UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-37839
TPI Composites, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
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20-1590775 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
8501 N. Scottsdale Rd.
Gainey Center II, Suite 100
Scottsdale, AZ 85253
(480) 305-8910
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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☒ (Do not check if a smaller reporting company) |
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Smaller reporting company |
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Emerging growth company ☒ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 4, 2017, there were 33,886,088 shares of common stock outstanding.
TPI COMPOSITES, INC. AND SUBSIDIARIES
INDEX
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ITEM 1. |
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Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016 |
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1 |
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Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2017 and 2016 |
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2 |
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Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016 |
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3 |
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Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 |
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4 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
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5 |
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ITEM 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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ITEM 3. |
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31 |
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ITEM 4. |
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32 |
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ITEM 1. |
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33 |
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ITEM 1A. |
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33 |
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ITEM 2. |
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33 |
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ITEM 3. |
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33 |
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ITEM 4. |
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33 |
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ITEM 5. |
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33 |
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ITEM 6. |
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34 |
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35 |
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as “may,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar words. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:
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growth of the wind energy market and our addressable market; |
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the potential impact of General Electric’s acquisition of LM Wind Power upon our business; |
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our future financial performance, including our net sales, cost of goods sold, gross profit or gross margin, operating expenses, ability to generate positive cash flow, and ability to achieve or maintain profitability; |
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the sufficiency of our cash and cash equivalents to meet our liquidity needs; |
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our ability to attract and retain customers for our products, and to optimize product pricing; |
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competition from other wind blade and wind blade turbine manufacturers; |
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the discovery of defects in our products; |
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our ability to successfully expand in our existing markets and into new international markets; |
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worldwide economic conditions and their impact on customer demand; |
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our ability to effectively manage our growth strategy and future expenses; |
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our ability to maintain, protect and enhance our intellectual property; |
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our ability to comply with existing, modified or new laws and regulations applying to our business, including the imposition of new taxes, duties or similar assessments on our products; and |
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the attraction and retention of qualified employees and key personnel. |
These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section of our Annual Report on Form 10-K filed with the United States Securities and Exchange Commission (SEC) on March 17, 2017 (the Annual Report on Form 10-K) the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.
The forward-looking statements in this Quarterly Report on Form 10-Q represent our views as of the date of this Quarterly Report. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we undertake no obligation to update any forward-looking statement to reflect events or developments after the date on which the statement is made or to reflect the occurrence of unanticipated events except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date after the date of this Quarterly Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.
PART I—FI NANCI AL INFORMATION
ITEM l. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TPI COMPOSITES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except par value data)
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June 30, |
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December 31, |
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2017 |
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2016 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
130,834 |
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$ |
119,066 |
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Restricted cash |
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2,783 |
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2,259 |
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Accounts receivable (Note 3) |
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117,202 |
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67,842 |
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Inventories |
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59,753 |
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53,095 |
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Inventories held for customer orders |
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56,974 |
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52,308 |
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Prepaid expenses and other current assets |
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25,487 |
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30,657 |
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Total current assets |
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393,033 |
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325,227 |
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Property, plant, and equipment, net |
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112,432 |
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91,166 |
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Other noncurrent assets |
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14,432 |
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20,813 |
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Total assets |
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$ |
519,897 |
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$ |
437,206 |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable and accrued expenses |
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$ |
149,285 |
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$ |
112,281 |
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Accrued warranty |
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25,873 |
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19,912 |
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Deferred revenue (Note 3) |
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74,255 |
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69,568 |
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Customer deposits and customer advances |
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8,663 |
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1,390 |
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Current maturities of long-term debt |
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38,511 |
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33,403 |
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Total current liabilities |
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296,587 |
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236,554 |
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Long-term debt, net of debt issuance costs and current maturities |
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89,852 |
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89,752 |
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Other noncurrent liabilities |
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4,222 |
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4,393 |
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Total liabilities |
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390,661 |
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330,699 |
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Commitments and contingencies (Note 10) |
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Shareholders’ equity: (Note 3) |
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Preferred shares, $0.01 par value, 5,500 shares authorized, no shares issued or outstanding at June 30, 2017 and December 31, 2016 |
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— |
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— |
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Common shares, $0.01 par value, 100,000 shares authorized and 33,737 shares issued and outstanding at June 30, 2017 and December 31, 2016 |
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337 |
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337 |
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Paid-in capital |
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297,653 |
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292,833 |
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Accumulated other comprehensive loss |
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(2,285 |
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(3,862 |
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Accumulated deficit |
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(166,469 |
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(182,801 |
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Total shareholders’ equity |
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129,236 |
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106,507 |
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Total liabilities and shareholders’ equity |
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$ |
519,897 |
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$ |
437,206 |
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See accompanying notes to unaudited condensed consolidated financial statements.
1
TPI COMPOSITES, INC. AND SUBSIDIARIES
Condensed Consolidated Income Statements
(In thousands, except per share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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(Unaudited) |
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Net sales (Note 3) |
$ |
248,186 |
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$ |
194,255 |
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$ |
439,788 |
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$ |
370,365 |
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Cost of sales |
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203,095 |
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168,382 |
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370,518 |
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328,248 |
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Startup and transition costs |
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10,540 |
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3,055 |
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16,699 |
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6,361 |
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Total cost of goods sold |
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213,635 |
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171,437 |
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387,217 |
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334,609 |
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Gross profit |
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34,551 |
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22,818 |
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52,571 |
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35,756 |
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General and administrative expenses |
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10,752 |
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5,340 |
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19,058 |
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10,089 |
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Income from operations |
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23,799 |
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17,478 |
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33,513 |
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25,667 |
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Other income (expense): |
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Interest income |
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11 |
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28 |
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30 |
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49 |
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Interest expense |
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(2,935 |
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(4,134 |
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(5,961 |
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(8,046 |
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Realized loss on foreign currency remeasurement |
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(1,233 |
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(18 |
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(2,614 |
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(457 |
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Miscellaneous income |
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258 |
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154 |
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578 |
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344 |
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Total other expense |
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(3,899 |
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(3,970 |
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(7,967 |
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(8,110 |
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Income before income taxes |
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19,900 |
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13,508 |
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25,546 |
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17,557 |
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Income tax provision |
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(6,042 |
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(1,953 |
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(8,143 |
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(4,256 |
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Net income |
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13,858 |
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11,555 |
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17,403 |
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13,301 |
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Net income attributable to preferred shareholders |
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— |
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2,438 |
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— |
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4,875 |
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Net income attributable to common shareholders |
$ |
13,858 |
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$ |
9,117 |
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$ |
17,403 |
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$ |
8,426 |
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Weighted-average common shares outstanding: |
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Basic |
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33,737 |
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4,238 |
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33,737 |
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4,238 |
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Diluted |
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33,828 |
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4,244 |
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33,827 |
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4,244 |
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Net income per common share: |
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Basic |
$ |
0.41 |
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$ |
2.15 |
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$ |
0.52 |
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$ |
1.99 |
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Diluted |
$ |
0.41 |
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$ |
2.15 |
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$ |
0.51 |
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$ |
1.99 |
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See accompanying notes to unaudited condensed consolidated financial statements.
2
TPI COMPOSITES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2017 |
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2016 |
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2017 |
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2016 |
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(Unaudited) |
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Net income |
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$ |
13,858 |
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$ |
11,555 |
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$ |
17,403 |
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$ |
13,301 |
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Other comprehensive income: |
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Foreign currency translation adjustments |
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1,300 |
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(1,253 |
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1,577 |
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(825 |
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Comprehensive income |
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$ |
15,158 |
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$ |
10,302 |
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$ |
18,980 |
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$ |
12,476 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
TPI COMPOSITES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
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Six Months Ended |
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June 30, |
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2017 |
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2016 |
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(Unaudited) |
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Cash flows from operating activities: |
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Net income |
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$ |
17,403 |
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$ |
13,301 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
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8,483 |
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6,173 |
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Share-based compensation expense |
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3,751 |
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— |
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Amortization of debt issuance costs |
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286 |
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830 |
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Amortization of debt discount |
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— |
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1,509 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(49,360 |
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(14,643 |
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Inventories |
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(11,324 |
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(2,368 |
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Prepaid expenses and other current assets |
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5,170 |
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(9,614 |
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Other noncurrent assets |
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7,111 |
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(2,527 |
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Accounts payable and accrued expenses |
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34,633 |
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196 |
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Accrued warranty |
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5,961 |
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16,977 |
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Customer deposits |
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7,273 |
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(261 |
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Deferred revenue |
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4,687 |
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136 |
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Other noncurrent liabilities |
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(141 |
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466 |
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Net cash provided by operating activities |
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33,933 |
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10,175 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
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(26,727 |
) |
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(14,244 |
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Net cash used in investing activities |
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(26,727 |
) |
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(14,244 |
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Cash flows from financing activities: |
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Repayment of term loan |
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(1,875 |
) |
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— |
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Net proceeds from (repayments of) accounts receivable financing |
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5,182 |
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(8,565 |
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Net repayments of working capital loans |
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(4,638 |
) |
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(764 |
) |
Net proceeds from (repayments of) other debt |
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6,253 |
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(2,664 |
) |
Proceeds from customer advances |
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— |
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|
2,000 |
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Restricted cash |
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(524 |
) |
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(648 |
) |
Net cash provided by (used in) financing activities |
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4,398 |
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(10,641 |
) |
Impact of foreign exchange rates on cash and cash equivalents |
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164 |
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(150 |
) |
Net change in cash and cash equivalents |
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11,768 |
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(14,860 |
) |
Cash and cash equivalents, beginning of year |
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|
119,066 |
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|
45,917 |
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Cash and cash equivalents, end of period |
|
$ |
130,834 |
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$ |
31,057 |
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
|
$ |
5,866 |
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|
$ |
4,864 |
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Cash paid for income taxes, net |
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|
9,982 |
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|
|
4,188 |
|
Supplemental disclosures of noncash investing and financing activities: |
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Accrued capital expenditures in accounts payable |
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|
5,002 |
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|
2,198 |
|
See accompanying notes to unaudited condensed consolidated financial statements.
4
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Summary of Operations and Significant Accounting Policies
Description of Business
TPI Composites, Inc. is the holding company that conducts substantially all of its business operations through its direct and indirect subsidiaries (collectively, the Company). The Company was founded in 1968 and has been producing composite wind blades since 2001. The Company’s knowledge and experience of composite materials and manufacturing originates with its predecessor company, Tillotson Pearson Inc., a leading manufacturer of high-performance sail and powerboats along with a wide range of composite structures used in other industrial applications. Following the separation from the boat building business in 2004, the Company reorganized in Delaware as LCSI Holding, Inc. and then changed its corporate name to TPI Composites, Inc. in 2008. Today, the Company is headquartered in Scottsdale, Arizona and has expanded its global footprint to include domestic facilities in Newton, Iowa; Fall River, Massachusetts; Warren, Rhode Island and Santa Teresa, New Mexico and international facilities in Dafeng, China; Taicang Port, China; Taicang City, China; Juárez, Mexico and Izmir, Turkey. In April 2017, the Company entered into a new lease agreement with a third party for a new manufacturing facility in Matamoros, Mexico, and the Company expects to commence operations at this facility in the first half of 2018.
Initial Public Offering and Stock Split
In July 2016, the Company completed an initial public offering (IPO) of 7,187,500 shares of the Company’s common stock at a price of $11.00 per share, which included 937,500 shares issued pursuant to the underwriters’ over-allotment option. Certain of the Company’s existing shareholders, a director and executive officers purchased an aggregate of 1,250,000 shares of common stock in the IPO included in the total issuance above. The net proceeds from the IPO were $67.2 million after deducting underwriting discounts and offering expenses. Immediately prior to the closing of the IPO, all shares of the then-outstanding redeemable preferred shares converted into an aggregate of 21,110,204 shares of common stock and the redeemable preferred share warrants converted on a net issuance basis into 120,923 shares of common stock. In addition, concurrent with the closing of the IPO, certain subordinated convertible promissory notes in the aggregate principal and interest amount of $11.9 million were converted into 1,079,749 shares of common stock at the public offering price of $11.00 per share.
Prior to the IPO, in July 2016 the Company amended its amended and restated certificate of incorporation to effect a 360-for-1 forward stock split of its common stock. As a result of the stock split, the Company has adjusted the share amounts authorized and issuable under the share-based compensation plans. All share and per share common stock information (including the share-based compensation plans) referenced throughout the unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect this stock split. The stock split did not cause an adjustment to the par value of the authorized shares of common stock.
5
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
In May 2017, the Company completed a secondary public offering of 5,075,000 shares of its common stock at a price of $16.35 per share, which included 575,000 shares issued pursuant to the underwriters’ option to purchase additional shares. All of the shares were sold by existing shareholders and certain executive officers of the Company. The selling shareholders received all of the net proceeds of $78.8 million from the secondary public offering. The Company did not sell any shares and did not receive any of the proceeds from the offering and the costs paid by the Company in connection with the offering of $0.8 million were recorded in general and administrative costs in the accompanying condensed consolidated income statement.
Basis of Presentation
The Company divides its business operations into four geographic operating segments—the United States, Asia, Mexico and Europe, the Middle East and Africa (EMEA) as follows:
|
• |
The U.S. segment includes (1) the manufacturing of wind blades at the Newton, Iowa plant, (2) the manufacturing of precision molding and assembly systems used for the manufacture of wind blades in the Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which the Company also conducts in its Rhode Island and Massachusetts facilities and (4) its corporate headquarters, the costs of which are included in general and administrative expenses. |
|
• |
The Asia segment includes (1) the manufacturing of wind blades at a facility in Taicang Port, China and at its two facilities in Dafeng, China, (2) the manufacturing of precision molding and assembly systems in the Taicang City, China facility, (3) the manufacture of components in a second Taicang Port, China facility and (4) wind blade inspection and repair services. |
|
• |
The Mexico segment manufactures wind blades from three facilities in Juárez, Mexico, one of which commenced operations in 2014, the second during the third quarter of 2016 and the third in January 2017. In April 2017, the Company entered into a new lease agreement with a third party for a new manufacturing facility in Matamoros, Mexico, and the Company expects to commence operations at this facility in the first half of 2018. |
|
• |
The EMEA segment manufactures wind blades from two facilities in Izmir, Turkey. The Company entered into a joint venture in 2012 to produce wind blades at the first Turkey plant and in 2013 became the sole owner of the Turkey operation with the acquisition of the remaining 25% interest. The EMEA segment commenced operations in the second facility during the third quarter of 2016. |
The accompanying consolidated financial statements include the accounts of TPI Composites, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the SEC and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2016 included in the Company’s Annual Report on Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted, as permitted by the SEC, although the Company believes the disclosures that are made are adequate to make the information presented herein not misleading. The accompanying condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly the Company’s financial position at June 30, 2017, and the results of the Company’s operations, comprehensive income and cash flows for the periods presented. The Company derived the December 31, 2016 condensed consolidated balance sheet data from audited financial statements, but does not include all disclosures required by GAAP. Interim results for the three and six months ended June 30, 2017 and 2016 are not necessarily indicative of the results to be expected for the full years.
Warranty Expense
The Company provides a limited warranty for its mold and wind blade products, including parts and labor, with terms and conditions that vary depending on the product sold, for periods that range from two to five years. Warranty expense is recorded based upon estimates of future repairs using a probability-based methodology. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount.
6
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Warranty accrual at June 30 consisted of the following (in thousands):
|
|
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
Warranty accrual at beginning of year |
|
$ |
19,912 |
|
Accrual during the period |
|
|
7,861 |
|
Cost of warranty services provided during the period |
|
|
(305 |
) |
Reversal of reserves upon warranty expiration |
|
|
(1,595 |
) |
Warranty accrual at end of period |
|
$ |
25,873 |
|
Net Income Attributable to Preferred Shareholders
Net income attributable to preferred shareholders related to the accrual of dividends on our convertible and senior redeemable preferred shares, the accretion to redemption amounts on our convertible preferred shares and warrant fair value adjustment. Immediately prior to the closing of our IPO, all preferred shares were converted into shares of our common stock and as a result, the accrual of dividends ceased.
Net Income Per Share Calculation
The basic net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during a period. Diluted net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding plus potentially dilutive securities. The table below reflects the calculation of the weighted-average number of common shares outstanding used in computing basic and diluted earnings per common share (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||
Basic weighted-average shares outstanding |
|
|
33,737 |
|
|
|
4,238 |
|
|
|
33,737 |
|
|
|
4,238 |
|
Effect of dilutive stock options and warrants |
|
|
91 |
|
|
|
6 |
|
|
|
90 |
|
|
|
6 |
|
Diluted weighted-average shares outstanding |
|
|
33,828 |
|
|
|
4,244 |
|
|
|
33,827 |
|
|
|
4,244 |
|
The Company did not have any potentially dilutive securities outstanding that are not included in the diluted net income per share calculation for the three and six months ended June 30, 2017 and 2016.
Use of Estimates
The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
7
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted in 2017
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-09, Compensation – Stock Compensation: Improvement to Employee Share-Based Payment Accounting , to simplify certain aspects of the accounting for share-based payment transactions to employees. The new standard requires excess tax benefits and tax deficiencies to be recorded in the consolidated income statements as a component of the provision for income taxes when stock awards vest or options are exercised. In addition, it eliminates the requirement to reclassify cash flows related to excess tax benefits from operating activities to financing activities on the consolidated statements of cash flows. Further, the standard provides an accounting policy election to account for forfeitures as they occur, allows us to withhold more of an employee’s vesting shares for tax withholding purposes without triggering liability accounting, and clarifies that all cash payments made to tax authorities on an employee’s behalf for withheld shares should be presented as a financing activity on the Company’s consolidated statements of cash flows.
The Company adopted ASU 2016-09 in the first quarter of 2017 using the modified retrospective transition method through a cumulative effect adjustment to equity as of January 1, 2017. Upon adoption, the Company elected to eliminate application of a forfeiture assumption to share based compensation expense and account for forfeitures as they occur over the vesting period. The cumulative effect of this change increased additional paid-in capital and decreased retained earnings as of January 1, 2017 by $1.1 million. The Company did not have any previously unrecognized excess tax effects that had not been recorded as a reduction to the tax liability.
The Company did not have any vesting of restricted stock units or stock option exercises during the periods presented in the accompanying financial statements; therefore, the provisions of the standard relating to the cash flow presentation and income taxes did not impact the statements of cash flows nor the income tax provision for the three or six months ended June 30, 2017. The inclusion of excess tax benefits and deficiencies as a component of the Company’s income tax expense in future periods will increase volatility within the provision for income taxes as the amount of excess tax benefits or deficiencies from share-based compensation awards are dependent on the Company’s stock price at the date the restricted awards vest, the stock price on the date an option is exercised, and the quantity of options exercised.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , (Topic 606), which provides new recognition and disclosure requirements for revenue from contracts with customers that supersedes the existing revenue recognition guidance. The new recognition requirements focus on when the customer obtains control of the goods or services, rather than the current risks and rewards model of recognition. The core principle of the new standard is that an entity will recognize revenue when it transfers goods or services to its customers in an amount that reflects the consideration an entity expects to be entitled to for those goods or services. The new disclosure requirements will include information intended to communicate the nature, amount, timing and any uncertainty of revenue and cash flows from the applicable contracts, including any significant judgments and changes in judgments and assets recognized from the costs to obtain or fulfill a contract. Entities will generally be required to make more estimates and use more judgment under the new standard.
The new requirements are effective for the Company beginning January 1, 2018, and may be implemented either retrospectively for all periods presented, or as a cumulative-effect adjustment as of the date of adoption.
The Company expects to adopt Topic 606 as of January 1, 2018 with retrospective application to January 1, 2016 through December 31, 2017. Based on the Company’s preliminary evaluation of the new standard, revenue recognition in accordance with Topic 606 differs from the current guidance provided by GAAP as outlined in the SEC’s Staff Accounting Bulletin 104, which requires the Company to defer recognition of revenue until the risk of loss has passed to the customer and delivery has been made or a fixed delivery schedule has been provided by the customer. Since the Company’s products have no alternative use to the Company due to contractual restrictions placed by each customer on the technical specifications and design of the products, the Company’s preliminary assessment is that revenue upon adoption of Topic 606 will likely be recognized over time during the course of the production process and before the product is delivered to the customer.
The Company expects that the adoption of Topic 606 will have a material impact on the amount of net sales, cost of goods sold and income from operations reported in the consolidated income statements in future periods. In accordance with Topic 606, revenues will be recognized over the time period of the production process, whereas currently it is recognized upon delivery to the client. Further,
8
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
since revenue will be recognized over time for m anufacturing contracts, future net sales will include amounts related to products that are in production as of the period end. Finally, the gross margin realized in the period may be impacted by the changes related to the timing and amount of revenue recog nized for products in the production process.
The changes noted above involving the timing of revenue recognition will materially impact the amount of reported assets and liabilities associated with our manufacturing contracts. Upon adoption of Topic 606, the Company will include amounts recognized in revenue for products in production in contract assets, which differs from the current practice of including the balances in inventory and will include an amount for the margin recognized to date. The Company believes that it will no longer report inventory held for customer orders since revenue will be recognized over time during the course of the production process and before the product is delivered to the customer. The Company expects that contract liabilities will be reported for amounts collected from customers in advance of the production of products. The Company also expects that the amount of deferred revenue will be substantially reduced as revenue for products will be recognized over time.
The Company does not anticipate a change in the timing of cash receipts and payments from customers as customers will continue to be invoiced as products are completed; however, the impact to the amounts reported in the consolidated statements of cash flows operating activities upon application of Topic 606 is expected to be material.
The Company has a project plan in place for the transition to revenue recognition in accordance with Topic 606 including necessary changes to accounting processes and procedures, the chart of accounts, the system of internal control and retrospective application of the standard to periods beginning January 1, 2016 through December 31, 2017. The Company expects to complete the plan in time to report in accordance with Topic 606 for the first quarterly filing on Form 10-Q for the period ended March 31, 2018.
Cash Flow Presentation
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , that clarifies how certain cash receipts and cash payments are presented and classified in the consolidated statement of cash flows. In addition, in November 2016, the FASB issued ASU 2016-18, Restricted Cash , that requires restricted cash and cash equivalents to be included with the amount of cash and cash equivalents that are reconciled to on the consolidated statement of cash flows. These ASUs are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company does not believe that the adoption of ASU 2016-15 and 2016-18 on January 1, 2018 will have a material effect on the Company’s financial position or results of operations.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases . ASU 2016-02 is a comprehensive new recognition model for leases requiring a lessee to recognize the asset and liability that arise from leases. For public companies, the amendment is effective for financial statements issued for annual periods beginning after December 16, 2018. Entities may elect to early adopt the lease standard in 2016. In adopting ASU 2016-02, entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. Management is evaluating the provisions of ASU 2016-02 and has not yet selected a transition method nor determined what impact the adoption of ASU 2016-02 will have on the Company’s financial position or results of operations.
Financial Instruments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments . ASU 2016-13 revises the accounting requirements related to the measurement of credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years and interim periods within those years, beginning after December 15, 2018. Accordingly, ASU 2016-13 is effective for the Company on January 1, 2020 using a modified retrospective approach, and the Company is currently evaluating the impact that the standard will have on the Company’s financial position and results of operations.
9
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 2. Significant Risks and Uncertainties
The Company’s revenues and receivables are from a small number of customers. As such, the Company’s production levels are dependent on these customers’ orders. See note 11, Concentration of Customers.
The Company maintains its U.S. cash in bank deposit accounts that, at times, exceed U.S. federally insured limits. U.S. bank accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) in an amount up to $250,000 during 2017 and 2016. At June 30, 2017 and December 31, 2016, the Company had $93.2 million and $103.4 million, respectively, of cash in deposit accounts in high quality U.S. banks, which was in excess of FDIC limits. The Company has not experienced losses in any such accounts.
The Company also maintains cash in bank deposit accounts outside the U.S. with no deposit insurance. This includes $30.8 million in China, $5.7 million in Turkey and $1.1 million in Mexico as of June 30, 2017. The Company has not experienced losses in these accounts in the past.
Note 3. Related-Party Transactions
Related party transactions include transactions between the Company and certain of its affiliates. The following transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the parties.
The Company has entered into several agreements with subsidiaries of General Electric Company and its consolidated affiliates (GE) relating to the operation of its business. As a result of these agreements, GE has been a debtor, creditor, holder of preferred shares and currently is a holder of common shares.
The Company has entered into five separate supply agreements with GE to manufacture wind blades in Newton, Iowa; Taicang Port, China; Juárez, Mexico (2) and Izmir, Turkey. The supply agreements in Taicang Port, China and Izmir, Turkey expire December 31, 2017 and GE has decided not to renew or extend these two contracts. As a result of the supply agreements, GE is the Company’s largest customer. As disclosed at note 11, Concentration of Customers , for the three months ended June 30, 2017 and 2016, the Company recorded related-party sales with GE of $102.4 million and $98.1 million, respectively, and for the six months ended June 30, 2017 and 2016, the Company recorded related-party sales with GE of $187.3 million and $194.3 million, respectively. As of June 30, 2017 and December 31, 2016, the Company had accounts receivables related to sales to GE of $26.7 million and $16.6 million, respectively.
Since 2007, the Company has issued multiple series of preferred shares, including several preferred share issuances to GE. Immediately prior to the closing of the IPO, all shares of the then-outstanding preferred shares were converted into shares of common stock. As a result of these transactions, GE owned approximately 8.4% of the Company’s outstanding common stock as of December 31, 2016. As of June 30, 2017, GE has informed the Company that GE owned less than 5% of the Company’s outstanding common stock.
In January 2016, the Company entered into an agreement with GE and received an advance of $2.0 million, which the Company repaid in full in August 2016.
Certain of the Company’s existing stockholders, consisting of entities associated with Element Partners, Angeleno Group and Landmark Partners, each of which is an affiliate of a member of the board of directors, as well as certain executive officers and a director, purchased an aggregate of 1,250,000 shares of common stock in the IPO. In addition, all outstanding obligations and accrued interest under the Company’s subordinated convertible promissory notes held by certain existing stockholders, including Element Partners, Angeleno Group and Landmark Partners, were converted into an aggregate of 1,079,749 shares of common stock concurrent with the closing of the IPO at the public offering price of $11.00 per share.
In connection with the Company’s secondary offering, certain entities associated with Element Partners, Angeleno Group, Landmark Partners and NGP Energy Technology Partners, L.P, as well as certain executive officers of the Company sold an aggregate of 5,075,000 shares of common stock at the public offering price of $16.35 per share.
10
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Accounts receivable consisted of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Trade accounts receivable |
|
$ |
114,401 |
|
|
$ |
66,612 |
|
Other accounts receivable |
|
|
2,801 |
|
|
|
1,230 |
|
Total accounts receivable |
|
$ |
117,202 |
|
|
$ |
67,842 |
|
Note 5. Inventories
Inventories consisted of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Raw materials |
|
$ |
28,524 |
|
|
$ |
29,278 |
|
Work in process |
|
|
26,774 |
|
|
|
21,169 |
|
Finished goods |
|
|
4,455 |
|
|
|
2,648 |
|
Total inventories |
|
$ |
59,753 |
|
|
$ |
53,095 |
|
Note 6. Property, Plant and Equipment, Net
Property, plant and equipment, net consisted of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Machinery and equipment |
|
$ |
86,314 |
|
|
$ |
70,481 |
|
Buildings |
|
|
13,973 |
|
|
|
13,449 |
|
Leasehold improvements |
|
|
19,599 |
|
|
|
16,818 |
|
Office equipment and software |
|
|
9,771 |
|
|
|
6,403 |
|
Furniture |
|
|
18,326 |
|
|
|
15,883 |
|
Vehicles |
|
|
339 |
|
|
|
342 |
|
Construction in progress |
|
|
16,416 |
|
|
|
11,592 |
|
Total |
|
|
164,738 |
|
|
|
134,968 |
|
Accumulated depreciation |
|
|
(52,306 |
) |
|
|
(43,802 |
) |
Property, plant and equipment, net |
|
$ |
112,432 |
|
|
$ |
91,166 |
|
Total depreciation expense for the three months ended June 30, 2017 and 2016 was $4.6 million and $3.2 million, respectively, and for the six months ended June 30, 2017 and 2016 was $8.4 million and $6.2 million, respectively.
11
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
Note 7. Long-Term Debt, Net of Debt Issuance Costs and Current Maturities
Long-term debt, net of debt issuance costs and current maturities, consisted of the following (in thousands):
|
|
June 30, |
|
|
December 31, |
|
||
|
|
2017 |
|
|
2016 |
|
||
Senior term loan—U.S. |
|
$ |
73,125 |
|
|
$ |
75,000 |
|
Senior revolving loan—U.S. |
|
|
2,820 |
|
|
|
2,820 |
|
Accounts receivable financing—EMEA |
|
|
20,302 |
|
|
|
15,120 |
|
Unsecured financing—EMEA |
|
|
— |
|
|
|
4,638 |
|
Equipment financing—EMEA |
|
|
17,121 |
|
|
|
15,813 |
|
Equipment capital lease—Mexico |
|
|
13,850 |
|
|
|
8,037 |
|
Equipment capital lease—U.S. |
|
|
1,156 |
|
|
|
2,016 |
|
Equipment capital lease—EMEA |
|
|
1,918 |
|
|
|
1,898 |
|
Equipment loan—Mexico |
|
|
75 |
|
|
|
103 |
|
Total long-term debt |
|
|
130,367 |
|
|
|
125,445 |
|
Less: Debt issuance costs |
|
|
(2,004 |
) |
|
|
(2,290 |
) |
Total long-term debt, net of debt issuance costs |
|
|
128,363 |
|
|
|
123,155 |
|
Less: Current maturities of long-term debt |
|
|
(38,511 |
) |
|
|
(33,403 |
) |
Long-term debt, net of debt issuance costs and current maturities |
|
$ |
89,852 |
|
|
$ |
89,752 |
|
Note 8. Share-Based Compensation Plans
The Company has granted stock option awards to certain employees and non-employee directors under the Amended and Restated 2015 Stock Option and Incentive Plan (the 2015 Plan). Each award granted prior to the consummation of the IPO included a performance condition that required the completion of an initial public offering by the Company and a required vesting period of one to four years commencing upon achievement of the performance condition. As the IPO was consummated in July 2016, the Company began recording compensation expense in July 2016 for the requisite service period from the grant date through the IPO date with the balance of the share-based compensation to be expensed over the remaining vesting period. Total share-based compensation expense recognized during the three months ended June 30, 2017 was $2.0 million, of which $0.3 million is included in cost of goods sold and the remaining $1.7 million is included in general and administrative expenses. The amount related to restricted stock units was $0.6 million while $1.4 million related to stock options. Total share-based compensation expense recognized during the six months ended June 30, 2017 was $3.8 million, of which $0.6 million is included in cost of goods sold and the remaining $3.2 million is included in general and administrative expenses. The amount related to restricted stock units (RSU) was $1.2 million while $2.6 million related to stock options. No share-based compensation costs were capitalized during the three and six months ended June 30, 2017 and 2016.
As of June 30, 2017, the unamortized cost of the outstanding restricted stock units was $2.3 million, which the Company expects to recognize in the consolidated financial statements over a weighted-average period of approximately 1.5 years. The total unrecognized cost related to non-vested stock option awards was $5.2 million as of June 30, 2017. The Company expects to recognize such costs in the consolidated financial statements over a weighted-average period of approximately 1.9 years.
The following table summarizes the activity of the stock options and RSUs under the Company’s incentive plans:
|
|
|
|
|
|
Stock Options |
|
|
RSUs |
|
||||||||||||||
|
|
Shares Available for Grant |
|
|
Shares |
|
|
Weighted- Average Exercise Price |
|
|
Options Exercisable |
|
|
Units |
|
|
Weighted- Average Grant Date Fair Value |
|
||||||
Balance as of December 31, 2016 |
|
|
3,587,692 |
|
|
|
3,331,418 |
|
|
$ |
12.72 |
|
|
|
25,828 |
|
|
|
636,120 |
|
|
$ |
10.90 |
|
Increase in shares authorized |
|
|
1,349,475 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
Granted |
|
|
(31,480 |
) |
|
|
5,300 |
|
|
|
16.04 |
|
|
|
|
|
|
|
26,180 |
|
|
|
16.04 |
|
Forfeited/cancelled |
|
|
64,800 |
|
|
|
(54,000 |
) |
|
|
13.14 |
|
|
|
|
|
|
|
(10,800 |
) |
|
|
10.87 |
|
Balance as of June 30, 2017 |
|
|
4,970,487 |
|
|
|
3,282,718 |
|
|
|
12.72 |
|
|
|
25,828 |
|
|
|
651,500 |
|
|
|
11.10 |
|
12
TPI COMPOSITES, INC. AND SUBSIDIARIES
Notes to Unaudited Condensed Consolidated Financial Statements
The following table summarizes the outstanding and exercisable stock option awards as of June 30, 2017 :
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
||||||||||||||
Range of Exercise Prices: |
|
|
Shares |
|
|
Weighted- Average Remaining Contractual Life ( in years ) |
|
|
Weighted- Average Exercise Price |
|
|
Shares |
|
|
Weighted- Average Exercise Price |
|
||||||
$8.49 |
|
|
|
25,828 |
|
|
|
2.5 |
|
|
$ |
8.49 |
|
|
|
25,828 |
|
|
$ |
8.49 |
|
|
$10.87 |
|
|
|
2,246,400 |
|
|
|
7.9 |
|
|
|
10.87 |
|
|
|
— |
|
|
|
— |
|
|
$11.00 - $16.04 |
|
|
|
84,500 |
|
|
|
9.1 |
|
|
|
12.73 |
|
|
|
— |
|
|
|
— |
|
|
$ |
16.53 |
|
|
|
583,200 |
|
|
|
8.5 |
|
|
|
16.53 |
|
|
|
— |
|
|
|
— |
|
$17.68 - $18.70 |
|
|
|
342,790 |
|
|
|
8.9 |
|
|
|
18.68 |
|
|
|
— |
|
|
|
— |
|
|
$8.49 to $18.70 |
|
|
|
3,282,718 |
|
|
|
8.1 |
|
|
|
12.72 |
|
|
|
25,828 |
|
|
|
8.49 |
|
Note 9. Income Taxes
Income tax expense was $6.0 million and $2.0 million in the three months ended June 30, 2017 and 2016, respectively, and $8.1 million and $4.3 million in the six months ended June 30, 2017 and 2016, respectively. The higher effective tax rate was primarily due to the Company not recording tax benefits from operating losses in both the U.S. and at the Company’s second manufacturing facility in Turkey. The Company also recognized an additional $0.9 million of tax expense during the six months ended June 30, 2017 as the Company did not record tax benefits from U.S. foreign tax credits due to valuation allowances. The United States and Turkey operations have not had a significant change to the full valuation allowances recorded against their deferred tax assets as of December 31, 2016. No changes in tax law since December 31, 2016 have had a material impact on the Company’s income tax provision.
Note 10. Commitments and Contingencies
Legal Proceedings
A complaint was filed against the Company in the Superior Court of the State of Arizona (Maricopa County) by a former employee of the Company, alleging that the Company had agreed to make certain cash payments to such employee upon any future sale of the Company. The Company denies the substantive allegations of the complaint and intends to vigorously defend this lawsuit; however, the Company is currently unable to determine the ultimate outcome of this case. In addition, the Company entered into a transition agreement with a former officer, pursuant to which he transitioned out of his role at the end of 2015 and was to serve in a consulting capacity in 2016 and 2017. In January 2016, following the discovery that he had materially violated the terms of his transition agreement, the Company terminated his consultancy for cause. In April 2016, the officer filed an arbitration claim alleging that the Company improperly terminated his transition agreement. The Company believes that the termination of his transition agreement was valid and the Company intends to vigorously defend this matter. The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
Note 11. Concentration of Customers
Revenues from certain customers in excess of 10 percent of total consolidated Company revenues (dollars in thousands) are as follows:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||||||||||||||||||
|
|
2017 |
|
|
2016 |
|
|
2017 |
|
|
2016 |
|
||||||||||||||||||||
Customer |
|
Revenues |
|
|
% of Total |
|
|
Revenues |
|
|
% of Total |
|
|
Revenues |
|
|
% of Total |
|
|
Revenues |
|