TPI COMPOSITES, INC. 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, 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 only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. We deliver high-quality, cost-effective composite solutions through long term relationships with leading original equipment manufacturers (OEM) in the wind and transportation markets. We also provide field service inspection and repair services to our OEM customers and wind farm owners and operators, and supply high strength, lightweight and durable composite products to the transportation market. We are headquartered inScottsdale, Arizona and operate factories throughout theU.S. ,China ,Mexico ,Turkey , andIndia . We operate additional engineering development centers inDenmark andGermany . Our business operations are defined geographically into five geographic operating segments-(1)the United States (U.S. ), (2)Asia , (3)Mexico , (4)Europe , theMiddle East andAfrica (EMEA) and (5)India . See Note 14, Segment Reporting, to our condensed consolidated financial statements for more details about our operating segments.
KEY TRENDS AND RECENT DEVELOPMENTS AFFECTING OUR BUSINESS
Our results of operations for the three months endedSeptember 30, 2021 were adversely affected by significant production delays that occurred at theMatamoros, Mexico manufacturing facility that we took over fromNordex inJuly 2021 , as well as significant production delays in one of ourJuarez, Mexico manufacturing facilities in connection with the ongoing transition to an innovative new blade for one of our customers. We expect that production will be stabilized in both of these manufacturing facilities by the end of the year. Our results of operations for the three and nine months endedSeptember 30, 2021 were adversely impacted by continued supply chain challenges, raw material shortages and increased logistics costs. During 2021, there have been both significant price increases and supply constraints with respect to resin andcarbon fiber, which are key raw materials that we use to manufacture our products, as well as increases in logistics costs to obtain raw materials. The resin price increases and supply constraints are due to a multitude of factors, including the extreme cold weather inTexas inFebruary 2021 , fires at resin manufacturing facilities inChina and unplanned maintenance outages at resin manufacturing facilities inEurope .Carbon fiber prices have increased primarily due to the cost of raw material inputs as well as increased global demand forcarbon fiber across multiple industries. These raw material price and logistics cost increases adversely affected our results of operations by approximately$20 million and$24 million for the three and nine months endedSeptember 30, 2021 , respectively. We expect that the price of resin andcarbon fiber will remain at elevated levels for the remainder of 2021 and into 2022. Approximately 55% of the resin and resin systems we use are purchased under contracts either controlled or borne by two of our customers and therefore these customers receive/bear 100% of any decrease or increase in resin prices. With respect to our other customer supply agreements, our customers typically receive/bear 70% of any raw material price decreases or increases. After taking into account our contractual share of any price increases for resin andcarbon fiber, we estimate that the impact of these raw materials price increases, together with increased logistics costs, will adversely impact our results of operations by approximately$30 million for 2021. If the supply of resin feedstocks andcarbon fiber continue to be constrained for an extended period of time, such shortages could impact our ability to meet our customers' forecasted demand for our products for the remainder of 2021and into 2022 and have a further material adverse impact on our results of operations for the remainder of 2021 and 2022. Our manufacturing facility in Yangzhou,China was shut down for approximately three weeks during the three months endedSeptember 30, 2021 due to an outbreak of positive COVID-19 cases in Yangzhou City, which had an adverse impact on our results of operations for the three months endedSeptember 30, 2021 . We expect to make up the lost volume from this shut down in the fourth quarter of 2021. 26
-------------------------------------------------------------------------------- Despite this shutdown, the COVID-19 pandemic has not materially adversely affected our manufacturing operations during the nine months endedSeptember 30, 2021 . Although all of our manufacturing facilities currently are operating at or near normal production levels, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities to the extent there are new resurgences of COVID-19 cases in the regions where we operate or there is an outbreak of positive COVID-19 cases in any of our manufacturing facilities. However, our global supply chain has been adversely affected by the COVID-19 pandemic in 2021 and our global supply chain may continue to be adversely affected if the COVID-19 pandemic persists. In addition, certain of our customers directly control the purchase of certain key raw materials and components, including resin andcarbon . In 2021, these customers have had challenges procuring adequate supplies of resin andcarbon , which has had an adverse impact on our production volumes and results of operations. We expect decreased demand for our wind blades from our customers during the remainder of 2021 and 2022. We believe this decrease in demand is due to the continued global renewable energy regulatory and policy uncertainty and raw material cost increases mentioned above. The result is an expected adverse impact to our Adjusted EBITDA in 2021 of approximately$33 million . We believe that general optimism around potential legislation in theU.S. to extend the Production Tax Credit (PTC) on a long-term basis is causing developers to delay project timelines in anticipation of being able to build projects at higher PTC levels once the expected extensions are in place. We are forecasting to incur a total of approximately$45 million of restructuring and impairment charges associated with our global footprint alignment and consolidation in 2021 and 2022 relating to ourChina andNorth America operations, including our planned suspension of production at ourIowa manufacturing facility at the end of 2021. Approximately$30 million of the total is forecasted to be incurred in 2021, with the remainder in 2022. We are forecasting that approximately 15% of the restructuring charges will be non-cash. We were not in compliance with our Total Net Leverage Ratio financial covenant as ofSeptember 30, 2021 , primarily due to theMexico production delays and increased raw material costs and constraints described above. OnNovember 8, 2021 (the Waiver Effective Date), we and the lenders that are parties to the Credit Agreement executed a limited waiver pursuant to which the lenders agreed to temporarily waive our compliance with this financial covenant from the Waiver Effective Date throughDecember 8, 2021 . We also must maintain domesticU.S. cash of at least$20.0 million and global available liquidity of at least$50.0 million as of the close of business on each Friday commencing as ofNovember 5, 2021 through the maturity date of the Credit Agreement. From and after the Waiver Effective Date, we may not allow any of our subsidiaries that are not loan parties to the Credit Agreement to incur any additional indebtedness and we may not make any investment in any of its subsidiaries that are not loan parties to the Credit Agreement in an aggregate amount greater than$5.0 million . We had$68.3 million of domesticU.S cash and$132.9 million of global available liquidity as ofOctober 29, 2021 . Given these near-term liquidity challenges, onNovember 8, 2021 , we entered into a Series A Preferred Stock Purchase Agreement (the Purchase Agreement) withOaktree Power Opportunities Fund V (Delaware) Holdings, L.P. ,OPPS TPIC Holdings, LLC , andOaktree Phoenix Investment Fund L.P. (collectively, the Purchasers) pursuant to which we agreed to issue and sell to the Purchasers 350,000 shares of our newly designated Series A Preferred Stock, par value$0.01 per share, for an aggregate purchase price of$350.0 million . We expect the closing of this equity financing transaction to occur in the fourth quarter of 2021 and intend to use the net proceeds from the issuance and sale of the Series A Preferred Stock to repay all outstanding indebtedness under our Credit Agreement and the remainder for general corporate purposes. We also may elect at our option to require Oaktree to purchase an additional$50.0 million of Series A Preferred Stock upon the same terms and conditions as the initial issuance of the Series A Preferred Stock during the two-year period following the Closing Date.
See Note 15, Subsequent Events, to our condensed consolidated financial statements for more details on the limited waiver and the Purchase Agreement.
KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE
For a detailed discussion of our key financial measures and our key operating
metrics, refer to the discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Key Metrics Used By Management
To Measure Performance" included in Part II, Item 7 of our Annual Report on Form
10-K.
27
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KEY FINANCIAL MEASURES
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Net sales $ 479,599 $ 474,113 $ 1,343,120 $ 1,204,566
Net income (loss) (30,677 ) 42,382 (72,271 ) (24,211 )
EBITDA (1) (6,478 ) 27,168 3,221 21,819
Adjusted EBITDA (1) 179 49,131 30,635 53,722
Capital expenditures 30,138 53,428
Free cash flow (1) (58,379 ) (19,563 )
September 30, December 31,
2021 2020
(in thousands)
Total debt, net of debt issuance costs
(143,833 ) (88,061 )
(1)
See below for a reconciliation of EBITDA, adjusted EBITDA, free cash flow and
net debt to net income (loss), net income (loss), net cash provided by (used in)
operating activities and total debt, net of debt issuance costs, respectively,
the most directly comparable financial measures calculated and presented in
accordance with GAAP.
The following tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:
EBITDA and adjusted EBITDA are reconciled as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
(in thousands)
Net income (loss) $ (30,677 ) $ 42,382 $ (72,271 ) $ (24,211 )
Adjustments:
Depreciation and amortization 13,289 14,031 37,399 36,675
Interest expense, net 2,662 3,093 8,057
7,409
Income tax provision (benefit) 8,248 (32,338 ) 30,036
1,946
EBITDA (6,478 ) 27,168 3,221
21,819
Share-based compensation expense 1,943 2,631 7,267
7,947
Foreign currency loss (income) (3,958 ) 17,127 6,273
18,095
Loss on sale of assets and asset
impairments 7,250 2,160 9,998 5,518 Restructuring charges, net 1,422 45 3,876 343 Adjusted EBITDA$ 179 $ 49,131 $ 30,635 $ 53,722
Free cash flow is reconciled as follows:
Nine Months Ended
September 30,
2021 2020
(in thousands)
Net cash provided by (used in) operating activities $ (28,241 ) $ 33,865
Less capital expenditures (30,138 ) (53,428 )
Free cash flow $ (58,379 ) $ (19,563 )
28
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Net debt is reconciled as follows:
September 30, December 31,
2021 2020
(in thousands)
Cash and cash equivalents $ 119,005 $ 129,857
Less total debt, net of debt issuance costs (262,129 ) (216,867 )
Less debt issuance costs (709 ) (1,051 )
Net debt $ (143,833 ) $ (88,061 )
KEY OPERATING METRICS
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Sets 830 1,037 2,487 2,556
Estimated megawatts 3,395 3,571 9,770 8,555
Utilization 76 % 93 % 78 % 78 %
Dedicated manufacturing lines 54 55 54 55
Manufacturing lines installed 54 54 54 54 RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
sales for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 98.5 89.7 96.5 94.8
Startup and transition costs 3.0 1.8 2.9 2.6
Total cost of goods sold 101.5 91.5 99.4 97.4
Gross profit (loss) (1.5 ) 8.5 0.6 2.6
General and administrative expenses 1.7 2.0 1.8 2.1
Loss on sale of assets and asset
impairments 1.5 0.4 0.7 0.5
Restructuring charges, net 0.3 0.0 0.3 0.0
Income (loss) from operations (5.0 ) 6.1 (2.2 ) 0.0
Total other income (expense) 0.3 (4.0 ) (1.0 ) (1.9 )
Income (loss) before income taxes (4.7 ) 2.1 (3.2 ) (1.9 )
Income tax benefit (provision) (1.7 ) 6.8 (2.2 ) (0.1 )
Net income (loss) (6.4 ) % 8.9 % (5.4 ) % (2.0 ) %
Net sales
Consolidated discussion
The following table summarizes our net sales by product/service for the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales $ 450,725 $ 450,135 $ 590 0.1 % $ 1,248,608 $ 1,134,535 $ 114,073 10.1 %
Precision molding and
assembly systems sales 8,383 10,541 (2,158 ) -20.5 % 30,913 24,198 6,715 27.8 %
Transportation sales 6,815 7,007 (192 ) -2.7 % 29,861 28,798 1,063 3.7 %
Other sales 13,676 6,430 7,246 112.7 % 33,738 17,035 16,703 98.1 %
Total net sales $ 479,599 $ 474,113 $ 5,486 1.2%$ 1,343,120 $ 1,204,566 $ 138,554 11.5 % 29
-------------------------------------------------------------------------------- Net sales of wind blades during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, were relatively flat. Net sales of wind blades during the three months endedSeptember 30, 2021 were positively impacted by a higher average sales price due to the mix of wind blade models produced, an increase in the year over year number of wind blades still in the production process at the end of the period, and foreign currency fluctuations. Additionally, when comparing our net sales during the three months endedSeptember 30, 2021 , against the comparable prior year period, our current year net sales were negatively impacted by the removal of five contracted manufacturing lines that expired inChina at the end of 2020 as well as a further reduction of two contracted manufacturing lines inChina in 2021, reduced production volumes resulting from certain of our customers' challenges in procuring adequate supplies of resin andcarbon , significant production delays that occurred at one of ourJuarez, Mexico manufacturing facilities related to an ongoing transition, and a temporary shutdown of our Yangzhou manufacturing facility due to a COVID-19 outbreak in Yangzhou City, which was partially offset by the adverse impact that the COVID-19 pandemic had on our net sales in the prior year period. The reasons set forth above were the primary drivers of the 20% decrease in the number of wind blades produced year over year. The fluctuatingU.S. dollar against the Euro in ourTurkey operations and the Chinese Renminbi in ourChina operations had a favorable impact of 0.3% on consolidated net sales for the three months endedSeptember 30, 2021 , as compared to the 2020 period.
The increase in net sales of wind blades during the nine months ended
Additionally, when comparing our net sales during the nine months endedSeptember 30, 2021 , against the comparable prior year period, our current year net sales were negatively impacted by the removal of five contracted manufacturing lines that expired inChina at the end of 2020 as well as a further reduction of two contracted manufacturing lines inChina in 2021, reduced production volumes resulting from certain of our customers' challenges in procuring adequate supplies of resin andcarbon , and significant production delays that occurred at one of ourJuarez, Mexico manufacturing facilities related to an ongoing transition, which was partially offset by the adverse impact that the COVID-19 pandemic had on our net sales in the prior year period. The reasons set forth above, mostly offset by increased production at ourIndia ,Turkey andMexico facilities were the primary drivers of the 3% decrease in the number of wind blades produced year over year. The fluctuatingU.S. dollar against the Euro in ourTurkey operations and the Chinese Renminbi in ourChina operations had a favorable impact of 1.2% on consolidated net sales for the nine months endedSeptember 30, 2021 , as compared to the 2020 period.
Segment discussion
The following table summarizes our net sales by our five geographic operating
segments for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
U.S. $ 47,702 $ 46,799 $ 903 1.9 % $ 153,749 $ 136,309 $ 17,440 12.8 %
Asia 51,869 163,458 (111,589 ) -68.3 % 219,903 400,513 (180,610 ) -45.1 %
Mexico 200,332 161,563 38,769 24.0 % 461,961 363,233 98,728 27.2 %
EMEA 129,444 83,640 45,804 54.8 % 347,160 260,138 87,022 33.5 %
India 50,252 18,653 31,599 169.4 %
160,347 44,373 115,974 NM
Total net sales
NM - not meaningfulU.S. Segment
The following table summarizes our net sales by product/service for the
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales
22,272 27,424 (5,152 ) -18.8 % Other sales
8,927 3,321 5,606 168.8 %
17,269 9,371 7,898 84.3 %
Total net sales
30
-------------------------------------------------------------------------------- The decrease in theU.S. segment's net sales of wind blades during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a 9% decrease in the number of wind blades produced, primarily related to volume reductions in anticipation of the suspension of production at ourNewton, Iowa facility by the end of 2021. This net sales decrease was partially offset by a higher average sales price of wind blade models produced in the two comparative periods. The increase in theU.S. segment's net sales of wind blades during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a 7% increase in the number of wind blades produced, primarily due to the adverse impact of the COVID-19 pandemic in the prior year period, as well as a higher average sales price of wind blade models produced in the two comparative periods. Asia Segment
The following table summarizes our net sales by product/service for the
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales $ 47,187 $ 158,120 $ (110,933 ) -70.2 % $ 202,181 $ 385,536 $ (183,355 ) -47.6 %
Precision molding
and
assembly
systems sales 3,869 4,451 (582 ) -13.1 % 15,467 13,088 2,379 18.2 %
Other sales 813 887 (74 ) -8.3 % 2,255 1,889 366 19.4 %
Total net sales
The decrease in theAsia segment's net sales of wind blades during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a 71% decrease in the number of wind blades produced, primarily due to the removal of five contracted manufacturing lines that expired inChina at the end of 2020, a further reduction of contracted manufacturing lines in 2021 inChina , and a temporary shutdown of our Yangzhou manufacturing facility due to a COVID-19 outbreak in Yangzhou City. Additionally, for the three months endedSeptember 30, 2021 , there was a decrease in the period over period number of wind blades still in the production process at the end of the period. The net sales decrease during the three months endedSeptember 30, 2021 was partially offset by an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. The decrease in theAsia segment's net sales of wind blades during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to a 49% decrease in the number of wind blades produced, primarily due to the removal of five contracted manufacturing lines that expired inChina at the end of 2020 and a further reduction of contracted manufacturing lines in 2021 inChina , which was partially offset by the adverse impact that the COVID-19 pandemic had on our net sales in the prior year period. The net sales decrease during the nine months endedSeptember 30, 2021 was partially offset by an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. The fluctuatingU.S. dollar against the Chinese Renminbi in ourChina operations had a favorable impact of 0.1% on consolidated net sales for the nine months endedSeptember 30, 2021 , as compared to the 2020 period.
Mexico Segment
The following table summarizes our net sales by product/service for the
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales $ 191,499 $ 153,575 $ 37,924 24.7 % $ 431,129 $ 346,954 $ 84,175 24.3 %
Precision molding
and
assembly
systems sales 4,514 6,090 (1,576 ) -25.9 % 15,446 11,110 4,336 39.0 %
Transportation
sales 3,194 801 2,393 NM 7,589 1,374 6,215 NM
Other sales 1,125 1,097 28 2.6 %
7,797 3,795 4,002 105.5 %
Total net sales
31
-------------------------------------------------------------------------------- The increase in theMexico segment's net sales of wind blades during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, reflects an increase in the period over period number of wind blades still in the production process at the end of the period, as well as an increase in the average sales price of wind blades due to the mix of wind blades produced in the two comparative periods. These net sales increases were partially offset by a 17% net decrease in overall wind blade volume, primarily due to significant production delays that occurred at one of ourJuarez, Mexico manufacturing facilities related to customer supplied specialized equipment and supply constraints affectingcarbon in connection with the ongoing transition to an innovative new blade for one of our customers and production delays resulting from one of our customer's challenges in procuring adequate supplies ofcarbon at one of ourMatamoros, Mexico manufacturing facilities. The increase in theMexico segment's net sales of wind blades during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, reflects a 5% net increase in overall wind blade volume, primarily due to the adverse impact of the COVID-19 pandemic in the prior year period partially offset by the production delays described above, an increase in the period over period number of wind blades still in the production process at the end of the period, as well as an increase in the average sales price of wind blades due to the mix of wind blades produced in the two comparative periods.
EMEA Segment
The following table summarizes our net sales by product/service for the EMEA
segment for the three and nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales $ 126,705 $ 82,550 $ 44,155 53.5 % $ 340,933 $ 258,193 $ 82,740 32.0 %
Other sales 2,739 1,090 1,649 151.3 %
6,227 1,945 4,282 NM
Total net sales
The increase in the EMEA segment's net sales of wind blades during the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was driven by a 32% and 20% increase in wind blade production at our twoTurkey plants, respectively, primarily due to transitions and the adverse impact of the COVID-19 pandemic in the prior year, as well as an increase in the average sales price of wind blades produced in the two comparative periods and foreign currency fluctuations. These net sales increases were partially offset by reduced production volumes resulting from one of our customer's challenges in procuring adequate supplies of resin andcarbon . The fluctuatingU.S. dollar relative to the Euro had a favorable impact of 1.0% and 4.5% on net sales during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the 2020 periods. India Segment
The following table summarizes our net sales by product/service for the
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Wind blade sales $ 50,180 $ 18,618 $ 31,562 169.5 % $ 160,157 $ 44,338 $ 115,819 NM
Other sales 72 35 37 105.7 % 190 35 155 NM
Total net sales
The increase in the
32
--------------------------------------------------------------------------------Total cost of goods sold
The following table summarizes our total cost of goods sold for the three and
nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Cost of sales
Startup costs 4,521 5,142 (621 ) -12.1 %
13,577 19,895 (6,318 ) -31.8 %
Transition
costs 10,020 3,434 6,586 191.8 %
25,417 11,635 13,782 118.5 %
Total startup and transition costs 14,541 8,576 5,965 69.6 %
38,994 31,530 7,464 23.7 %
Total cost of
goods sold
% of net sales 101.5 % 91.5 % 10.0 % 99.4 % 97.4 % 2.0 % Total cost of goods sold as a percentage of net sales increased by approximately ten percentage points during the three months endedSeptember 30, 2021 , as compared to the same period in 2020, driven primarily by increases in direct material costs, direct labor costs and foreign currency fluctuations. The significant production delays that occurred at theMatamoros, Mexico manufacturing facility, which we took over fromNordex inJuly 2021 , during the three months endedSeptember 30, 2021 were a major contributor to this increase. The fluctuatingU.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso had an unfavorable impact of 0.5% on consolidated cost of goods sold for the three months endedSeptember 30, 2021 as compared to the 2020 period. Total cost of goods sold as a percentage of net sales increased by approximately two percentage points during the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, driven primarily by an increase in direct material costs and foreign currency fluctuations, partially offset by a decrease in warranty costs. The fluctuatingU.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso had an unfavorable impact of 1.2% on consolidated cost of goods sold for the nine months endedSeptember 30, 2021 , as compared to the 2020 period.
General and administrative expenses
The following table summarizes our general and administrative expenses for the
three and nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
General and
administrative
expenses$ 8,185 $ 9,263 $ (1,078 ) -11.6 % $
23,819
% of net sales 1.7 % 2.0 % -0.3 % 1.8 % 2.1 % -0.3 % The decrease in general and administrative expenses as a percentage of net sales for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, were primarily driven by our continued focus on reducing costs.
Loss on sale of assets and asset impairments
The increase in the loss on sale of assets and asset impairments for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, were primarily driven by asset impairment charges of$5.9 million incurred at ourNewton, Iowa blade facility related to the plant's expected shutdown at the end of the year. Restructuring costs, net The increase in restructuring costs, net for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, were associated with the optimization of our global footprint, comprised of$1.4 million and$3.9 million , respectively, of 33 --------------------------------------------------------------------------------
severance benefits to terminated employees. We expect that all of the severance
benefits will be paid to the terminated employees by the end of
Income (loss) from operations
Segment discussion
The following table summarizes our income (loss) from operations by our five geographic operating segments for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, Change September 30, Change 2021 2020 $ % 2021 2020 $ % (in thousands) (in thousands)
U.S.$ (24,598 ) $ (6,360 ) $ (18,238 ) NM$ (36,070 ) $ (33,991 ) $ (2,079 ) -6.1 % Asia (3,607 ) 25,779 (29,386 ) -114.0 % 7,207 49,343 (42,136 ) -85.4 % Mexico (3,802 ) 11,986 (15,788 ) -131.7 % (33,082 ) (1,106 ) (31,976 ) NM EMEA 9,423 1,795 7,628 NM 29,993 3,314 26,679 NM India (1,403 ) (4,195 ) 2,792 66.6 %
2,725 (17,214 ) 19,939 115.8 % Total income (loss)
from operations$ (23,987 ) $ 29,005 $ (52,992 ) -182.7 %$ (29,227 ) $ 346 $ (29,573 ) NM % of net sales -5.0 % 6.1 % -11.1 % -2.2 % 0.0 % -2.2 % U.S. Segment The increase in the loss from operations in theU.S. segment for the three months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to the decrease in wind blade volume, an increase in direct material and direct labor costs and impairment charges incurred at ourNewton, Iowa blade facility related to the suspension of production by the end of 2021, partially offset by an increase in the average sales price of wind blades produced. The increase in the loss from operations in theU.S. segment for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, was primarily due to an increase in direct material costs and impairment charges incurred at ourNewton, Iowa blade facility related to the suspension of production by the end of 2021, partially offset by an increase in wind blade volume, an increase in the average sales price of wind blades produced and a decrease in direct labor costs.
Asia Segment
The decrease in the income from operations in theAsia segment for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was primarily due to the decrease in the net sales of wind blades, an increase in direct material costs and foreign currency fluctuations. The fluctuatingU.S. dollar against the Chinese Renminbi had an unfavorable impact of 4.9% and 5.9% on cost of goods sold for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the 2020 periods.
Mexico Segment
The increase in the loss from operations in theMexico segment for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was primarily due to an increase in direct material costs and startup and transition costs related to theMatamoros andJuarez, Mexico production delays described above, partially offset by an increase in the period over period number of wind blades still in the production process at the end of the period, an increase in the average sales price of wind blades, and a decrease in warranty costs as compared to the 2020 periods. The fluctuatingU.S. dollar relative to the Mexican Peso had an unfavorable impact of 1.5% and 1.2% on cost of goods sold for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the 2020 periods.
EMEA Segment
The increase in the income from operations in the EMEA segment for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was primarily driven by increased wind blade production at our twoTurkey manufacturing facilities and an increase in the average sales price of wind blades produced. In addition, for the three and nine months endedSeptember 30, 2021 , there was a decrease in startup and transition costs and an increase in direct material costs as compared to the 2020 period. Additionally, for the nine months endedSeptember 30, 2021 , there was a decrease in warranty costs as compared to the 34 -------------------------------------------------------------------------------- 2020 period. The fluctuatingU.S. dollar relative to the Turkish Lira and Euro had an favorable impact of 2.8% and 0.9% on cost of goods sold for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the 2020 periods.
India Segment
The decrease in the loss from operations in theIndia segment for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was driven by the commencement of production for one of our customers in 2020, and the ramp up of such production in 2021.
Other income (expense)
The following table summarizes our total other income (expense) for the three
and nine months ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)
Interest 13.9 % -8.7 %
expense, net $ (2,662 ) $ (3,093 ) $ 431 $
(8,057 )
Foreign currency income (loss) 3,958 (17,127 ) 21,085 123.1 % (6,273 ) (18,095 ) 11,822 65.3 % Miscellaneous -79.2 % -54.3 % income 262 1,259 (997 ) 1,322 2,893 (1,571 ) Total other income 108.2 % (expense)$ 1,558 $ (18,961 ) $ 20,519 $ (13,008 ) $ (22,611 ) $ 9,603 42.5 % The decrease in the total other expense for the three and nine months endedSeptember 30, 2021 , as compared to the same periods in 2020, was primarily due to a decrease in the foreign currency loss primarily due to net Euro liability exposure against the Turkish Lira in the current year periods as compared to the same periods in 2020. Income taxes
The following table summarizes our income taxes for the three and nine months
ended
Three Months Ended Nine Months Ended
September 30, Change September 30, Change
2021 2020 $ % 2021 2020 $ %
(in thousands) (in thousands)Income tax benefit
(provision)
Effective tax rate -36.8 % -322.0 % -71.1 % -8.7 %
See Note 9, Income Taxes, to our condensed consolidated financial statements for
more details about our income taxes for the three and nine months ended
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity and capital resources were adversely affected by certain events that occurred during the three months endedSeptember 30, 2021 . We experienced significant production delays that occurred at theMatamoros, Mexico manufacturing facility that we took over fromNordex inJuly 2021 , as well as significant production delays in one of ourJuarez, Mexico manufacturing facilities in connection with the ongoing transition to an innovative new blade for one of our customers. Although we expect that production will be stabilized in both of these manufacturing facilities by the end of the year, we expect that these transitions will continue to have an adverse impact on our liquidity for the remainder of the year. We also expect decreased demand for our wind blades from our customers during the remainder of 2021 and 2022. We believe this decrease in demand is due to the continued global renewable energy regulatory and policy uncertainty and raw material cost increases and constraints. We believe this decreased demand will also adversely impact our profitability and liquidity for the remainder of 2021 and 2022. We were not in compliance with our Total Net Leverage Ratio financial covenant as ofSeptember 30, 2021 , primarily due to theMexico production delays and increased raw material costs and constraints described above. OnNovember 8, 2021 (the Waiver Effective Date), we and the lenders that are parties to the Credit Agreement executed a limited waiver pursuant to which the lenders 35 -------------------------------------------------------------------------------- agreed to temporarily waive our compliance with this financial covenant from the Waiver Effective Date throughDecember 8, 2021 . We also must maintain domesticU.S. cash of at least$20.0 million and global available liquidity of at least$50.0 million as of the close of business on each Friday commencing as ofNovember 5, 2021 through the maturity date of the Credit Agreement. From and after the Waiver Effective Date, we may not allow any of our subsidiaries that are not loan parties to the Credit Agreement to incur any additional indebtedness and we may not make any investment in any of its subsidiaries that are not loan parties to the Credit Agreement in an aggregate amount greater than$5.0 million . We had$68.3 million of domesticU.S cash and$132.9 million of global available liquidity as ofOctober 29, 2021 . Given these near-term liquidity challenges, onNovember 8, 2021 , we entered into the Purchase Agreement pursuant to which we agreed to issue and sell to the Purchasers 350,000 shares of our newly designated Series A Preferred Stock, par value$0.01 per share, for an aggregate purchase price of$350.0 million . We expect the closing of this equity financing transaction to occur in the fourth quarter of 2021 and intend to use the net proceeds from the issuance and sale of the Series A Preferred Stock to repay all outstanding indebtedness under our Credit Agreement and the remainder for general corporate purposes. We also may elect at our option to require Oaktree to purchase an additional$50.0 million of Series A Preferred Stock upon the same terms and conditions as the initial issuance of the Series A Preferred Stock during the two-year period following the Closing Date.
See Note 15, Subsequent Events, to our condensed consolidated financial statements for more details on the limited waiver and the Purchase Agreement.
Our primary needs for liquidity have been, and in the future will continue to be, capital expenditures, new facility startup costs, the impact of transitions, working capital, debt service costs, warranty costs and restructuring costs associated with the optimization of our global footprint. Our capital expenditures have been primarily related to machinery and equipment at our new facilities and expansion and improvements at our existing facilities. Historically, we have funded our working capital needs through cash flows from operations, the proceeds received from our credit facilities and from proceeds received from the issuance of stock. We had net proceeds under our financing arrangements of$43.1 million for the nine months endedSeptember 30, 2021 as compared to net proceeds under our financing arrangements of$96.5 million in the comparable period of 2020. As ofSeptember 30, 2021 andDecember 31, 2020 , we had$262.8 million and$217.9 million in outstanding indebtedness, excluding debt issuance costs, respectively. As ofSeptember 30, 2021 , we had an aggregate of$103.6 million of remaining capacity and$66.2 million of remaining availability under our various credit facilities. Working capital requirements have increased as a result of our overall growth and the need to fund higher accounts receivable and inventory levels as our business volumes have increased, as well as increased raw material costs primarily related to resin,carbon fiber and logistics. Based upon current and anticipated levels of operations, we believe that cash on hand, available credit facilities, the anticipated net proceeds from the preferred equity financing described above, which we believe is probable, and cash flows from operations will be adequate to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our indebtedness over the next twelve months. We anticipate that any new facilities and future facility expansions will be funded through cash flows from operations, the incurrence of other indebtedness and other potential sources of liquidity. AtSeptember 30, 2021 andDecember 31, 2020 , we had unrestricted cash, cash equivalents and short-term investments totaling$119.0 million and$129.9 million , respectively. TheSeptember 30, 2021 balance includes$48.5 million of cash located outside ofthe United States , including$20.7 million inChina ,$17.9 million inTurkey ,$7.3 million inIndia ,$1.9 million inMexico and$0.7 million in other countries. Our ability to repatriate funds fromChina is subject to a number of restrictions imposed by the Chinese government. We repatriate funds through several technology license and corporate/administrative service agreements. We are compensated quarterly based on agreed upon royalty rates for such intellectual property licenses and quarterly fees for those services. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions ofChina , including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.6 million as ofSeptember 30, 2021 andDecember 31, 2020 ) of registered capital is contributed to a surplus reserve, ourChina operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, ourChina operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. AtSeptember 30, 2021 andDecember 31, 2020 , the amount of the surplus reserve fund was$9.4 million and$7.0 million , respectively. InJuly 2021 ,China paid a dividend of approximately$19.5 million , net of withholding taxes, to our subsidiary inSwitzerland . 36 --------------------------------------------------------------------------------
Financing Facilities
Our total principal amount of debt outstanding as ofSeptember 30, 2021 was$262.8 million , including our Credit Agreement, secured and unsecured financing, working capital and term loan agreements and equipment finance leases. See Note 5, Long-Term Debt, Net of Current Maturities, and Note 15, Subsequent Events, to our condensed consolidated financial statements for more details on our debt balances. Cash Flow Discussion
The following table summarizes our key cash flow activity for the nine months
ended
Nine Months Ended
September 30,
2021 2020 $ Change
(in thousands)
Net cash provided by (used in) operating
activities $ (28,241 ) $ 33,865 $ (62,106 )
Net cash used in investing activities (30,138 ) (53,428 ) 23,290
Net cash provided by financing activities 48,280 102,427 (54,147 ) Impact of foreign exchange rates on cash, cash equivalents and restricted cash (939 ) (3,204 )
2,265
Net change in cash, cash equivalents and restricted cash$ (11,038 ) $ 79,660 $ (90,698 ) Operating Cash Flows Net cash provided by operating activities decreased by$62.1 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, primarily as a result of lower operating results and unfavorable working capital usage. Investing Cash Flows Net cash used in investing activities decreased by$23.3 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, as a result of a decrease in capital expenditures. We anticipate fiscal year 2021 capital expenditures of between$40 million to$45 million and we estimate that the cost that we will incur afterSeptember 30, 2021 to complete our current projects in process will be approximately$7.0 million . We have used, and will continue to use, cash flows from operations, the proceeds received from our credit facilities and the proceeds received from the issuance of stock for major projects currently being undertaken, which include new manufacturing facilities inChennai, India and the continued investment in our existing Tukey,Mexico ,China andU.S. facilities.
Financing Cash Flows
Net cash provided by financing activities decreased by$54.1 million for the nine months endedSeptember 30, 2021 , as compared to the same period in 2020, primarily as a result of decreased net borrowings on our revolving loans.
OFF-BALANCE SHEET TRANSACTIONS
We are not presently involved in any off-balance sheet arrangements, including
transactions with unconsolidated special-purpose or other entities that would
materially affect our financial position, results of operations, liquidity or
capital resources, other than our accounts receivable assignment agreements
described below. Furthermore, we do not have any relationships with
special-purpose or other entities that provide off-balance sheet financing;
liquidity, market risk or credit risk support; or engage in leasing or other
services that may expose us to liability or risks of loss that are not reflected
in the condensed consolidated financial statements and related notes.
Our segments enter into accounts receivable assignment agreements with various
financial institutions. Under these agreements, the financial institution buys,
on a non-recourse basis, the accounts receivable amounts related to our
segment's customers at an agreed-upon discount rate.
37
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The following table summarizes certain key details of each of the accounts
receivable assignment agreements in place as of
Year Of Initial Agreement Segment(s) Related To Current Annual Interest Rate 2014 Mexico LIBOR plus 0.75% 2019 Asia and Mexico LIBOR plus 1.00% 2019 Asia Fixed rate of 3.85% 2020 EMEA EURIBOR plus 1.95% 2020 India LIBOR plus 1.00% 2020 U.S. LIBOR plus 1.25% 2021 Mexico LIBOR plus 1.25% As the receivables are purchased by the financial institutions under the agreements noted above, the receivables are removed from our condensed consolidated balance sheet. During the three months endedSeptember 30, 2021 and 2020,$346.3 million and$343.0 million , respectively, and during the nine months endedSeptember 30, 2021 and 2020,$1,001.2 million and$802.9 million , respectively, of receivables were sold under the accounts receivable assignment agreements described above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 1, Basis of Presentation, under the heading "Accounting Pronouncements" to our condensed consolidated financial statements for a discussion of recent accounting pronouncements. CONTRACTUAL OBLIGATIONS During the nine months endedSeptember 30, 2021 , there have been no material changes to the contractual obligations reported in our Annual Report on Form 10-K, other than in the ordinary course of business.
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