| Summary of Operations and Significant Accounting Policies | Note 1. Summary of Operations and Significant Accounting
Policies
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). 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; Fall River, Massachusetts; Warren, Rhode Island and
Santa Teresa, New Mexico and international facilities in Dafeng,
China; Taicang Port, China; Taicang City, China; Juárez,
Mexico and Izmir, Turkey. In April 2017, the Company entered into a
multiyear supply agreement with Vestas Wind Systems A/S (Vestas) to
supply wind blades from two manufacturing lines at a new
manufacturing facility that will be constructed in Matamoros,
Mexico. The Company expects this new manufacturing facility will
commence operations in the first half of 2018.
Initial Public Offering and Stock Split
In July 2016, the Company completed an initial public offering
(IPO) of 7,187,500 shares of the Company’s common stock
at a price of $11.00 per share, which included 937,500 shares
issued pursuant to the underwriters’ over-allotment option.
Certain of the Company’s existing shareholders, a director
and executive officers purchased an aggregate of 1,250,000 shares
of common stock in the IPO included in the total issuance above.
The net proceeds from the IPO were $67.2 million after
deducting underwriting discounts and offering expenses. Immediately
prior to the closing of the IPO, all shares of
the then-outstanding redeemable preferred shares converted
into an aggregate of 21,110,204 shares of common stock and the
redeemable preferred share warrants converted on a net issuance
basis into 120,923 shares of common stock. In addition, concurrent
with the closing of the IPO, certain subordinated convertible
promissory notes in the aggregate principal and interest amount of
$11.9 million were converted into 1,079,749 shares of common
stock at the public offering price of $11.00 per share.
Prior to the IPO, in July 2016 the Company amended its amended and
restated certificate of incorporation to effect a 360-for-1
Basis of Presentation
The Company divides its business operations into four geographic
operating segments—the United States, Asia, Mexico and the
Middle East and Africa (EMEA), as follows:
•
The U.S. segment includes (1) the manufacturing
of wind blades at the Newton, Iowa plant, (2) the
manufacturing of precision molding and assembly systems used for
the manufacture of wind blades in the Warren, Rhode Island
facility, (3) the manufacturing of composite solutions for the
transportation industry, which the Company also conducts in its
Rhode Island and Massachusetts facilities and (4) its
corporate headquarters, the costs of which are included in general
and administrative expenses.
• The Asia segment includes
(1) the manufacturing of wind blades at a facility in Taicang
Port, China and at its two facilities in Dafeng, China,
(2) the manufacturing of precision molding and assembly
systems in the Taicang City, China facility, (3) the
manufacture of components in a second Taicang Port, China facility
and (4) wind blade inspection and repair services.
• The Mexico segment manufactures wind
blades from three facilities in Juárez, Mexico, one of which
commenced operations in 2014, the second during the third quarter
of 2016 and the third in January 2017.
• The EMEA segment manufactures wind
blades from two facilities in Izmir, Turkey. The Company entered
into a joint venture in 2012 to produce wind blades at the first
Turkey plant and in 2013 became the sole owner of the Turkey
operation with the acquisition of the remaining 25% interest. The
EMEA segment commenced operations in the second facility during the
third quarter of 2016.
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.
The condensed consolidated financial statements included herein
have been prepared by the Company without audit, pursuant to the
rules and regulations of the United States Securities and Exchange
Commission (SEC) and should be read in conjunction with the audited
consolidated financial statements for the year ended
December 31, 2016 included in the Company’s Annual
Report on Form 10-K.
Warranty Expense
The Company provides a limited warranty for its mold and wind blade
products, including parts and labor, with terms and conditions that
vary depending on the product sold, for periods that range from two
to five years. Warranty expense is recorded based upon estimates of
future repairs using a probability-based methodology. Once the
warranty period has expired, any remaining unused warranty accrual
for the specific products is reversed against the current year
warranty expense amount.
Warranty accrual at March 31 consisted of the following (in
thousands):
2017
Warranty accrual at beginning of year $ 19,912
Accrual during the period 3,447
Cost of warranty services provided during the period (196 )
Reversal of reserves upon warranty expiration (1,268 )
Warranty accrual at end of the period $ 21,895
Net Income Attributable to Preferred Shareholders
Net income attributable to preferred shareholders related to 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 adjustment.
Immediately prior to the closing of our IPO, all preferred shares
were converted into shares of our common stock and as a result, the
accrual of dividends ceased.
Net Income Per Share Calculation
The basic net income per common share is computed by dividing the
net income 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, adjusted on an as-if-converted
Three Months Ended March 31,
2017
2016
Basic weighted-average shares outstanding 33,737 4,238
Effect of dilutive stock options and warrants 90
—
Diluted weighted-average shares outstanding 33,827 4,238
The Company did not have any potentially dilutive securities
outstanding that are not included in the diluted net income per
share calculation for the quarter ended March 31, 2017. The
Company had 6,000 potentially dilutive securities outstanding
during the three months ended March 31, 2016 that are not
included in the diluted net loss per share calculation because
their effect would be anti-dilutive. The potentially dilutive
securities excluded from the calculation include common shares
issued upon conversion or exercise of options and warrants.
Assuming that the IPO had occurred on January 1, 2016, diluted
earnings per share would have been a loss of $0.02 for the three
months ended March 31, 2016.
Use of Estimates
The preparation of these condensed consolidated financial
statements in conformity with 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 condensed consolidated financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted in 2017
In March 2016, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update (ASU) 2016-09, Compensation – Stock
Compensation: Improvement to Employee Share-Based Payment
Accounting
The Company adopted ASU 2016-09 in the first quarter of 2017 using
the modified retrospective transition method through a cumulative
effect adjustment to equity as of January 1, 2017. Upon adoption,
the Company elected to eliminate application of a forfeiture
assumption to share based compensation expense and account for
forfeitures as they occur over the vesting period. The cumulative
effect of this change increased additional paid-in capital and
decreased retained earnings as of January 1, 2017 by $0.7 million,
net of tax. The Company did not have any previously unrecognized
excess tax effects that had not been recorded as a reduction to the
tax liability.
The Company did not have any vesting of restricted stock units or
stock option exercises during the periods presented in the
accompanying financial statements; therefore, the provisions of the
standard relating to the cash flow presentation and income taxes
did not impact the statements of cash flows nor the income tax
provision for the three months ended March 31, 2017. The
inclusion of excess tax benefits and deficiencies as a component of
the Company’s income tax expense in future periods will
increase volatility within the provision for income taxes as the
amount of excess tax benefits or deficiencies from share-based
compensation awards are dependent on the Company’s stock
price at the date the restricted awards vest, the stock price on
the date an option is exercised, and the quantity of options
exercised.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers
The new requirements are effective for the Company beginning
January 1, 2018, and may be implemented either retrospectively
for all periods presented, or as a cumulative-effect adjustment as
of the date of adoption.
The Company expects to adopt Topic 606 as of January 1, 2018
with retrospective application to January 1, 2016 through
December 31, 2017. Based on the Company’s preliminary
evaluation of the new standard, revenue recognition in accordance
with Topic 606 differs from the current guidance provided by GAAP
as outlined in the SEC’s Staff Accounting Bulletin 104, which
requires the Company to defer recognition of revenue until the risk
of loss has passed to the customer and delivery has been made or a
fixed delivery schedule has been provided by the customer. Since
the Company’s products have no alternative use to the Company
due to contractual restrictions placed by each customer on the
technical specifications and design of the products, the
Company’s preliminary assessment is that revenue upon
adoption of Topic 606 will likely be recognized over time during
the course of the production process and before the product is
delivered to the customer.
The Company expects that the adoption of Topic 606 will have a
material impact on the amount of net sales, cost of goods sold and
income from operations reported in the consolidated statements of
operations in future periods. In accordance with Topic 606,
revenues will be recognized over the time period of the production
process, whereas currently it is recognized upon delivery to the
client. Further, since revenue will be recognized over time for
manufacturing contracts, future net sales will include amounts
related to products that are in production as of the period end.
Finally, the gross margin realized in the period may be impacted by
the changes related to the timing and amount of revenue recognized
for products in the production process.
The changes noted above involving the timing of revenue recognition
will materially impact the amount of reported assets and
liabilities associated with our manufacturing contracts. Upon
adoption of Topic 606, the Company will include amounts recognized
in revenue for products in production in contract assets, which
differs from the current practice of including the balances in
inventory and will include an amount for the margin recognized to
date. The Company believes that it will no longer report inventory
held for customer orders since revenue will be recognized over time
during the course of the production process and before the product
is delivered to the customer. The Company expects that contract
liabilities will be reported for amounts collected from customers
in advance of the production of products. The Company also expects
that the amount of deferred revenue will be substantially reduced
as revenue for products will be recognized over time.
The Company does not anticipate a change in the timing of cash
receipts and payments from customers as customers will continue to
be invoiced as products are completed; however, the impact to the
amounts reported in the consolidated statements of cash flows
operating activities upon application of Topic 606 is expected to
be material.
The Company has a project plan in place for the transition to
revenue recognition in accordance with Topic 606 including
necessary changes to accounting processes and procedures, the chart
of accounts, the system of internal control and retrospective
application of the standard to periods beginning January 1,
2016 through December 31, 2017. The Company expects to
complete the plan in time to report in accordance with Topic 606
for the first quarterly filing on Form 10-Q
Cash Flow Presentation
In August 2016, the FASB issued ASU 2016-15, Classification of Certain
Cash Receipts and Cash Payments 2016-18, Restricted Cash 2016-15 2016-18
Leases
In February 2016, the FASB issued ASU 2016-02, Leases 2016-02 2016-02, 2016-02 2016-02
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
– Credit Losses: Measurement of Credit Losses on Financial
Instruments 2016-13 2016-13 2016-13 | Note 1. Summary of Operations and Significant Accounting
Policies
(a) Description of Business and Basis of
Presentation
TPI Composites, Inc. is the holding company that conducts
substantially all of its business operations through its direct and
indirect subsidiaries (collectively, the Company). The Company was
founded in 1968 and has been providing 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. The
Company 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; Fall River, Massachusetts; Warren, Rhode Island and
Santa Teresa, New Mexico and international facilities in Dafeng,
China; Taicang Port, China; Taicang City, China; Juárez,
Mexico and Izmir, Turkey.
The Company divides its business operations into four geographic
operating segments—the United States, Asia, Mexico and
Europe, the Middle East and Africa (EMEA), as follows:
• The U.S. segment includes
(1) the manufacturing of wind blades at the Newton, Iowa
plant, (2) the manufacturing of precision molding and assembly
systems used for the manufacture of wind blades at the Warren,
Rhode Island facility, (3) the manufacturing of composite
solutions for the transportation industry, which the Company also
conducts at its Rhode Island and Massachusetts facilities and
(4) its corporate headquarters, the costs of which are
included in general and administrative expenses.
• The Asia segment includes
(1) the manufacturing of wind blades at the facility in
Taicang Port, China and at its two facilities in Dafeng, China,
(2) the manufacturing of precision molding and assembly
systems at the Taicang City, China facility, (3) the
manufacture of components at the second Taicang Port, China
facility and (4) wind blade inspection and repair
services.
• The Mexico segment manufactures wind
blades from its three facilities in Juárez, Mexico, one of
which commenced operations in 2014, the second during the third
quarter of 2016 and the third in January 2017.
• The EMEA segment manufactures wind
blades from its two facilities in Izmir, Turkey. The Company
entered into a joint venture in 2012 to produce wind blades at the
first Turkey plant and in 2013 became the sole owner of the Turkey
operation with the acquisition of the remaining 25% interest. The
EMEA segment commenced operations at its second facility during the
third quarter of 2016.
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.
(b) Initial Public Offering and Stock Split
In July 2016, the Company completed an initial public offering
(IPO) of 7,187,500 shares of its common stock at a price of
$11.00 per share, which included 937,500 shares issued pursuant to
the underwriters’ exercise of their option to purchase
additional shares. Certain of the Company’s existing
shareholders, a director and executive officers purchased an
aggregate of 1,250,000 shares of common stock in the IPO included
in the total issuance above. The net proceeds from the IPO were
$67.2 million after deducting underwriting discounts and offering
expenses. Immediately prior to the closing of the IPO, all shares
of the then-outstanding redeemable preferred shares converted
into an aggregate of 21,110,204 shares of common stock and the
redeemable preferred share warrants converted on a net issuance
basis into 120,923 shares of common stock. In addition, concurrent
with the closing of the IPO, certain subordinated convertible
promissory notes in the aggregate principal and interest amount of
$11.9 million were converted into 1,079,749 shares of common stock
at the public offering price of $11.00 per share.
Prior to the IPO, in July 2016 the Company amended its amended and
restated certificate of incorporation to effect a 360-for-1 forward
stock split of its common stock. As a result of the stock split,
the Company has adjusted the share amounts authorized and issuable
under the share-based compensation plans. All share and per share
common stock information (including the share-based compensation
plans) referenced throughout the consolidated financial statements
and notes thereto have been retroactively adjusted to reflect this
stock split. The stock split did not cause an adjustment to the par
value of the authorized shares of common stock.
(c) Revenue Recognition
The Company records all sales of goods when a firm sales agreement
is in place, delivery has occurred as defined by the sales
contract, and collectability of the fixed or determinable sales
price is reasonably assured. The basic criteria necessary for
revenue recognition are: (1) evidence that a sales arrangement
exists, (2) title and risk of loss have passed to the
customer, (3) delivery of goods has occurred, (4) the
seller’s price to the buyer is fixed or determinable and
(5) collectability is reasonably assured. The Company
recognizes revenue at the time of delivery to customers as all
criteria necessary for revenue recognition have occurred at this
point.
For multiple deliverable revenue arrangements, the Company
allocates revenue to each element based on a selling price
hierarchy. The selling price for a deliverable is based on its
vendor specific objective evidence (VSOE) if available, third-party
evidence (TPE) if VSOE is not available, or best estimated selling
price (BESP) if neither VSOE nor TPE is available. The Company
generally allocates revenue for each of the deliverables within
multiple element arrangements through BESP using cost plus margin
estimates prepared during contract negotiations and agreed upon
sales price. The precision molding and assembly systems provided
for in each customer’s contract are based upon the specific
engineering requirements and design of the customer relative 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 margin is applied based on the location
the work is to be performed, customer and complexity of the
customer’s design. Precision molding and assembly systems are
built to produce wind blades which are manufactured in production
runs specified in the customer contract. To determine the
appropriate accounting for recognition of revenue, the Company
considers whether the deliverables specified in the multiple
element arrangement should be treated as separate units of
accounting, and, if so, how the price should be allocated among the
elements, when to recognize revenue for each element, and the
period over which revenue should be recognized. The Company also
evaluates whether a delivered item has value on a stand-alone basis
prior to delivery of the remaining items by determining whether the
Company has made separate sales of such items or whether the
undelivered items are essential to the functionality of the
delivered items. Further, the Company assesses whether the fair
value of the undelivered items is known, determined by reference to
stand-alone sales of such items, if available, or BESP. As each of
these items has stand-alone value to the customer, revenue from
sales of wind blades and precision molding and assembly systems
used in the production of composite products are recognized when
those specific items are accepted by the customer as meeting the
contractual technical specifications and delivered to the customer.
Delivery of wind blades and precision molding and assembly systems
generally takes place as defined in the contract at the facility
where the precision molding and assembly systems are produced at
which point the precision molding and assembly systems become
exclusive property of the customer. The customer is generally then
responsible for transportation and may transport the composite mold
to its own or the Company’s wind blade production facility.
Revenue related to engineering and freight services provided under
customer contracts is recognized upon completion of the services
being provided. Customers usually pay the cost of shipping
associated with items produced directly to the carrier, but if paid
by the Company, that cost is included in cost of goods sold and
amounts invoiced for shipping and handling are included in
revenue.
The Company’s 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 composite products be stored by the Company in one
of its facilities. The Company will bill for the components as
allowed by the contract; however, revenue is deferred for financial
reporting purposes until the Company delivers the finished
composite product and all of the other requirements for revenue
recognition have been met. Composite products that have been billed
by the Company and continue to be stored by the Company at one of
its facilities are included at net realizable value in inventory
held for customer orders included on the consolidated balance
sheets. Inventory held for customer orders is physically segregated
from finished goods and is accounted for separately within the
Company’s accounting records.
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; however, 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.
(d) Cost of Goods Sold
Cost of goods sold includes the costs associated with products
invoiced during the period as well as unallocated manufacturing
overhead costs associated with startup and transition costs. Cost
of sales includes all costs incurred at the Company’s
production facilities to make products saleable, such as raw
materials, direct labor and indirect labor and facilities costs
including purchasing and receiving costs, plant management,
inspection costs, product engineering and internal transfer costs.
In addition, all depreciation associated with assets used to
produce composite products and make them saleable is included in
cost of sales. Direct labor costs consist of salaries, benefits and
other personnel related costs for employees engaged in the
manufacture of the Company’s products.
Startup and transition costs represent the unallocated factory
overhead relating to the transition of wind blade models at the
request of the Company’s customers and startup costs related
to new manufacturing facilities. The startup and transition costs
are primarily fixed overhead costs, incurred during the period
production facilities are under-utilized while transitioning wind
blade models and ramping up manufacturing that are not allocated to
products and are expensed as incurred. 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, manufacturing overhead as a
percentage of net sales is 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
the Company’s facilities includes virtually all indirect
costs incurred at the plants, including engineering, finance,
information technology, human resources and plant management.
(e) General and Administrative Expense
General and administrative expenses are primarily incurred at the
Company’s corporate headquarters and research facilities and
include salaries, benefits and other personnel related costs for
employees engaged in research and development, engineering,
finance, 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. For the years ended December 31, 2016,
2015 and 2014, total research and development expenses (included in
general and administrative expenses) totaled $1.5 million, $0.9
million and $0.8 million, respectively.
(f) 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, 2016 and 2015, the Taicang plants had
unrestricted cash of $8.3 million and $5.1 million,
respectively, in bank accounts in China. As of December 31,
2016 and 2015, the Dafeng plant had unrestricted cash of $4.0
million and $0.2 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. The Company has provided fully
cash-collateralized letters of credit in connection with certain
facility leases and with one of the Company’s workers’
compensation providers totaling $2.3 million and
$1.8 million, respectively. These amounts are reported as
restricted cash in the Company’s consolidated balance sheets.
Also, as of December 31, 2016 and 2015, the Company maintained
long-term deposits in interest bearing accounts, related to fully
cash-collateralized letters of credit in connection with the
facility leases at our Mexico locations and an equipment lessor in
Iowa, totaling $8.5 million and $2.5 million, respectively. See
Note 9, Other Noncurrent Assets.
(g) Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and
generally do not bear interest. The Company follows 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
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. The Company records 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-worthiness of individual customers, economic
conditions affecting specific customer industries, and economic
conditions in general. The Company charges-off accounts receivable
after all reasonable collection efforts have been exhausted. The
Company credits payments subsequently received on such receivables
to bad debt expense in the period payment is received. The Company
records delinquent finance charges on outstanding accounts
receivables only if they are collected. The Company wrote off $0.5
million during 2016 and did not write off any material amounts due
during 2015 or 2014, and does not have any off-balance-sheet credit
exposure related to its customers. See Note 4, Accounts
Receivable.
(h) Inventories
Inventory is 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 raw materials and specific
identification for work in process and finished goods inventories.
Actual cost includes the cost of materials, direct labor, and
applied manufacturing overhead. 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. See Note 5,
Inventories
(i) 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, Property, Plant and Equipment, Net.
Estimated useful lives
Machinery and equipment 7–10 years
Buildings 20 years
Leasehold improvements
5 to 10 years, or
Office equipment and software 3 to 5 years
Furniture 5 years
Vehicles 5 years
(j) Recoverability of Long-Lived Assets
The Company reviews 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.
(k) Goodwill and Intangible Assets
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, the Company uses a
two-step approach. Step 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, there is a potential impairment and step two must be
performed. Step two compares the carrying value of the reporting
unit’s goodwill to its implied fair value (i.e., fair value
of reporting unit less the fair value of the unit’s assets
and liabilities, including identifiable intangible assets). If the
implied fair value of goodwill is less than the carrying amount of
goodwill, impairment is recognized for that difference. The Company
may first assess qualitative factors to determine whether it is
necessary to perform the two-step quantitative goodwill impairment
test. The Company performed its annual goodwill impairment test
during 2016 and determined that it is more-likely-than-not that its
fair value exceeds its carrying amount.
Intangible assets were acquired in a business acquisition and
provide contractual or legal rights, or other future benefits that
could be separately identified. The Company’s 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. See Note 8,
Intangible Assets, Net.
(l) Warranty Expense
The Company provides a limited warranty for its mold and wind blade
products, including parts and labor, with terms and conditions that
vary depending on the product sold, for periods that range from two
to five years. Warranty expense is recorded based upon
estimates of future repairs using a probability-based methodology.
Once the warranty period has expired, any remaining unused warranty
accrual for the specific products is reversed against the current
year warranty expense amount. See Note 10, Accrued
Warranty
(m) Foreign Currency Translation Adjustments
The reporting currency of the Company is the U.S. dollar.
However, the Company has non-U.S. operating segments in Mexico,
Turkey and China.
• The U.S. parent companies of the
three Mexico operations, each of which are wholly-owned
subsidiaries of TPI Composites, Inc., maintain their books and
records in U.S. dollars.
• The Mexico operations maintain their
books and records through multiple legal entities that are
denominated in the local Mexican currency, the Peso.
• The Turkey operations maintain their
books and records in the local Turkish currency, the Lira.
• TPI China, LLC, the U.S. parent
company of the China operations and a wholly-owned subsidiary of
TPI Composites, Inc., maintains its books and records in U.S.
dollars.
• The Taicang Port, Dafeng and Taicang
City operations maintain their books and records in the local
Chinese currency, the Renminbi.
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 foreign subsidiaries
are translated at the average exchange rates during the respective
periods. Foreign currency transaction gains and losses are reported
in realized gain (loss) on foreign currency remeasurement in the
Company’s consolidated statements of operations. Translation
adjustments are reported in accumulated other comprehensive income
(loss) in the Company’s consolidated balance sheets. Currency
translation adjustments for the years ended December 31, 2016,
2015 and 2014 amounted to losses of $3.8 million, $2.4 million and
$0.1 million, respectively.
(n) Share-Based Compensation
The Company maintains two active incentive compensation plans: the
2008 Stock Option and Grant Plan and the Amended and Restated 2015
Stock Option and Incentive Plan (the 2015 Plan). In May 2015, the
Company’s board of directors and shareholders 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, restricted stock
awards, unrestricted stock awards, cash-based awards, performance
share awards and dividend equivalent rights to certain 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 the common
stock of the Company on the date of grant, as determined by the
Compensation Committee of the 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.
The Company measures share-based compensation expense for stock
options using the estimated fair value of the related award on the
date of grant using the Black-Scholes valuation model as of the
grant date using the following assumptions:
Expected Volatility
Expected Life (years)
Risk-Free Interest Rate
Dividend Yield
Expected Vesting Period
Share-based compensation expense related to restricted stock units
is expensed over the vesting period using the straight-line method
for Company employees and the Company’s board of directors.
The restricted stock units do not have voting rights. The Company
calculates the fair value of share-based awards on the date of
grant for employees and directors. The Company calculates the fair
value of share-based awards to consultants on the date of vesting.
Forfeitures are estimated at the time of grant and revised in
subsequent periods if actual forfeitures differ from those
estimates.
(o) Leases
Leases are classified as either operating leases or capital leases.
Assets acquired under capital leases are amortized on the same
basis as similar property, plant and equipment. Rental payments,
including rent holidays, leasehold incentives, and scheduled rent
increases are expensed on a straight-line basis. Leasehold
improvements are amortized over the shorter of the depreciable
lives of the corresponding fixed assets or the lease term including
any applicable renewals.
(p) Debt Issuance Costs and Discount
Costs associated with the issuance of debt and debt issuance
discounts are presented net of the related debt and are amortized
over the term of the debt using the effective interest rate method.
See Note 1, Summary of Operations and Significant Accounting
Policies – (u) Recently Issued Accounting
Pronouncements
(q) Income Taxes
Income taxes are accounted for under the asset and liability method
in accordance with Financial Accounting Standards Board (FASB)
Accounting Standard Codification (ASC) Topic 740, Income
Taxes Income Taxes.
(r) Net Income Per Share Calculation
The basic net income per common share is computed by dividing the
net income 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, adjusted on an as-if-converted
basis, by the weighted-average number of common shares outstanding
plus potentially dilutive securities. The table below reflects the
calculation of the weighted-average number of common shares
outstanding, on an as if converted basis, used in computing basic
and diluted earnings per common share for the years ended
December 31 (in thousands):
2016
2015
2014
Basic weighted-average shares outstanding 17,530 4,238 4,238
Effect of dilutive stock options and warrants 86 — —
Diluted weighted-average shares outstanding 17,616 4,238 4,238
The Company did not have potential dilutive securities that are not
shown in the diluted net income per share calculation for the year
ended December 31, 2016. The Company had potentially dilutive
securities of 4,571,007 outstanding for each of the years ended
December 31, 2015 and 2014 that are not shown in the diluted
net loss per share calculation because their effect would be
anti-dilutive. The potentially dilutive securities excluded from
the calculation include common shares issued upon conversion or
exercise of options and warrants.
Assuming that the IPO had occurred on January 1, 2014, diluted
earnings per share would have been $0.41, $0.23 and a loss of $0.20
for the years ended December 31, 2016, 2015 and 2014,
respectively.
(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 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 and deferred tax
assets, inventory valuation, relative selling prices for revenue
recognition, fair value of stock options and warrants, warranty
reserves and other contingencies.
(t) Fair Value of Financial Instruments
FASB ASC Topic 820, Fair Value Measurements
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 the Company’s own estimate
of assumptions that market participants would use in pricing the
asset or liability.
The carrying amounts of 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 capital loans approximates fair value due to
their short term nature and the loans carry a current market rate
of interest, a level 2 input. The carrying value of long-term debt
approximates fair value based on its variable rate index or based
upon market interest rates available to the Company for debt of
similar risk and maturities, both of which are level 2 inputs.
(u) Recently Issued Accounting Pronouncements
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued Accounting Standards Update (ASU)
2015-03, Simplifying the Presentation of Debt Issuance
Costs Long Term Debt, Net of Debt Issuance Costs
and Discount
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update (ASU)
2014-09, Revenue from Contracts with Customers
The new requirements are effective for the Company beginning
January 1, 2018, and may be implemented either retrospectively
for all periods presented, or as a cumulative-effect adjustment as
of the date of adoption.
The Company expects to adopt Topic 606 as of January 1, 2018
with retrospective application to January 1, 2016 through
December 31, 2017. Based on the Company’s preliminary
evaluation of the new standard, revenue recognition in accordance
with Topic 606 differs from the current guidance provided by GAAP
as outlined in the SEC’s Staff Accounting Bulletin 104, which
requires the Company to defer recognition of revenue until the risk
of loss has passed to the customer and delivery has been made or a
fixed delivery schedule has been provided by the customer. Since
the Company’s products have no alternative use to the Company
due to contractual restrictions placed by each customer on the
technical specifications and design of the products, the
Company’s preliminary assessment is that revenue upon
adoption of Topic 606 will likely be recognized over time during
the course of the production process and before the product is
delivered to the customer.
The Company expects that the adoption of Topic 606 will have a
material impact on the amount of net sales, cost of goods sold and
income from operations reported in the Consolidated Statements of
Operations in future periods. In accordance with Topic 606,
revenues will be recognized over the time period of the production
process, whereas currently it is recognized upon delivery to the
client. Further, since revenue will be recognized over time for
manufacturing contracts, future net sales will include amounts
related to products that are in production as of the period end.
Finally, the gross margin realized in the period may be impacted by
the changes related to the timing and amount of revenue recognized
for products in the production process.
The changes noted above involving the timing of revenue recognition
will materially impact the amount of reported assets and
liabilities associated with our manufacturing contracts. Upon
adoption of Topic 606, the Company will include amounts recognized
in revenue for products in production in contract assets, which
differs from the current practice of including the balances in
inventory and will include an amount for the margin recognized to
date. The Company believes that it will no longer report inventory
held for customer orders since revenue will be recognized over time
during the course of the production process and before the product
is delivered to the customer. Contract liabilities will be reported
for amounts collected from customers in advance of the production
of products. The amount of deferred revenue will be substantially
reduced as revenue for products will be recognized over time.
The Company does not anticipate a change in the timing of cash
receipts and payments from customers as customers |
