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EX-32.2 - EX-32.2 - TPI COMPOSITES, INCtpic-ex322_8.htm
EX-32.1 - EX-32.1 - TPI COMPOSITES, INCtpic-ex321_9.htm
EX-31.2 - EX-31.2 - TPI COMPOSITES, INCtpic-ex312_7.htm
EX-31.1 - EX-31.1 - TPI COMPOSITES, INCtpic-ex311_6.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-37839

 

TPI Composites, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-1590775

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

8501 N. Scottsdale Rd.

Gainey Center II, Suite 100

Scottsdale, AZ 85253

(480) 305-8910

(Address, including zip code, and telephone number,

including area code, of registrant’s principal executive offices)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of April 28, 2017, there were 33,736,863 shares of common stock outstanding.

 


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

  

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016

 

1

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016

 

2

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2017 and 2016

 

3

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016

 

4

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

 

5

 

 

 

 

 

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

15

 

 

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

 

27

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

 

28

 

 

 

 

 

ITEM 1A.

  

Risk Factors

 

28

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Securities and Use of Proceeds

 

28

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

 

28

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

 

28

 

 

 

 

 

ITEM 5.

  

Other Information

 

28

 

 

 

 

 

ITEM 6.

  

Exhibits

 

29

 

 

 

 

 

SIGNATURES

 

30

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

 

growth of the wind energy market and our addressable market;

 

the potential impact of General Electric’s acquisition of LM Wind Power upon our business;

 

our future financial performance, including our net sales, cost of goods sold, gross profit or gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve or maintain profitability;

 

the sufficiency of our cash and cash equivalents to meet our liquidity needs;

 

our ability to attract and retain customers for our products, and to optimize product pricing;

 

competition from other wind blade and wind blade turbine manufacturers;

 

the discovery of defects in our products;

 

our ability to successfully expand in our existing markets and into new international markets;

 

worldwide economic conditions and their impact on customer demand;

 

our ability to effectively manage our growth strategy and future expenses;

 

our ability to maintain, protect and enhance our intellectual property;

 

our ability to comply with existing, modified or new laws and regulations applying to our business, including the imposition of new taxes, duties or similar assessments on our products; and

 

the attraction and retention of qualified employees and key personnel.

These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 17, 2017 (the Annual Report on Form 10-K) the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.

The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to update any forward-looking statement to reflect events or developments after the date on which the statement is made or to reflect the occurrence of unanticipated events except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM l. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except par value data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,541

 

 

$

119,066

 

Restricted cash

 

 

1,928

 

 

 

2,259

 

Accounts receivable (Note 3)

 

 

96,564

 

 

 

67,842

 

Inventories

 

 

51,947

 

 

 

53,095

 

Inventories held for customer orders

 

 

68,675

 

 

 

52,308

 

Prepaid expenses and other current assets

 

 

23,839

 

 

 

30,657

 

Total current assets

 

 

358,494

 

 

 

325,227

 

Property, plant, and equipment, net

 

 

103,486

 

 

 

91,166

 

Other noncurrent assets

 

 

15,961

 

 

 

20,813

 

Total assets

 

$

477,941

 

 

$

437,206

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

123,390

 

 

$

112,281

 

Accrued warranty

 

 

21,895

 

 

 

19,912

 

Deferred revenue (Note 3)

 

 

89,319

 

 

 

69,568

 

Customer deposits and customer advances

 

 

6,217

 

 

 

1,390

 

Current maturities of long-term debt

 

 

32,474

 

 

 

33,403

 

Total current liabilities

 

 

273,295

 

 

 

236,554

 

Long-term debt, net of debt issuance costs and current maturities

 

 

88,015

 

 

 

89,752

 

Other noncurrent liabilities

 

 

4,565

 

 

 

4,393

 

Total liabilities

 

 

365,875

 

 

 

330,699

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

Shareholders’ equity: (Note 3)

 

 

 

 

 

 

 

 

Preferred shares, $0.01 par value, 5,500 shares authorized, no shares issued

   or outstanding at March 31, 2017 and December 31, 2016

 

 

 

 

 

 

Common shares, $0.01 par value, 100,000 shares authorized and 33,737

   shares issued and outstanding at March 31, 2017 and December 31, 2016

 

 

337

 

 

 

337

 

Paid-in capital

 

 

295,292

 

 

 

292,833

 

Accumulated other comprehensive loss

 

 

(3,585

)

 

 

(3,862

)

Accumulated deficit

 

 

(179,978

)

 

 

(182,801

)

Total shareholders’ equity

 

 

112,066

 

 

 

106,507

 

Total liabilities and shareholders’ equity

 

$

477,941

 

 

$

437,206

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

1


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

 

 

Three Months Ended

 

 

March 31,

 

 

2017

 

 

2016

 

 

(Unaudited)

 

Net sales (Note 3)

$

191,602

 

 

$

176,110

 

Cost of sales

 

167,423

 

 

 

159,866

 

Startup and transition costs

 

6,159

 

 

 

3,306

 

Total cost of goods sold

 

173,582

 

 

 

163,172

 

Gross profit

 

18,020

 

 

 

12,938

 

General and administrative expenses

 

8,306

 

 

 

4,749

 

Income from operations

 

9,714

 

 

 

8,189

 

Other income (expense):

 

 

 

 

 

 

 

Interest income

 

19

 

 

 

21

 

Interest expense

 

(3,026

)

 

 

(3,912

)

Realized loss on foreign currency remeasurement

 

(1,381

)

 

 

(439

)

Miscellaneous income

 

320

 

 

 

190

 

Total other expense

 

(4,068

)

 

 

(4,140

)

Income before income taxes

 

5,646

 

 

 

4,049

 

Income tax provision

 

(2,101

)

 

 

(2,303

)

Net income

 

3,545

 

 

 

1,746

 

Net income attributable to preferred shareholders

 

 

 

 

2,437

 

Net income (loss) attributable to common shareholders

$

3,545

 

 

$

(691

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

Basic

 

33,737

 

 

 

4,238

 

Diluted

 

33,827

 

 

 

4,238

 

Net income (loss) per common share:

 

 

 

 

 

 

 

Basic

$

0.11

 

 

$

(0.16

)

Diluted

$

0.10

 

 

$

(0.16

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Net income

 

$

3,545

 

 

$

1,746

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

277

 

 

 

428

 

Comprehensive income

 

$

3,822

 

 

$

2,174

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 


3


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

3,545

 

 

$

1,746

 

Adjustments to reconcile net income to net cash provided by (used in)

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,829

 

 

 

3,011

 

Share-based compensation expense

 

 

1,707

 

 

 

 

Amortization of debt issuance costs

 

 

143

 

 

 

412

 

Amortization of debt discount

 

 

 

 

 

755

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(28,722

)

 

 

(14,119

)

Inventories

 

 

(15,220

)

 

 

(5,274

)

Prepaid expenses and other current assets

 

 

6,816

 

 

 

(8,346

)

Other noncurrent assets

 

 

5,871

 

 

 

(2,959

)

Accounts payable and accrued expenses

 

 

11,211

 

 

 

6,801

 

Accrued warranty

 

 

1,983

 

 

 

14,339

 

Customer deposits

 

 

4,827

 

 

 

2,542

 

Deferred revenue

 

 

19,751

 

 

 

(493

)

Other noncurrent liabilities

 

 

197

 

 

 

446

 

Net cash provided by (used in) operating activities

 

 

15,938

 

 

 

(1,139

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(16,922

)

 

 

(10,888

)

Net cash used in investing activities

 

 

(16,922

)

 

 

(10,888

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Repayment of term loan

 

 

(938

)

 

 

 

Net proceeds from (repayments of) accounts receivable financing

 

 

(1,233

)

 

 

6,800

 

Net proceeds from (repayments of) working capital loans

 

 

517

 

 

 

(4,958

)

Net repayments of other debt

 

 

(1,155

)

 

 

(1,192

)

Proceeds from customer advances

 

 

 

 

 

2,000

 

Restricted cash

 

 

331

 

 

 

(647

)

Net cash provided by (used in) financing activities

 

 

(2,478

)

 

 

2,003

 

Impact of foreign exchange rates on cash and cash equivalents

 

 

(63

)

 

 

(51

)

Net change in cash and cash equivalents

 

 

(3,525

)

 

 

(10,075

)

Cash and cash equivalents, beginning of year

 

 

119,066

 

 

 

45,917

 

Cash and cash equivalents, end of period

 

$

115,541

 

 

$

35,842

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

2,899

 

 

$

2,565

 

Cash paid for income taxes, net

 

 

4,146

 

 

 

1,426

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Accrued capital expenditures in accounts payable

 

 

2,569

 

 

 

760

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

4


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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 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 unaudited condensed 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.

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.

5


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

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. In April 2017, the Mexico segment entered into a multiyear supply agreement with Vestas to supply wind blades from two manufacturing lines at a new manufacturing facility that will be constructed in Matamoros, Mexico.

 

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 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. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted, as permitted by the SEC, although the Company believes the disclosures that are made are adequate to make the information presented herein not misleading. The accompanying condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2017, and the results of the Company’s operations, comprehensive income and cash flows for the periods presented. The Company derived the December 31, 2016 condensed consolidated balance sheet data from audited financial statements, but does not include all disclosures required by GAAP. Interim results for the three months ended March 31, 2017 and 2016 are not necessarily indicative of the results to be expected for the full years.

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.

6


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 (in thousands):

 

 

 

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.

7


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

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, to simplify certain aspects of the accounting for share-based payment transactions to employees.  The new standard requires excess tax benefits and tax deficiencies to be recorded in the consolidated statements of operations as a component of the provision for income taxes when stock awards vest or options are exercised.  In addition, it eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows.  Further, the standard provides an accounting policy election to account for forfeitures as they occur, allows us to withhold more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s consolidated statements of cash flows.  

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, (Topic 606), which provides new recognition and disclosure requirements for revenue from contracts with customers that supersedes the existing revenue recognition guidance. The new recognition requirements focus on when the customer obtains control of the goods or services, rather than the current risks and rewards model of recognition. The core principle of the new standard is that an entity will recognize revenue when it transfers goods or services to its customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services. The new disclosure requirements will include information intended to communicate the nature, amount, timing and any uncertainty of revenue and cash flows from the applicable contracts, including any significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. Entities will generally be required to make more estimates and use more judgment under the new standard.

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.

8


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 for the period ended March 31, 2018.

 

Cash Flow Presentation

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, that clarifies how certain cash receipts and cash payments are presented and classified in the consolidated statement of cash flows.  In addition, in November 2016, the FASB issued ASU 2016-18, Restricted Cash, that requires restricted cash and cash equivalents to be included with the amount of cash and cash equivalents that are reconciled to on the consolidated statement of cash flows.   These ASUs are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company does not believe that the adoption of ASU 2016-15 and 2016-18 on January 1, 2018 will have a material effect on the Company’s financial position or results of operations.  

Leases

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 is a comprehensive new recognition model for leases requiring a lessee to recognize the asset and liability that arise from leases. For public companies, the amendment is effective for financial statements issued for annual periods beginning after December 16, 2018. Entities may elect to early adopt the lease standard in 2016. In adopting ASU 2016-02, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. Management is evaluating the provisions of ASU 2016-02 and has not yet selected a transition method nor determined what impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of operations.

Financial Instruments

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU 2016-13 revises the accounting requirements related to the measurement of credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years and interim periods within those years, beginning after December 15, 2018. Accordingly, ASU 2016-13 is effective for the Company on January 1, 2020 using a modified retrospective approach, and the Company is currently evaluating the impact that the standard will have on the Company’s financial position and results of operations.

9


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

    

 

 

Note 2. Significant Risks and Uncertainties

The Company’s revenues and receivables are from a small number of customers. As such, the Company’s production levels are dependent on these customers’ orders. See note 11, Concentration of Customers.

The Company maintains its U.S. cash in bank deposit 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 2017 and 2016. At March 31, 2017 and December 31, 2016, the Company had $97.8 million and $103.4 million, respectively, of cash in deposit accounts in high quality U.S. banks, which was in excess of FDIC limits. The Company has not experienced losses in any such accounts.

The Company also maintains cash in bank deposit accounts outside the U.S. with no deposit insurance. This includes $14.8 million in China, $1.9 million in Turkey and $1.0 million in Mexico as of March 31, 2017. The Company has not experienced losses in these accounts in the past.

 

 

Note 3. Related-Party Transactions

Related party transactions include transactions between the Company and certain of its 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.

The Company has 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, holder of preferred shares and currently is a holder of common shares.

The Company has entered into five separate supply agreements with GE to manufacture wind blades in Newton, Iowa; Taicang Port, China; Juárez, Mexico (2) and Izmir, Turkey. As a result of the supply agreements, GE is the Company’s largest customer. As disclosed at note 11, Concentration of Customers, for the three months ended March 31, 2017 and 2016, the Company recorded related-party sales with GE of $84.9 million and $96.2 million, respectively. As of March 31, 2017 and December 31, 2016, the Company had accounts receivables related to sales to GE of $25.1 million and $16.6 million, respectively.

Since 2007, the Company has issued multiple series of preferred shares, including several preferred share issuances to GE. Immediately prior to the closing of the IPO, all shares of the then-outstanding preferred shares were converted into shares of common stock. As a result of these transactions, GE owned 8.4% of the Company’s outstanding common stock as of March 31, 2017.

In January 2016, the Company entered into an agreement with GE and received an advance of $2.0 million, which the Company repaid in full in August 2016.

Certain of the Company’s existing stockholders, consisting of entities associated with Element Partners, Angeleno Group and Landmark Partners, each of which is an affiliate of a member of the board of directors, as well as certain executive officers and a director, purchased an aggregate of 1,250,000 shares of common stock in the IPO. In addition, all outstanding obligations and accrued interest under the Company’s subordinated convertible promissory notes held by certain existing stockholders, including Element Partners, Angeleno Group and Landmark Partners, were converted into an aggregate of 1,079,749 shares of common stock concurrent with the closing of the IPO at the public offering price of $11.00 per share.

 

 

Note 4. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Trade accounts receivable

 

$

93,979

 

 

$

66,612

 

Other accounts receivable

 

 

2,585

 

 

 

1,230

 

Total accounts receivable

 

$

96,564

 

 

$

67,842

 

10


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Note 5. Inventories

Inventories consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

26,551

 

 

$

29,278

 

Work in process

 

 

23,915

 

 

 

21,169

 

Finished goods

 

 

1,481

 

 

 

2,648

 

Total inventories

 

$

51,947

 

 

$

53,095

 

 

 

Note 6. Property, Plant, and Equipment, Net

Property, plant and equipment, net consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Machinery and equipment

 

$

77,330

 

 

$

70,481

 

Buildings

 

 

13,590

 

 

 

13,449

 

Leasehold improvements

 

 

17,994

 

 

 

16,818

 

Office equipment and software

 

 

8,945

 

 

 

6,403

 

Furniture

 

 

16,412

 

 

 

15,883

 

Vehicles

 

 

348

 

 

 

342

 

Construction in progress

 

 

16,349

 

 

 

11,592

 

Total

 

 

150,968

 

 

 

134,968

 

Accumulated depreciation and amortization

 

 

(47,482

)

 

 

(43,802

)

Property, plant and equipment, net

 

$

103,486

 

 

$

91,166

 

 

Total depreciation and amortization expense for the three months ended March 31, 2017 and 2016 was $3.8 million and $3.0 million, respectively.

 

Note 7. Long-Term Debt, Net of Debt Issuance Costs and Current Maturities

 

Long-term debt, net of debt issuance costs and current maturities, consisted of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Senior term loan—U.S.

 

$

74,063

 

 

$

75,000

 

Senior revolving loan—U.S.

 

 

2,820

 

 

 

2,820

 

Accounts receivable financing—EMEA

 

 

13,887

 

 

 

15,120

 

Unsecured financing—EMEA

 

 

5,155

 

 

 

4,638

 

Equipment financing—EMEA

 

 

16,112

 

 

 

15,813

 

Equipment capital lease—U.S.

 

 

1,431

 

 

 

2,016

 

Equipment capital lease—EMEA

 

 

1,499

 

 

 

1,898

 

Equipment capital lease—Mexico

 

 

7,580

 

 

 

8,037

 

Equipment loan—Mexico

 

 

89

 

 

 

103

 

Total long-term debt

 

 

122,636

 

 

 

125,445

 

Less: Debt issuance costs

 

 

(2,147

)

 

 

(2,290

)

Total long-term debt, net of debt issuance costs

 

 

120,489

 

 

 

123,155

 

Less: Current maturities of long-term debt

 

 

(32,474

)

 

 

(33,403

)

Long-term debt, net of debt issuance costs and

current maturities

 

$

88,015

 

 

$

89,752

 

 

11


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

Note 8. Share-Based Compensation Plans

The Company has granted stock option awards to certain employees and non-employee directors under the Amended and Restated 2015 Stock Option and Incentive Plan (the 2015 Plan). Each award granted prior to the consummation of the IPO included a performance condition that required the completion of an initial public offering by the Company 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, the Company 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. Total share-based compensation expense recognized during the three months ended March 31, 2017 was $1.7 million, of which $0.2 million is included in cost of goods sold and the remaining $1.5 million is included in general and administrative expenses. The amount related to restricted stock units was $0.5 million while $1.2 million related to stock options. No share-based compensation costs were capitalized during the three months ended March 31, 2017 and 2016.

As of March 31, 2017, the unamortized cost of the outstanding restricted stock units was $2.3 million, which the Company expects to recognize in the consolidated financial statements over a weighted-average period of approximately 1.7 years. The total unrecognized cost related to non-vested stock option awards was $6.0 million as of March 31, 2017. The Company expects to recognize such costs in the consolidated financial statements over a weighted-average period of approximately 2.0 years.

The following table summarizes the activity of the stock options and restricted stock units (RSU) under the Company’s incentive plans:

 

 

 

 

 

 

 

Stock Options

 

 

RSUs

 

 

 

Shares

Available

for Grant

 

 

Shares

 

 

Weighted-

Average

Exercise Price

 

 

Options

Exercisable

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited/cancelled

 

 

21,600

 

 

 

(21,600

)

 

 

16.53

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2017

 

 

4,958,767

 

 

 

3,309,818

 

 

 

12.70

 

 

 

25,828

 

 

 

636,120

 

 

 

10.90

 

 

The following table summarizes the outstanding and exercisable stock option awards as of March 31, 2017:

 

 

 

 

 

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

 

 

 

25,828

 

 

 

2.8

 

 

$

8.49

 

 

 

25,828

 

 

$

8.49

 

$10.87

 

 

 

2,278,800

 

 

 

8.2

 

 

 

10.87

 

 

 

 

 

 

 

$11.00 - $14.31

 

 

 

79,200

 

 

 

9.3

 

 

 

12.50

 

 

 

 

 

 

 

$

16.53

 

 

 

583,200

 

 

 

8.7

 

 

 

16.53

 

 

 

 

 

 

 

$17.68 - $18.70

 

 

 

342,790

 

 

 

9.2

 

 

 

18.68

 

 

 

 

 

 

 

$8.49 to $18.70

 

 

 

3,309,818

 

 

 

8.4

 

 

 

12.70

 

 

 

25,828

 

 

 

8.49

 

 

 

Note 9. Income Taxes

Income tax expense was $2.1 million and $2.3 million in the three months ended March 31, 2017 and 2016, respectively. Tax expense was primarily due to the operating results in China and Mexico. The United States and Turkey operations have not had a significant change to the full valuation allowances recorded against their deferred tax assets as of December 31, 2016. No changes in tax law since December 31, 2016 have had a material impact on the Company’s income tax provision.

 

 

12


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 10. Commitments and Contingencies

Legal Proceedings

The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

 

 

Note 11. Concentration of Customers

Revenues from certain customers in excess of 10 percent of total consolidated Company revenues (in thousands) are as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Customer

 

Revenues

 

 

% of Total

 

 

Revenues

 

 

% of Total

 

GE

 

$

84,910

 

 

 

44.3

%

 

$

96,151

 

 

 

54.6

%

Vestas

 

 

44,322

 

 

 

23.2

 

 

 

29,941

 

 

 

17.0

 

Nordex Group

 

 

33,559

 

 

 

17.5

 

 

 

29,664

 

 

 

16.8

 

Gamesa

 

 

26,262

 

 

 

13.7

 

 

 

18,137

 

 

 

10.3

 

Other

 

 

2,549

 

 

 

1.3

 

 

 

2,217

 

 

 

1.3

 

Total

 

$

191,602

 

 

 

100.0

%

 

$

176,110

 

 

 

100.0

%

 

Trade accounts receivable from certain customers in excess of 10 percent of total consolidated Company trade accounts receivable are as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Customer

 

% of Total

 

 

% of Total

 

GE

 

 

26.7

%

 

 

24.9

%

Vestas

 

 

36.1

%

 

 

26.2

%

Nordex Group

 

 

30.1

%

 

 

26.8

%

Gamesa

 

 

4.6

%

 

 

16.2

%

 

 

Note 12. Segment Reporting

The Company’s operating segments are defined geographically as the United States, Asia, Mexico and EMEA. Financial results are aggregated into four reportable segments based on quantitative thresholds. All of the Company’s segments operate in their local currency except for the China and Mexico segments, which both include a U.S. parent company.

13


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following tables set forth certain information (in thousands) regarding each of the Company’s segments:

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues by segment:

 

 

 

 

 

 

 

 

U.S.

 

$

46,540

 

 

$

51,761

 

Asia

 

 

66,732

 

 

 

64,352

 

Mexico

 

 

46,931

 

 

 

25,540

 

EMEA

 

 

31,399

 

 

 

34,457

 

Total revenues

 

$

191,602

 

 

$

176,110

 

Revenues by geographic location (1):

 

 

 

 

 

 

 

 

U.S.

 

$

46,540

 

 

$

51,761

 

China

 

 

66,732

 

 

 

64,352

 

Mexico

 

 

46,931

 

 

 

25,540

 

Turkey

 

 

31,399

 

 

 

34,457

 

Total revenues

 

$

191,602

 

 

$

176,110

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

U.S. (2)

 

$

(10,111

)

 

$

(661

)

Asia

 

 

14,704

 

 

 

15,542

 

Mexico

 

 

1,947

 

 

 

967

 

EMEA

 

 

3,174

 

 

 

(7,659

)

Total income from operations

 

$

9,714

 

 

$

8,189

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Property, plant and equipment, net:

 

 

 

 

 

 

 

 

U.S.

 

$

17,450

 

 

$

16,740

 

Asia (China)

 

 

27,462

 

 

 

26,341

 

Mexico

 

 

35,634

 

 

 

24,842

 

EMEA (Turkey)

 

 

22,940

 

 

 

23,243

 

Total property, plant and equipment, net

 

$

103,486

 

 

$

91,166

 

 

(1)

Revenues are attributable to countries based on the location where the product is manufactured or the services are performed.

(2)

The losses from operations in the U.S. segment includes corporate general and administrative costs of $8.3 million and $4.7 million for the three months ended March 31, 2017 and 2016, respectively.

 

 

Note 13. Subsequent Events

In April 2017, the Company entered into a multiyear supply agreement with Vestas to supply wind blades from two manufacturing lines at a new manufacturing facility that will be constructed in Matamoros, Mexico. The Company also granted Vestas an option to add additional manufacturing lines to the scope of the supply agreement. The Company expects this new manufacturing facility will commence operations in the first half of 2018 and that the wind blades produced at this manufacturing facility will primarily serve wind markets in Mexico, Central America and South America.

In April 2017, the Company amended its Restated Credit Facility to increase the letter of credit sub-facility from $15.0 million to $20.0 million.

 

 

 

14


 

ITEM 2. 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 condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q (“Form 10-Q”). Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, 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 Form 10-Q or in our previously filed Annual Report on Form 10-K, particularly those under “Risk Factors.”

OVERVIEW

Our Company

We are the largest U.S.-based independent manufacturer of composite wind blades. We enable many of the industry’s leading wind turbine original equipment manufacturers (OEM), who have historically relied on in-house production, to outsource 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 reliability 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 supplier to our OEM customers in the manufacture of wind blades and related precision molding 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. As of April 28, 2017, our long-term supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.7 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of over approximately $4.2 billion through the end of 2023. 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. Our wind blade and precision molding and assembly systems manufacturing businesses accounted for approximately 99% of our total net sales in each of the three month periods ended March 31, 2017 and 2016.

We divide our business operations into four geographic operating segments—the United States, Asia, Mexico and Europe, the Middle East and Africa, or EMEA, 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 for the manufacture of wind blades in our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which we also conduct in our Rhode Island and Massachusetts facilities and (4) our corporate headquarters, the costs of which are included in general and administrative expenses.

 

Our Asia segment includes (1) the manufacturing of wind blades in facilities in Taicang Port, China and in two facilities in Dafeng, China, (2) the manufacturing of precision molding and assembly systems in our Taicang City, China facility, (3) the manufacture of components in our second Taicang Port, China facility and (4) wind blade inspection and repair services.

 

Our 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. In April 2017, we entered into a multiyear supply agreement with Vestas to supply wind blades from two manufacturing lines at a new manufacturing facility that will be constructed in Matamoros, Mexico.

 

Our EMEA segment manufactures wind blades from our two facilities in Izmir, Turkey. We entered into a joint venture in 2012 to produce wind blades at our first Turkey plant and in 2013 became the sole owner of the Turkey operation with the acquisition of the remaining 25% interest. Our EMEA segment commenced operations at our second facility during the third quarter of 2016.

COMPONENTS OF RESULTS OF OPERATIONS

Net Sales

Net sales reflect sales of our products, including wind blades, precision molding and assembly systems and transportation products, as well as fees and other amounts paid by our customers to compensate us for our costs and capital expenditures associated with wind blade model transitions. Several factors affect net sales in any period, including customer demand, wind blade model transitions,

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general economic conditions and weather conditions. We currently derive an immaterial amount of net sales from our transportation business. Under GAAP, we do not recognize revenue on our wind blade sales until the wind blades have been delivered to our customers. 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 15 to 65 days after receipt of the invoice based on negotiated payment terms. However, in many cases, our customers request that we store their wind blades until they are ready to assemble wind turbines at a particular wind farm project. We have no control over when our customers decide to ship wind blades from our storage sites, and in some cases, our customers have stored large numbers of their wind blades at our sites for six months or more. Even if the customer has paid us for the wind blades and title has passed to the customer, we do not recognize revenue for these wind blades until the wind blades have been delivered to the customer. Instead, these transactions are recorded as deferred revenue in our condensed consolidated financial statements.

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 our 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 our products.

Startup costs represent the unallocated overhead related to both new manufacturing facilities as well as new lines in existing manufacturing facilities. Transition costs represent the unallocated overhead related to the transition of wind blade models at the request of our customers. 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, which 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 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 are primarily 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, 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 each of the three months ended March 31, 2017 and 2016, our research and development expenses (included in general and administrative expenses) totaled $0.3 million.

Other Income (Expense)

Other income (expense) consists primarily of interest expense on our credit facilities and the amortization of deferred financing costs and beneficial conversion features related to our debt borrowings. Other income (expense) also includes realized gains and losses on foreign currency remeasurement, interest income and miscellaneous income and expense.

Income Tax Provision

Income tax provision consists of federal, state, provincial, local and foreign taxes based on income in jurisdictions in which we operate, including in the United States, China, Mexico and Turkey. The composite income tax rate, tax provisions, deferred tax assets and deferred tax liabilities vary according to the jurisdiction in which the income (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.

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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.

KEY FINANCIAL MEASURES

In addition to measures of financial performance presented in our condensed consolidated financial statements in accordance with GAAP, we use certain other financial measures and operating metrics to analyze the performance of our company. The “non-GAAP” financial measures consist of total billings, EBITDA, adjusted EBITDA and net 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, estimated megawatts (MWs) of energy capacity for wind blades invoiced, manufacturing lines dedicated to customers under long-term supply agreements, total manufac