TPI COMPOSITES, INC. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly those under "Risk Factors" included in Part I, Item 1A of this Annual Report on Form 10-K. OVERVIEW Our Company We are the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. We deliver high-quality, cost-effective composite solutions through long term relationships with leading original equipment manufacturers 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 . For a further overview of our Company, refer to the discussion in "Business-Overview" included in Part I, Item 1 of this Annual Report on Form 10-K. 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 . For further information regarding our operating segments, refer to Note 19 - Segment Reporting of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Key Trends Affecting our Business
We have identified the following material trends affecting our business:
• The COVID-19 pandemic adversely affected our business and operations
during the year ended December 31, 2020 . During the first quarter of
2020, our China manufacturing facilities were adversely impacted by the
COVID-19 pandemic in the form of reduced production levels and COVID-19related costs associated with the health and safety of our associates
and non-productive labor. During the second quarter of 2020, all of our
manufacturing facilities with the exception of our
facilities and our
temporarily suspend production or operate at reduced production levels
due primarily to certain applicable government-mandated stay at home
orders in response to the COVID-19 pandemic, demands from certain of ourlabor unions to suspend or reduce production and general safety concerns
of our associates. By the end of the second quarter of 2020, most of our
manufacturing facilities had returned to operating at or near normal
production levels. Although all of our manufacturing facilities
currently are operating at or near normal production levels, we may be
required to reinstate temporary production suspensions or volumereductions at our manufacturing facilities or at our other locations to
the extent there is a resurgence of COVID-19 cases in the regions where
we operate or there is an outbreak of positive COVID-19 cases in any of
our facilities.
• Our business seeks to capitalize on two major global trends: (i)
increasing worldwide demand for renewable energy; and (ii) increasing
worldwide demand for electric vehicles.
• The wind power generation industry has grown rapidly and expandedworldwide over the last five years to meet global demand for electricity
and the expanded use of renewable energy. Our sales of wind blades to
our wind turbine customers have grown rapidly over the last several
years in response to these trends. In 2020, our net sales grew to $1.67
billion compared to net sales of $1.44 billion in 2019.
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• We believe the long term global demand for wind energy will continue to
be strong and potentially accelerate in the coming years due to a
multitude of factors, including: increased cost competitiveness of wind
energy compared to fossil fuel generated electricity; increased demand
from corporations and utility providers for renewable energy; recent
international policy initiatives designed to promote the growth of
renewable energy; and the Biden administration's proposed plans to
promote renewable energy growth in
the recently announced domestic and international policy initiatives to
expand renewable energy have yet to be implemented into concrete
legislation and regulations. As such, we expect our revenue in 2021 to
continue to grow but at a rate lower than our revenue growth rate in2020 due primarily to lower expected demand for wind blades manufactured
in our
expected demand for wind blades manufactured in our
blades sets in 2021 compared to 2020, but we expect that the average
sales price per set in 2021 will be higher than in 2020 because we plan
to produce larger wind blades in 2021.
• During the last several years, many wind turbine OEMs have increased the
outsourced production of wind blades and other key components to
specialized manufacturers to meet the increasing global demand for wind
energy in a cost-effective manner in new and growing markets. That
shift, together with the overall expansion of the wind power generation
industry, has increased our addressable market. Given our growth in
production, we have hired several thousand new employees globally in the
past two years. In addition, we have expanded our wind turbine OEMcustomer base from one to five OEM customers since 2012, capitalizing on
the growth and expansion of the wind energy generation industry
generally as well as the specific trend of most wind turbine OEMs
increasing the outsourcing of the manufacturing of wind blades for
growth and diversification.
• Changing customer demands, including shifts to bigger wind turbines with
larger wind blades, have driven some of our customers to require us to
transition to new wind blade models one or two times during the term of
a long-term supply agreement. Although we generally receive transition
payments to compensate us for certain costs incurred during these
transitions, these payments generally do not fully cover the transition
costs and lost margin. In 2020, we postponed several wind blade model
transitions due to the COVID-19 pandemic and also had a significant
number of lines starting up in our new manufacturing facility in
and profitability in 2020. As such, we expect to have a larger number of
lines in transition during 2021, which will have an adverse impact on
our results of operations for 2021. We expect these line transitions to
provide a foundation for longer term revenue growth and profitability as
these lines ramp up to full production levels.
• We expect our new manufacturing facilities to generally generate
operating losses in their first 12 to 18 months of operations due to
production and overhead expenses as they initially operate far belowcapacity during the pre-production and production ramp up periods. As a
result, this generally has a negative impact on our results of
operations during these ramp-up periods. In addition, construction of
new facilities and expansion of existing facilities, including the
fabrication of precision molding and assembly systems to outfit those
facilities, is complex and involves inherent risks.
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• The long-term supply agreements we sign with our customers provide us
with significant visibility of future production demands due in part to
the annual minimum purchase commitments of our customers contained in
those agreements. These annual minimum purchase commitments generally
require our customers to purchase a negotiated percentage of the
manufacturing capacity that we have agreed to dedicate to them.
Generally, this percentage begins at 100% of the manufacturing capacity
for the first few years of the supply agreement, and the percentage
declines over time in subsequent years according to the terms of the
agreement, but generally remains above 50%. It is our experience thatour customers will generally order wind blades from us in a volume that
exceeds (sometimes substantially) the annual minimum purchase
commitments contained in our supply agreements, particularly in the
later years of a supply agreement when the annual minimum purchase
commitment percentage declines. As of
wind and transportation supply agreements provide for minimum aggregate
volume commitments from our customers of approximately
encourage our customers to purchase additional volume up to, in the
aggregate, a total contract value of approximately $4.6 billion through
the end of 2024. As noted elsewhere in this Annual Report on Form 10-K,some of our long-term supply agreements are subject to early termination
by our customers if our customers pay an early termination fee. We
caution investors that the annual minimum purchase commitments in ourlong-term supply agreements can understate the forecasted net sales that
we are likely to generate in a given period or periods if all of our
long-term supply agreements remain in place and pricing remains
materially unchanged, and they could potentially overstate theforecasted net sales that we are likely to generate in a given period or
periods if one or more of our agreements were to be terminated by our
customers for any reason, or our plants are underutilized due to market
conditions. See "Business-Wind Blade Long-Term Supply Agreements"
included in Part 1, Item 1A of this Annual Report on Form 10-K for
additional information.
• As the global vehicle electrification trend continues, reducing theweight of these vehicles is critical to expanding range and/or providing
more room for additional batteries or reducing the number of batteries.
We believe there is an increasing demand for composites products for
electric vehicles. As part of our diversification strategy, we have made
significant investments to expand our transportation business during the
last several years. In 2018 through 2020, we experienced significant
losses relating to our transportation business and experienced
operational challenges as we are expanding this business. Specifically,
we experienced extended startup delays and challenges with respect to
our
our results of operations in 2019 and 2020. We ceased manufacturing
composite bus bodies from our Newton, Iowa manufacturing facility in the
first quarter of 2020 and consolidated these operations into our Warren,
Rhode Island manufacturing facility. From 2018 to 2020, we invested
approximately
transportation business will continue to operate at a loss in 2021 and
expect to invest between approximately
our transportation business in 2021.
COMPONENTS OF RESULTS OF OPERATIONS
We recognize revenue from manufacturing services over time as our customers
control the product as it is produced, and we may not use or sell the product to
fulfill other customers' contracts. Net sales include amounts billed to our
customers for our products, including wind blades, precision molding and
assembly systems and other products and services, as well as the progress
towards the completion of the performance obligation for products in progress,
which is determined on a ratio of direct costs incurred to date in fulfillment
of the contract to the total estimated direct costs required to complete the
performance obligation.
Cost of Goods Sold
Cost of goods sold includes the costs we incur at our production facilities to
make products saleable on both products invoiced during the period as well as
products in progress towards the completion of each performance obligation. Cost
of goods sold includes such items as raw materials, direct and indirect labor
and facilities costs, including purchasing and receiving costs, plant
management, inspection costs, production process improvement activities, product
engineering and internal transfer costs. In addition, all depreciation
associated with assets used in the production of our products is also included
in cost of goods sold. Direct labor costs consist of salaries, benefits and
other personnel related costs for employees engaged in the manufacturing of our
products and services.
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-------------------------------------------------------------------------------- Startup and transition costs are primarily unallocated fixed overhead costs and underutilized direct labor costs incurred during the period production facilities are transitioning wind blade models and ramping up manufacturing. All direct labor costs are included in the measure of progress towards completion of the relevant performance obligation when determining revenue to be recognized during the period. The cost of sales for the initial wind blades from a new model manufacturing line is generally higher than when the line is operating at optimal production volume levels due to inefficiencies during ramp-up related to labor hours per blade, cycle times per blade and raw material usage. Additionally, these costs as a percentage of net sales are generally higher during the period in which a facility is ramping up to full production capacity due to underutilization of the facility. Manufacturing overhead at each of our facilities includes virtually all indirect costs (including share-based compensation costs) incurred at the plants, including engineering, finance, information technology, human resources and plant management.
General and Administrative Expenses
General and administrative expenses primarily relate to the unallocated portion of costs incurred at our corporate headquarters and our research facilities and include salaries, benefits and other personnel related costs for employees engaged in research and development, engineering, finance, internal audit, information technology, human resources, business development, global operational excellence, global supply chain, in-house legal and executive management. Other costs include outside legal and accounting fees, risk management (insurance), share-based compensation and certain other administrative and global resources costs. The unallocated research and development expenses incurred at ourWarren, Rhode Island location as well as at our Kolding,Denmark advanced engineering center and ourBerlin, Germany engineering center are also included in general and administrative expenses. For the years endedDecember 31, 2020 , 2019 and 2018, total research and development expenses totaled$1.0 million ,$1.0 million and$0.8 million , respectively.
Loss on Sale of Assets and Asset Impairments
Loss on sale of assets represents the losses on the sale of certain receivables, on a non-recourse basis under supply chain financing arrangements with our customers, to financial institutions and losses on the sale of other assets at our corporate and manufacturing facilities. Asset impairments represent the losses on the impairment of our assets at our corporate and manufacturing facilities.
Restructuring Charges
Restructuring charges primarily consist of employee severance, one-time termination benefits and ongoing benefits related to the reduction of our workforce and other costs associated with exit activities, which may include costs related to leased facilities to be abandoned and facility and employee relocation costs. Other Income (Expense) Other income (expense) consists of interest expense on our debt borrowings and the amortization of deferred financing costs on such borrowings, foreign currency income and losses, interest income, losses on extinguishment of debt and miscellaneous income and expense.
Income Taxes
Income taxes consists of federal, state, provincial, local and foreign taxes based on income in jurisdictions in which we operate, including in theU.S. ,China ,Mexico ,Turkey andIndia . The income tax rate, tax provisions, deferred tax assets and liabilities vary according to the jurisdiction in which the income or loss arises. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets. 37
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KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE
In addition to measures of financial performance presented in our consolidated
financial statements in accordance with GAAP, we use certain other financial
measures and operating metrics to analyze our performance. These "non-GAAP"
financial measures consist of EBITDA, adjusted EBITDA, free cash flow and net
cash (debt), which help us evaluate growth trends, establish budgets, assess
operational efficiencies, oversee our overall liquidity, and evaluate our
overall financial performance. The key operating metrics consist of wind blade
sets produced, estimated megawatts of energy capacity to be generated by wind
blade sets produced, utilization, dedicated manufacturing lines, and
manufacturing lines installed, which help us evaluate our operational
performance. We believe that these measures are useful to investors in
evaluating our performance.
Key Financial Measures
The key financial measures as of and for the years ended December 31 are as
follow:
2020 2019 2018
(in thousands)
Net sales $ 1,670,137 $ 1,436,500 $ 1,029,624
Net income (loss) (19,027 ) (15,708 ) 5,279
EBITDA(1) 52,323 54,009 42,308
Adjusted EBITDA(1) 94,498 85,841 68,173
Capital expenditures 65,666 74,408 52,688
Net cash provided by (used in) operating
activities 37,570 57,084 (3,258 )
Free cash flow(1) (28,096 ) (17,324 ) (55,946 )
Total debt, net of debt issuance costs and
discount 216,867 141,389 137,623
Net debt(1) (88,061 ) (71,779 ) (53,155 )
(1) See below for more information and a reconciliation of 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.
EBITDA and adjusted EBITDA
We define EBITDA, a non-GAAP financial measure, as net income or loss plus interest expense (including losses on extinguishment of debt and net of interest income), income taxes and depreciation and amortization. We define adjusted EBITDA as EBITDA plus any share-based compensation expense, plus or minus any foreign currency losses or income, plus or minus any losses or gains from the sale of assets and asset impairments, plus any restructuring charges. Adjusted EBITDA is the primary metric used by our management and our board of directors to establish budgets and operational goals for managing our business and evaluating our performance. In addition, our credit agreement (the Credit Agreement) that we entered into inApril 2018 contains minimum EBITDA (as defined in the Credit Agreement) covenants with which we must comply. We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period-to-period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities. Our use of adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• adjusted EBITDA does not reflect our cash expenditures for capital
equipment or other contractual commitments;
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• adjusted EBITDA does not reflect the interest expense or the cash
requirements necessary to service interest or principal payments on our
indebtedness;
• adjusted EBITDA does not reflect losses on extinguishment of debt
relating to prepayment penalties, termination fees and the write off of
any remaining debt discount and debt issuance costs upon the repayment
or refinancing of our debt;
• adjusted EBITDA does not reflect tax payments that may represent a
reduction in cash available to us;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future,
and adjusted EBITDA does not reflect capital expenditure requirements
relating to the future need to augment or replace those assets;
• adjusted EBITDA does not reflect share-based compensation expense on
equity-based incentive awards to our officers, employees, directors and
consultants;
• adjusted EBITDA does not reflect the foreign currency income or losses
in our operations;
• adjusted EBITDA does not reflect the gains or losses on the sale of
assets and asset impairments;
• adjusted EBITDA does not reflect restructuring charges; and
• other companies, including companies in our industry, may calculate
EBITDA and adjusted EBITDA differently, which reduces their usefulness
as comparative measures.
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments noted herein. Our presentations of EBITDA and adjusted EBITDA should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider EBITDA and adjusted EBITDA alongside other financial performance measures, including our net income (loss) and other GAAP measures.
Free cash flow
We define free cash flow as net cash provided by (used in) operating activities less capital expenditures. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our business for purposes such as repaying maturing debt and funding business acquisitions.
Net cash (debt)
We define net cash (debt) as total unrestricted cash and cash equivalents less the total principal amount of debt outstanding. The total principal amount of debt outstanding is comprised of the long-term debt and current maturities of long-term debt as presented in our consolidated balance sheets adding back any debt issuance costs. We believe that the presentation of net cash (debt) provides useful information to investors because our management reviews net cash (debt) as part of our oversight of overall liquidity, financial flexibility and leverage. Net cash (debt) is important when we consider opening new manufacturing facilities and expanding existing manufacturing facilities, as well as for capital expenditure requirements.
The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:
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EBITDA and adjusted EBITDA for the years endedDecember 31 are reconciled as follows: 2020 2019 2018 (in thousands) Net income (loss)$ (19,027 ) $ (15,708 ) $ 5,279 Adjustments: Depreciation and amortization 49,667 38,580
26,429
Interest expense (net of interest income) 10,399 8,022
10,236
Loss on extinguishment of debt - -
3,397
Income tax provision (benefit) 11,284 23,115 (3,033 ) EBITDA 52,323 54,009
42,308
Share-based compensation expense 10,352 5,681
7,795
Foreign currency loss, net 19,986 4,107
13,489
Loss on sale of assets and asset impairments 7,748 18,117
4,581 Restructuring charges, net 4,089 3,927 - Adjusted EBITDA$ 94,498 $ 85,841 $ 68,173
Free cash flow for the years ended
2020 2019 2018
(in thousands)
Net cash provided by (used in) operating
activities $ 37,570 $ 57,084 $ (3,258 )
Less capital expenditures (65,666 ) (74,408 ) (52,688 )
Free cash flow $ (28,096 ) $ (17,324 ) $ (55,946 ) Net debt as of
2020 2019 2018
(in thousands)
Cash and cash equivalents $ 129,857 $ 70,282 $ 85,346
Less total debt, net of debt issuance costs (216,867 ) (141,389 ) (137,623 )
Less debt issuance costs (1,051 ) (672 ) (878 )
Net debt $ (88,061 ) $ (71,779 ) $ (53,155 )
Key Operating Metrics (1)
The key operating metrics as of and for the year ended December 31 are as
follows:
2020 2019 2018
Sets 3,544 3,189 2,423
Estimated megawatts 12,080 9,598 6,560
Utilization 81 % 79 % 71 %
Dedicated manufacturing lines 53 52 55
Manufacturing lines installed 55 48 43
(1) See below for more information on each of our key operating metrics.
Sets represents the number of wind blade sets, consisting of three wind blades
each, which we produced worldwide during the period. We monitor sets and believe
that presenting sets to investors is helpful because we believe that it is the
most direct measurement of our manufacturing output during the period. Sets
primarily impact net sales.
Estimated megawatts are the energy capacity to be generated by wind blade sets
produced during the period. Our estimate is based solely on name-plate capacity
of the wind turbine on which the wind blades we manufacture
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are expected to be installed. We monitor estimated megawatts and believe that
presenting estimated megawatts to investors is helpful because we believe that
it is a commonly followed measurement of energy capacity across our industry and
provides an indication of our share of the overall wind blade market.
Utilization represents the percentage of the number of wind blades invoiced
during the period compared to the total potential wind blade capacity of the
manufacturing lines installed during the period. We monitor utilization because
we believe it helps investors to better understand how close we are to operating
at maximum production capacity.
Dedicated manufacturing lines are the number of wind blade manufacturing lines
that we have dedicated to our customers pursuant to our long-term supply
agreements at the end of the period. We monitor dedicated manufacturing lines
and believe that presenting this metric to investors is helpful because we
believe that the number of dedicated manufacturing lines is the best indicator
of demand for the wind blades we manufacture for customers under our long-term
supply agreements in any given period. Lines become dedicated upon the execution
of a long-term supply agreement; this means that lines are typically dedicated
before they are installed.
Manufacturing lines installed represents the number of wind blade manufacturing
lines installed and either in operation, startup or transition during the
period. We believe that total manufacturing lines installed provides an
understanding of the number of manufacturing lines installed and either in
operation, startup or transition. From time to time, we have manufacturing lines
installed that are not dedicated to our customers pursuant to a long-term supply
agreement.
RESULTS OF OPERATIONS
Year Ended
The following table summarizes certain of our operating results as a percentage of net sales for the years endedDecember 31 that have been derived from our consolidated statements of operations: 2020 2019 Net sales 100.0 % 100.0 % Cost of sales 93.5 89.8 Startup and transition costs 2.7 4.8 Total cost of goods sold 96.2 94.6 Gross profit 3.8 5.4 General and administrative expenses 2.0 2.8 Loss on sale of assets and asset impairments 0.5 1.3 Restructuring charges, net 0.2 0.2 Income from operations 1.1 1.1 Total other expense (1.6 ) (0.6 ) Income (loss) before income taxes (0.5 ) 0.5 Income tax provision (0.6 ) (1.6 ) Net loss (1.1 ) % (1.1 ) % 41
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Net sales
Consolidated discussion
The following table summarizes our net sales by product/service for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) Wind blade sales$ 1,580,055 $ 1,328,717 $ 251,338 18.9 % Precision molding and assembly systems sales 28,073 48,680 (20,607 ) -42.3 % Transportation sales 36,196 28,870 7,326 25.4 % Other sales 25,813 30,233 (4,420 ) -14.6 % Total net sales$ 1,670,137 $ 1,436,500 $ 233,637 16.3 % The increase in net sales of wind blades was primarily driven by a 11% increase in the number of wind blades produced during the year endedDecember 31, 2020 as compared to the same period in 2019 as a result of increased production at ourChina ,Mexico ,India andIowa facilities. The increase was also due to a higher average sales price due to the mix of wind blade models produced during the year endedDecember 31, 2020 compared to the same period in 2019. Net sales from the manufacturing of precision molding and assembly systems decreased, primarily inAsia , during the year endedDecember 31, 2020 as compared to the same period in 2019, primarily due to our customers deferring a number of blade model transitions due to the COVID-19 pandemic. Additionally, there was an increase in transportation and other sales during the year endedDecember 31, 2020 as compared to the same period in 2019. The fluctuatingU.S. dollar against the Euro in ourTurkey operations and the Chinese Renminbi in ourChina operations had a favorable impact of 0.1% on consolidated net sales for the year endedDecember 31, 2020 as compared to 2019. Although our net sales increased for the year endedDecember 31, 2020 compared to the same period in 2019, we estimate that our net sales were adversely impacted by approximately$148.0 million , based upon 352 wind blade sets, which we had forecasted to produce at ourMexico ,China ,Iowa ,Turkey andIndia manufacturing facilities in the periods under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels primarily during the first and second quarters of 2020 as a result of certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates.
Segment discussion
The following table summarizes our net sales by our five geographic operating
segments for the years ended
Change
2020 2019 $ %
(in thousands)
U.S. $ 181,941 $ 169,317 $ 12,624 7.5 %
Asia 527,083 393,809 133,274 33.8 %
Mexico 495,839 435,606 60,233 13.8 %
EMEA 373,545 437,081 (63,536 ) -14.5 %
India 91,729 687 91,042 NM
Total net sales $ 1,670,137 $ 1,436,500 $ 233,637 16.3 %
NM - not meaningful.
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The following table summarizes our net sales by product/service for the
Change
2020 2019 $ %
(in thousands)
Wind blade sales $ 135,415 $ 120,125 $ 15,290 12.7 %
Precision molding and
assembly systems sales - 3,774 (3,774 ) NM
Transportation sales 33,849 28,523 5,326 18.7 %
Other sales 12,677 16,895 (4,218 ) -25.0 %
Total net sales $ 181,941 $ 169,317 $ 12,624 7.5 %
The increase in the U.S. segment's net sales of wind blades was primarily due to
a 14% increase in the number of wind blades produced in the year ended
December 31, 2020 as compared to the same period in 2019, as well as a higher
average sales price due to the mix of wind blade models produced in the
comparable periods. Although our U.S. net sales increased for the year ended
December 31, 2020 compared to the same period in 2019, our U.S. net sales were
adversely impacted due to reduced production levels at our U.S. manufacturing
facilities due to the COVID-19 pandemic primarily during the second quarter of
2020.
Asia Segment
The following table summarizes our net sales by product/service for the
Change
2020 2019 $ %
(in thousands)
Wind blade sales $ 511,090 $ 366,206 $ 144,884 39.6 %
Precision molding and
assembly systems sales 13,134 25,203 (12,069 ) -47.9 %
Other sales 2,859 2,400 459 19.1 %
Total net sales $ 527,083 $ 393,809 $ 133,274 33.8 %
The increase in the Asia segment's net sales of wind blades was primarily due to
a 22% net increase in the number of wind blades produced in the year ended
December 31, 2020 as compared to the same period in 2019 and an increase in the
average sales price of wind blades due to a change in the mix of wind blades
produced in the two comparative periods. Although our Asia net sales increased
for the year ended December 31, 2020 compared to the same period in 2019, our
Asia net sales were adversely impacted due to reduced production levels at our
Asia manufacturing facilities due to the COVID-19 pandemic primarily during the
first quarter of 2020. Net sales from the manufacturing of precision molding and
assembly systems during the 2020 period decreased by $12.1 million as compared
to the 2019 period primarily due to our customers deferring a number of blade
model transitions due to the COVID-19 pandemic.
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Mexico Segment
The following table summarizes our net sales by product/service for the
Change
2020 2019 $ %
(in thousands)
Wind blade sales $ 472,994 $ 410,337 $ 62,657 15.3 %
Precision molding and
assembly systems sales 14,939 19,703 (4,764 ) -24.2 %
Transportation sales 2,347 347 2,000 NM
Other sales 5,559 5,219 340 6.5 %
Total net sales $ 495,839 $ 435,606 $ 60,233 13.8 %
The increase in the Mexico segment's net sales of wind blades reflects a 18% net
increase in overall wind blade volume and an increase in the average sales price
of wind blades due to a change in the mix of wind blades produced in the two
comparative periods. In addition, our 2019 net sales were impacted by the
employees strike at our Matamoros production facility. Although our Mexico net
sales increased for the year ended December 31, 2020 compared to the same period
in 2019, our Mexico net sales were adversely impacted due to reduced production
levels at our Mexico manufacturing facilities due to the COVID-19 pandemic
primarily during the second quarter of 2020.
EMEA Segment
The following table summarizes our net sales by product/service for the EMEA
segment for the years ended
Change
2020 2019 $ %
(in thousands)
Wind blade sales $ 368,907 $ 431,362 $ (62,455 ) -14.5 %
Other sales 4,638 5,719 (1,081 ) -18.9 %
Total net sales $ 373,545 $ 437,081 $ (63,536 ) -14.5 %
The decrease in the EMEA segment's net sales of wind blades was driven by a 22%
decrease in wind blade production at our two Turkey plants due to transitions
and reduced production levels at these manufacturing facilities due to the
COVID-19 pandemic primarily during the second quarter of 2020. The decrease was
partially offset by an increase in the average sales price of wind blades
delivered in the comparative periods and an increase in the year over year
number of wind blades still in the production process at the end of the period.
The fluctuating U.S. dollar relative to the Euro had a favorable impact of 0.3%
on net sales during the year ended December 31, 2020 as compared to the 2019
period.
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India Segment
The following table summarizes our net sales by product/service for the
Change
2020 2019 $ %
(in thousands)
Wind blade sales $ 91,649 $ 687 $ 90,962 NM
Other sales 80 - 80 NM
Total net sales $ 91,729 $ 687 $ 91,042 NM
The increase in the
Total cost of goods sold
The following table summarizes our total cost of goods sold for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) Cost of sales$ 1,561,432 $ 1,290,619 $ 270,813 21.0 % Startup and transition costs 44,606 68,033 (23,427 ) -34.4 % Total cost of goods sold$ 1,606,038 $ 1,358,652 $ 247,386 18.2 % % of net sales 96.2 % 94.6 % 1.6 % Total cost of goods sold for the year endedDecember 31, 2020 was$1,606.0 million and included$25.9 million related to lines in startup and$18.7 million related to lines in transition during the period. This compares to total cost of goods sold for the year endedDecember 31, 2019 of$1,358.7 million and included$48.5 million related to lines in startup and$19.5 million related to lines in transition during the period. Cost of goods sold as a percentage of net sales increased by approximately two percentage points during the year endedDecember 31, 2020 as compared to the same period in 2019, driven primarily by the increase in warranty costs primarily relating to a remediation campaign for a specific wind blade model for one of our customers, and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, partially offset by a decrease in startup and transition costs, the impact of savings in raw material costs and foreign currency fluctuations. The fluctuatingU.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso had a favorable impact of 1.5% on consolidated cost of goods sold for the year endedDecember 31, 2020 as compared to 2019.
General and administrative expenses
The following table summarizes our general and administrative expenses for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) General and administrative expenses$ 33,496 $ 39,916 $ (6,420 ) -16.1 % % of net sales 2.0 % 2.8 % -0.8 % The decrease in general and administrative expenses as a percentage of net sales for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily driven by lower travel and training costs due to the COVID-19 pandemic. 45
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Loss on sale of assets and asset impairments
The following table summarizes our loss on sale of assets and asset impairments
for the years ended
Change
2020 2019 $ %
(in thousands)
Loss on sale of assets
and asset impairments $ 7,748 $ 18,117 $ (10,369 ) -57.2 %
% of net sales 0.5 % 1.3 % -0.8 %
The decrease in the loss on sale of assets and asset impairments for the year
ended December 31, 2020 as compared to the same period in 2019 was primarily due
to: (i) a decrease of $4.4 million in asset impairment charges primarily related
to the shutdown of our second Newton, Iowa facility in 2019, (ii) a decrease of
$4.1 million in losses on the sale of assets at our corporate and manufacturing
facilities, and (iii) lower losses on the sale of receivables under supply chain
financing arrangements with our customers in the current year period due to
decreasing interest rates as compared to the equivalent prior year period.
Restructuring charges, net
Restructuring charges, net, for the year endedDecember 31, 2020 totaled$4.1 million . These charges primarily related to downsizing at our Dafeng,China manufacturing facility, comprised of$3.8 million of severance benefits to terminated employees, and$0.2 million of other charges, primarily related to exit costs, at our secondNewton, Iowa facility. The$3.8 million of severance benefits relating to our Dafeng,China facility were paid to terminated employees inJanuary 2021 . Restructuring charges, net, for the year endedDecember 31, 2019 totaled$3.9 million . These charges primarily related to the closing of our Taicang City,China manufacturing facility, comprised of$3.3 million of severance benefits to terminated employees and$0.6 million of other charges, primarily related to exit costs.
Income (loss) from operations
Segment discussion
The following table summarizes our income (loss) from operations by our five
geographic operating segments for the years ended
Change
2020 2019 $ %
(in thousands)
U.S. $ (40,991 ) $ (78,278 ) $ 37,287 47.6 %
Asia 62,869 24,132 38,737 160.5 %
Mexico (9,611 ) 3,533 (13,144 ) NM
EMEA 23,331 70,449 (47,118 ) -66.9 %
India (16,832 ) (3,948 ) (12,884 ) NM
Total income from
operations $ 18,766 $ 15,888 $ 2,878 18.1 %
% of net sales 1.1 % 1.1 % 0.0 %
U.S. Segment
The decrease in the loss from operations in the U.S. segment for the year ended
December 31, 2020 as compared to the same period in 2019 was primarily due to:
(i) the decreased costs related to the shutdown of our Newton, Iowa
transportation facility, (ii) the decrease in transition costs at our Newton,
Iowa blade facility, (iii) the increase in wind blade volume, (iv) the increase
in the average sales price of wind blades and (v) a decrease in general and
administrative expenses, partially offset by increased direct material costs at
our Newton, Iowa blade facility. Although our U.S. loss from operations
decreased for the year ended December 31, 2020 compared to the same period in
2019, our income from operations for the year ended December 31, 2020 was
adversely impacted due to reduced production levels at our U.S. blade
manufacturing facility due to the COVID-19 pandemic during the
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second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.
Asia Segment
The increase in the income from operations in theAsia segment for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to the net increase in overall wind blade volume and increase in the average sales price of wind blades, a decrease in the startup and transition costs and lower direct labor costs. The fluctuatingU.S. dollar against the Chinese Renminbi had an unfavorable impact of 0.3% on cost of goods sold for the year endedDecember 31, 2020 as compared to the 2019 period. Although ourAsia income from operations increased for the year endedDecember 31, 2020 as compared to the same period in 2019, our income from operations was adversely impacted due to reduced production levels at ourAsia manufacturing facilities due to the COVID-19 pandemic during the first quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.
Mexico Segment
The decrease in income from operations in theMexico segment for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to increased warranty costs, the reduced production levels at ourMexico manufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. These increased costs were partially offset by the overall increase in wind blade volume, an increase in the average sales price of wind blades, decreased startup and transition costs, favorable foreign currency fluctuations as well as from savings in raw material costs. The fluctuatingU.S. dollar relative to the Mexican Peso had a favorable impact of 1.9% on cost of goods sold for the year endedDecember 31, 2020 as compared to 2019. EMEA Segment The decrease in income from operations in the EMEA segment for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily driven by increased warranty costs, decreased wind blade production at our twoTurkey manufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, the increased transition costs at one of ourTurkey manufacturing facilities, partially offset by favorable foreign currency fluctuations. The fluctuatingU.S. dollar relative to the Turkish Lira and Euro had a favorable impact of 3.2% on cost of goods sold for the year endedDecember 31, 2020 as compared to 2019.
India Segment
The increase in the loss from operations in theIndia segment for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to the increased startup costs related to ourIndia manufacturing facility during 2020. Other income (expense) The following table summarizes our total other income (expense) for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) Interest income$ 102 $ 157 $ (55 ) -35.0 % Interest expense (10,501 ) (8,179 ) (2,322 ) -28.4 % Foreign currency loss, net (19,986 ) (4,107 ) (15,879 ) NM Miscellaneous income 3,876 3,648 228 6.3 % Total other expense$ (26,509 ) $ (8,481 ) $ (18,028 ) NM 47
-------------------------------------------------------------------------------- The increase in the total other expense for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to increases in foreign currency loss, net primarily due to net Euro liability exposure against the Turkish Lira in the current year period as compared to the same period in 2019. Income tax provision The following table summarizes our income tax provision for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) Income tax provision$ 11,284 $ 23,115 $ (11,831 ) -51.2 % Effective tax rate -145.7 % 312.1 % The decrease in the income tax provision for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to tax benefits from the effect of tax law changes and the release of valuation allowances in certain jurisdictions, partially offset by lower pretax income related to the earnings mix by jurisdiction and unrecognized tax benefits in the year endedDecember 31, 2020 as compared to the same period in 2019.
Net loss
The following table summarizes our net loss for the years endedDecember 31 : Change 2020 2019 $ % (in thousands) Net loss$ 19,027 $ 15,708 $ 3,319 21.1 % The increase in the net loss for the year endedDecember 31, 2020 as compared to the same period in 2019 was primarily due to the reasons set forth above. In addition, we estimate that our net loss during the year endedDecember 31, 2020 was adversely impacted by approximately$26.5 million , net of taxes, based upon the forecasted gross margin on the wind blade sets we had forecasted to produce at ourMexico ,China ,Iowa ,Turkey andIndia manufacturing facilities in the period under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. In addition, during the period we incurred$15.5 million , net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The diluted net loss per share was$0.54 for the year endedDecember 31, 2020 , compared to a diluted net loss per share of$0.45 for the year endedDecember 31, 2019 .
Year Ended
For a comparison of our results of operations for the years endedDecember 31, 2019 and 2018, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations" included in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onMarch 2, 2020 incorporated herein by reference.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the uncertainty relating to: (i) the rapidly evolving nature, magnitude and duration of the COVID-19 pandemic, (ii) the variety of measures implemented by governments around the world to address its effects and (iii) the impact on our manufacturing operations, we have and will continue to manage our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the year endedDecember 31, 2020 , we had net borrowings of$58.7 million under our Credit Agreement. In addition, during the year endedDecember 31, 2020 , we entered into or amended four unsecured credit agreements with four Turkish financial institutions resulting in net borrowings of$25.1 million and current availability of$52.9 million . 48 -------------------------------------------------------------------------------- Our primary needs for liquidity have been, and in the future will continue to be, capital expenditures, new facility startup costs, the impact of transitions, working capital, debt service costs and warranty costs. Our capital expenditures have been primarily related to machinery and equipment for new facilities or facility expansions. Historically, we have funded our working capital needs through cash flows from operations, the proceeds received from our credit facilities and from proceeds received from the issuance of stock. We had net borrowings under our financing arrangements of$75.7 million for the year endedDecember 31, 2020 as compared to net repayments under our financing arrangements of$2.1 million and$8.9 million for the years endedDecember 31, 2019 and 2018, respectively. As ofDecember 31, 2020 and 2019, we had$217.9 million and$142.1 million in outstanding indebtedness, excluding debt issuance costs, respectively. As ofDecember 31, 2020 , we had an aggregate of$120.5 million of remaining capacity and$94.2 million of remaining availability under our various credit facilities. Working capital requirements have increased as a result of our overall growth and the need to fund higher accounts receivable and inventory levels as our business volumes have increased. Based upon current and anticipated levels of operations, we believe that cash on hand, available credit facilities and cash flow from operations will be adequate to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our indebtedness over the next twelve months. We anticipate that any new facilities and future facility expansions will be funded through cash flows from operations, the incurrence of other indebtedness and other potential sources of liquidity. AtDecember 31, 2020 and 2019, we had unrestricted cash, cash equivalents and short-term investments totaling$129.9 million and$70.3 million , respectively. TheDecember 31, 2020 balance includes$61.0 million of cash located outside ofthe United States , including$47.4 million inChina ,$6.0 million inTurkey ,$5.0 million inIndia ,$2.1 million inMexico and$0.5 million in other countries. InFebruary 2020 , we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement was increased from$150.0 million to$205.0 million . Our ability to repatriate funds fromChina tothe United States is subject to a number of restrictions imposed by the Chinese government. We repatriate funds through several technology license and corporate/administrative service agreements. We are compensated quarterly based on agreed upon royalty rates for such intellectual property licenses and quarterly fees for those services. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions ofChina , including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.6 million ) 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. AtDecember 31, 2020 , the amount of the surplus reserve fund was$7.0 million .
Cash Flow Discussion
The following table summarizes our key cash flow activity for the years endedDecember 31 : 2020 2019 $ Change (in thousands)
Net cash provided by operating activities
$ (19,514 ) Net cash used in investing activities (65,666 ) (75,510 )
9,844
Net cash provided by financing activities 88,612 970
87,642
Impact of foreign exchange rates on cash, cash equivalents and restricted cash (2,069 ) (171 ) (1,898 ) Net change in cash, cash equivalents and restricted cash$ 58,447 $ (17,627 ) $ 76,074 49
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Operating Cash Flows
Net cash provided by operating activities decreased by$19.5 million for the year endedDecember 31, 2020 as compared to the same period in 2019 primarily as the result of decreased operating results and certain changes in our working capital. Investing Cash Flows Net cash used in investing activities decreased by$9.8 million for the year endedDecember 31, 2020 as compared to the same period in 2019 primarily as the result of a decrease in capital expenditures. We anticipate fiscal year 2021 capital expenditures of between$55 million to$65 million and we estimate that the cost that we will incur afterDecember 31, 2020 to complete our current projects in process will be approximately$13.8 million . We have used, and will continue to use, cash flows from operations, the proceeds received from our credit facilities and the proceeds received from the issuance of stock for major projects currently being undertaken, which include our manufacturing facility inChennai, India and the continued investment in our existingTurkey ,Mexico ,China andU.S. facilities. Financing Cash Flows Net cash provided by financing activities increased by$87.6 million for the year endedDecember 31, 2020 as compared to the same period in 2019 primarily as the result of increased borrowings on our revolving loans and other growth-related debt, as well as increased proceeds from the exercise of stock options. Our Indebtedness
For a discussion of our indebtedness, refer to Note 11 - Long-Term Debt, Net of Debt Issuance Costs and Current Maturities of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Other Contingencies
For a discussion of our legal proceedings, refer to Note 14 - Commitments and Contingencies - (b) Legal Proceedings of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. The wind blades and other composite structures that we produce are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade or the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade (which could include significant transportation and installation costs) at our sole expense. AtDecember 31, 2020 and 2019, we had accrued warranty reserves totaling$50.9 million and$47.6 million , respectively.
As of
Off-Balance Sheet Transactions
We are not presently involved in any off-balance sheet arrangements, including
transactions with unconsolidated special-purpose or other entities that would
materially affect our financial position, results of operations, liquidity or
capital resources, other than our accounts receivable assignment agreements
described below. Furthermore, we do not have any relationships with
special-purpose or other entities that provide off-balance sheet financing;
liquidity, market risk or credit risk support; or engage in leasing or other
services that may expose us to liability or risks of loss that are not reflected
in the consolidated financial statements and related notes.
50
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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.
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% 2018 Mexico LIBOR plus 1.25% 2018 EMEA EURIBOR plus 0.75% 2019 Asia and Mexico LIBOR plus 1.00% 2019 Asia and Mexico LIBOR plus 1.00% 2019 Asia Fixed rate of 3.85% 2020 EMEA EURIBOR plus 1.95% 2020 India LIBOR plus 1.00% 2020 U.S. LIBOR plus 1.25%
As the receivables are purchased by the financial institutions under the
agreements noted above, the receivables are removed from our consolidated
balance sheet. During the years ended
Contractual Obligations
The following table summarizes certain of our contractual obligations as ofDecember 31, 2020 : Payments Due by Period Less than 1 More than 5 year 1-3 years 3-5 years years Total (in thousands)
Long-term debt obligations(1)
217 $ - $ 217,918
Operating lease obligations(2) 34,798 62,644 54,004 98,764 250,210
Purchase obligations 2,568 2,465 714 - 5,747
Estimated interest payments(3) 7,529 8,904 6 - 16,439
Total contractual obligations
(1) See "-Our Indebtedness" above.
(2) Our operating lease obligations represent the contractual payments due for
the lease of our corporate office in
facilities in Iowa , Rhode Island , New Mexico , China , Mexico , Turkey ,
Denmark , Germany and India .
(3) Includes interest on variable rate debt based on interest rates as of
December 31, 2020 . See "-Our Indebtedness" above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported
amount of our assets, liabilities, revenue and expenses and related disclosure
of contingent assets and liabilities. We evaluate our estimates on an ongoing
basis, including those related to income taxes and warranty expense. We base our
estimates on our historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making the judgments we make about the carrying values of our assets
and liabilities that are not readily apparent from other sources. Because these
estimates can vary depending on the situation, actual results may differ from
the estimates.
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We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements.
Revenue Recognition. The majority of our revenue is generated from long-term contracts associated with manufacturing of wind blades and related services. We account for a long-term contract when it has the approval from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and the collectability of consideration is probable. Our manufacturing services are customer specific and involve production of items that cannot be sold to other customers due to the customers' protected intellectual property. Revenue is primarily recognized over time as we have an enforceable right to payment upon termination and we may not use or sell the product to fulfill other customers' contracts. Because control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation under the cost-to-cost input measure of progress as this method provides the best representation of the production progress towards satisfaction of the performance obligation. Under the cost-to-cost method, progress and the related revenue recognition is determined by a ratio of direct costs incurred to date in fulfillment of the performance obligation to the total estimated direct costs required to complete the performance obligation. Determining the revenue to be recognized for services performed under our manufacturing contracts involves judgments and estimates relating to the total consideration to be received and the expected direct costs to complete the performance obligation. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information available to us at the time of the estimate and may materially change as additional information becomes known. Under the cost-to-cost method, contract assets established primarily relate to our rights to consideration for work completed but not billed at the reporting date on manufacturing services contracts. The contract assets are transferred to accounts receivable when the rights become unconditional, which generally occurs when customers are invoiced upon the determination that a product conforms to the contract specifications. See Note 1 - Summary of Operations and Summary of Significant Accounting Policies - (c) Revenue Recognition of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, for further discussion of our accounting policies related to revenue recognition, including accounting policies surrounding our non-manufacturing related services. Income Taxes. In connection with preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our assessment of any net operating loss carryforwards, as well as estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We also have to assess whether any portion of our earnings generated in one taxing jurisdiction might be claimed as earned by income tax authorities in a differing tax jurisdiction. Significant judgment is required in determining our annual tax rate, the allocation of earnings to various jurisdictions and the evaluation of our tax positions. In the normal course of business, we establish valuation allowances for our deferred tax assets when the realization of the assets is not more likely than not. We intend to maintain such valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowances. Historically, we determined that a valuation allowance for all of ourU.S. deferred tax assets was appropriate, however during the third quarter of 2018, we reversed a portion of theU.S. valuation allowance, based on the available evidence at that time. In 2019 a full valuation allowance was recorded in Taicang andIndia . Given our anticipated future earnings inIndia from becoming fully operational in 2020, we reversed the valuation allowance in that jurisdiction in 2020. The effect of a change in judgment concerning the realizability of deferred tax assets is included in our income tax provision. 52
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As of
InDecember 2017 , the Tax Cuts and Jobs Act (Tax Reform) was signed into law, which significantly revisedU.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning afterDecember 31, 2017 , eliminating certain deductions, imposing a mandatory one-time transition tax, introducing new tax regimes, and changing how foreign earnings are subject toU.S. tax. Tax Reform also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, interest expense limitations, NOL deduction limitations, tax on global intangible low tax income (GILTI) earned by foreign corporate subsidiaries, the base erosion anti abuse tax (BEAT), and a deduction for foreign derived intangible income (FDII). As ofDecember 31, 2018 , we completed the accounting for the enactment-date income tax effects of Tax Reform, which resulted in an immaterial impact to our financial statements. Upon further analyses of certain aspects of Tax Reform, and refinement of calculations during 2018, we increased our provisional amount of previously untaxed foreign earnings by$13.8 million , to$88.1 million . This resulted in no change to ourU.S. federal income tax expense due to the impact of foreign tax credits. In addition, the provisional net tax expense, which was estimated at approximately$0.1 million , primarily attributable to the reduction in the federal tax rate, was unchanged and we made a policy election to account for any impacts of GILTI tax in the period in which it is incurred. Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both theU.S. and numerous foreign jurisdictions in which we operate, principally,China ,Mexico , andTurkey . Significant judgements and estimates are required in determining our consolidated income tax expense. The statutory federal corporate income tax rate in the U. S. is 21% and the tax rates inChina ,Mexico andTurkey are 25%, 30% and 22%, respectively. Our secondTurkey facility is located in a tax-free zone and is not subject to income taxes on earnings recognized from its manufacturing activities. Warranty Expense. The wind blades we manufacture are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade in the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade at our sole expense. We provide warranties for all of our products with terms and conditions that vary depending on the product sold. We record warranty expense based upon our estimate of future repairs using a probability-based methodology that considers previous warranty claims, identified quality issues and industry practices. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount. Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, availability of materials, shipping and handling, and de-installation and re-installation costs at customers' sites, among others. When a potential or actual warranty claim arises, we may accrue additional warranty reserves for the estimated cost of remediation or proposed settlement. In 2020, we accrued additional warranty expenses of approximately$12.9 million beyond the normal warranty expense describe above related to a remediation campaign for a specific wind blade model for one of our customers. We have not experienced any material warranty expenses beyond the provision described above in the years endedDecember 31, 2019 and 2018. However, changes in warranty reserves could have a material effect on our consolidated financial statements. For example, as ofDecember 31, 2020 , a change in the estimated warranty accrual rate of 1% across all products would change the warranty accrual by approximately$42.5 million . 53
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Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 - Summary of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
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