 2013, as amended (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1710.16 | | Amendment Agreement, among Macquarie Mexico Real Estate Management S.A. de. C.V., TPI-Composites, S. de R.L. de C.V. and TPI Composites, Inc., dated November 27, 2018 (incorporated by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K (File No. 001-37839) filed on March 5, 2019) | | | | 10.1810.17 | | Lease between TPI-Composites S. de R.L. de C.V. and The Bank of New York Mellon, S.A., as Trustee in the Trust F/00335, dated September 25, 2013 (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.1910.18 | | Lease between TPI Mexico, LLC and Trailer Transfer, Inc., dated October 16, 2013 (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2010.19 | | Lease between TPI Mexico, LLC and Lanestone 1, LLC, dated April 14, 2014 (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | |
Number | | Description | | | | 10.22‡ 10.21*
| | Form of Employment Agreement between the Registrant and each of its executive officers (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2310.22 | | Form of Indemnification Agreement (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2410.23 | | Contract between TPI Composites (Taicang) Co. Ltd. and Mr. Jun Ji, dated August 4, 2015 (incorporated by reference to Exhibit 10.25 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2510.24 | | Lease between TPI Composites, S. de R.L. de C.V. and Vesta Baja California, S. de R.L. de C.V., dated November 20, 2015 (incorporated by reference to Exhibit 10.26 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2610.25 | | Lease between TPI Turkey IZBAS, LLC and Dere Konstruksiyon Demir Celik Insaat Taahhut Muhendislik Musavirlik Sanayi ve Ticaret Anonim Sirketi, dated December 9, 2015 (incorporated by reference to Exhibit 10.27 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2710.26 | | Lease between TPI Composites (Taicang) Co., Ltd. and Suzhou Suchen Chemical & Plastics Co., Ltd., dated August 5, 2014 (incorporated by reference to Exhibit 10.28 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2810.27 | | Lease between TPI Wind Blade Dafeng Co., Ltd. and Jiangsu Jianhao Transmission Machinery Co., Ltd., commencing January 1, 2016 (incorporated by reference to Exhibit 10.29 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.2910.28 | | Lease between TPI Kompozit Kanat San. ve Tic. A.S. and BORO Insaat Yatirim Sanayi ve Ticaret A.S., dated October 16, 2015 (incorporated by reference to Exhibit 10.30 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.3010.29 | | Sublease between TPI Inc. and Nordex Energy GmbH, dated April 24, 2015 (incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on June 17, 2016) | | | | 10.31†10.30† | | Settlement Agreement and Release between the Registrant and Nordex SE, dated June 3, 2016 (incorporated by reference to Exhibit 10.3210.5 to the Registrant’s Registration StatementCurrent Report on Form S-18-K (File No. 333-212093)001-37839) filed on June 17, 2016)December 30, 2020) | | | | 10.3210.31 | | Senior Executive Cash Incentive Bonus Plan (incorporated by reference to Exhibit 10.34 to the Registrant’s Registration Statement on Form S-1 (File No. 333-212093) filed on July 11, 2016) | | | | 10.3310.32 | | Lease between Phoenix Newton LLC and TPI Iowa II, LLC, dated January 5, 2018 (incorporated by reference to Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K (File No.001-37839) filed on March 8, 2018) | | | | 10.3410.33 | | Master Lease Agreement Subject to Condition between TPI Composites II, S. de R.L. de C.V. and QVC II, S. de. R.L. de C.V. dated May 25, 2017, as amended (incorporated by reference to Exhibit 10.34 to the Registrant’s Annual Report on Form 10-K (File No.001-37839) filed on March 8, 2018) | | | | 10.34* | | Second Amended and Restated Non-Employee Director Compensation Policy | | | | 10.35 | | Amended and Restated Non-Employee Director Compensation Policy (incorporated by reference to Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K (File No. 001-37839) filed on March 5, 2019)
| | | |
Number | | Description | | | | 10.37 10.36
| | Credit Agreement entered into as of April 6, 2018, by and among the Registrant, JPMorgan Chase Bank, N.A., as Administrative Agent, and Well Fargo Bank, National Association and Capital One National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.37 | | Amendment No. 2 dated as of June 29, 2020, by and among the Registrant, JPMorgan Chase Bank, N.A., as Administrative Agent, and Well Fargo Bank, National Association and Capital One National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37839) filed on June 30, 2020) | | | | 10.38 | | Incremental Facility Agreement dated as of February 26, 2020, by and among the Registrant, JPMorgan Chase Bank, N.A., as Administrative Agent, and Well Fargo Bank, National Association and Capital One National Association, as Co-Syndication Agents, and the lenders from time to time party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37839) filed on February 27, 2020) | | | | 10.39 | | Form of Employee Restricted Stock Unit Award (Time-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.3910.40 | | Form of Executive Restrictive Stock Unit Award (Time-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.4010.41 | | Form of Employee Restricted Stock Unit Award (Adjusted EBITDA Performance-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.4110.42 | | Form of Executive Restricted Stock Unit Award (Adjusted EBITDA Performance-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.4210.43 | | Form of Employee Restricted Stock Unit Award (Stock Price Performance-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.4310.44 | | Form of Executive Restricted Stock Unit Award (Stock Price Performance-Based Vesting) under the Amended and Restated 2015 Stock Option And Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on May 3, 2018) | | | | 10.4410.45 | | Amendment No. 1 dated as of May 24, 2019 to the Credit Agreement entered into as of April 6, 2018, by and among the Registrant, JPMorgan Chase Bank, N.A., as Administrative Agent, and Well Fargo Bank, National Association and the lenders party thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q (File No. 001-37839) filed on August 7, 2019) | | | | 21.1* | | List of Subsidiaries | | | | 23.1* | | Consent of KPMG LLP, Independent Registered Public Accounting Firm | | | | 24.1 | | Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) | | | | 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 | | | | 32.1** | | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 32.2**
| | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| | | | 101.INS*
| | XBRL Instance Document
| | | | 101.SCH*
| | XBRL Taxonomy Extension Schema Document
| | | | 101.CAL*
| | XBRL Taxonomy Extension Calculation Linkbase Document
|
Number | | Description | | | | | | | 32.2** | | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | 101.INS* | | Inline XBRL Instance Document – the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document | | | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | 104 * | | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101.*) (filed herewith) |
** | The certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference. |
† | Confidential treatment has been granted for certain provisions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act of 1933. |
‡ | Indicates compensatory plan or arrangement |
SIGNATURESSIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. | | TPI COMPOSITES, INC. | | | | | | Date: February 28, 202025, 2021 | | By: | | /s/ Bryan R. Schumaker | | | | | Bryan R. Schumaker | | | | | Chief Financial Officer (Principal Financial and Accounting Officer) |
We, the undersigned officers and directors of TPI Composites, Inc., hereby severally constitute and appoint Steven C. LockardWilliam E. Siwek and Bryan R. Schumaker and each of them singly (with full power to each of them to act alone), our true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them for him or her and, place and stead, and in any and all capacities, to sign conformed for us and in our names in the capacities indicated below any and all signatures and amendments to this report, and to file the same, with all exhibits thereto, filing date and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as full to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-infactattorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name | | Title | | Date | | | | | | /s/ Steven C. LockardWilliam E. Siwek | | President, Chief Executive Officer and Director | | February 28, 202025, 2021 | Steven C. LockardWilliam E. Siwek
| | (Principal Executive Officer) | | | | | | | | /s/ Bryan R. Schumaker | | Chief Financial Officer | | February 28, 202025, 2021 | Bryan R. Schumaker | | (Principal Financial and Accounting Officer) | | | | | | | | /s/ Stephen B. BransfieldAdan Gossar | | DirectorChief Accounting Officer
| | February 28, 202025, 2021 | Stephen B. BransfieldAdan Gossar
| | | | | | | | | | /s/ Michael L. DeRosa
| | Director
| | February 28, 2020
| Michael L. DeRosa
| | (Principal Accounting Officer) | | | | | | | | /s/ Jayshree S. Desai | | Director | | February 28, 202025, 2021 | Jayshree S. Desai | | | | | | | | | | /s/ Philip J. Deutch | | Director | | February 28, 202025, 2021 | Philip J. Deutch | | | | | | | | | | /s/ Paul G. Giovacchini | | Lead Independent Director and Chairman of the Board | | February 28, 202025, 2021 | Paul G. Giovacchini | | | | | | | | | | /s/ Jack A. Henry | | Director | | February 28, 202025, 2021 | Jack A. Henry | | | | | | | | | | /s/ James A. HughesBavan M. Holloway | | Director | | February 28, 202025, 2021 | Bavan M. Holloway | | | | | | | | | | /s/ Linda P. Hudson | | Director | | February 25, 2021 | Linda P. Hudson | | | | | | | | | | /s/ James A. Hughes | | Director | | February 25, 2021 | James A. Hughes | | | | | | | | | | /s/ Tyrone M. Jordan | | Director | | February 28, 202025, 2021 | Tyrone M. Jordan | | | | | | | | | | /s/ Steven C. Lockard | | Director and Chairman of the Board | | February 25, 2021 | Steven C. Lockard | | | | | | | | | | /s/ Daniel G. Weiss | | Director | | February 28, 202025, 2021 | Daniel G. Weiss | | | | |
|