0001564590-16-028676 10-Q 72 20160930 20161109 20161109 TPI COMPOSITES, INC 0001455684 3510 201590775 10-Q 34 001-37839 161984803 8501 N SCOTTSDALE ROAD GAINEY CENTER II, SUITE 100 SCOTTSDALE AZ 85253 480-305-8910 8501 N SCOTTSDALE ROAD GAINEY CENTER II, SUITE 100 SCOTTSDALE AZ 85253 TPI COMPOSITES INC 20090206 10-Q 1 tpic-10q_20160930.htm 10-Q tpic-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended September 30, 2016

OR

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

Commission File Number 001-37839

 

TPI Composites, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

20-1590775

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

8501 N. Scottsdale Rd.

Gainey Center II, Suite 100

Scottsdale, AZ 85253

(480) 305-8910

(Address, including zip code, and telephone number,

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

 

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

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

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

 

Large accelerated filer

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

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 October 31, 2016, there were 33,736,863 shares of common stock outstanding.

 

 

 


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

 

ITEM 1.

  

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

  

Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015

 

1

 

 

 

 

 

 

  

Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2016 and 2015

 

2

 

 

 

 

 

 

  

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015

 

3

 

 

 

 

 

 

  

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit) for the Nine Months Ended September 30, 2016

 

4

 

 

 

 

 

 

  

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015

 

5

 

 

 

 

 

 

  

Notes to Condensed Consolidated Financial Statements

 

6

 

 

 

 

 

ITEM 2.

  

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

 

18

 

 

 

 

 

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

ITEM 4.

  

Controls and Procedures

 

35

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

 

ITEM 1.

  

Legal Proceedings

 

36

 

 

 

 

 

ITEM 1A.

  

Risk Factors

 

36

 

 

 

 

 

ITEM 2.

  

Unregistered Sales of Securities and Use of Proceeds

 

37

 

 

 

 

 

ITEM 3.

  

Defaults Upon Senior Securities

 

37

 

 

 

 

 

ITEM 4.

  

Mine Safety Disclosures

 

37

 

 

 

 

 

ITEM 5.

  

Other Information

 

37

 

 

 

 

 

ITEM 6.

  

Exhibits

 

38

 

 

 

 

 

SIGNATURES

 

39

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

 

growth of the wind energy market and our addressable market;

 

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

 

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

 

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

 

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

 

competition from other wind blade manufacturers;

 

the discovery of defects in our products;

 

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

 

worldwide economic conditions and their impact on customer demand;

 

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

 

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

 

our ability to comply with existing, modified or new laws and regulations applying to our business; and

 

the attraction and retention of qualified employees and key personnel.

These forward-looking statements are only predictions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to materially differ from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We have described in the “Risk Factors” section of our Registration Statement on Form S-1 the principal risks and uncertainties that we believe could cause actual results to differ from these forward-looking statements. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as guarantees of future events.

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

 

 

 


 

PART I—FINANCIAL INFORMATION

ITEM l. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In thousands, except per share data)

 

 

 

September 30,

2016

 

 

December 31,

2015

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,802

 

 

$

45,917

 

Restricted cash

 

 

2,409

 

 

 

1,760

 

Accounts receivable

 

 

100,150

 

 

 

72,913

 

Inventories

 

 

58,824

 

 

 

50,841

 

Inventories held for customer orders

 

 

48,203

 

 

 

49,594

 

Prepaid expenses and other current assets

 

 

26,415

 

 

 

31,337

 

Total current assets

 

 

342,803

 

 

 

252,362

 

Property, plant, and equipment, net

 

 

78,635

 

 

 

67,732

 

Other noncurrent assets

 

 

17,655

 

 

 

9,826

 

Total assets

 

$

439,093

 

 

$

329,920

 

Liabilities and Shareholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

107,319

 

 

$

101,108

 

Accrued warranty

 

 

31,057

 

 

 

13,596

 

Deferred revenue

 

 

61,949

 

 

 

65,520

 

Customer deposits and customer advances

 

 

13,775

 

 

 

8,905

 

Current maturities of long-term debt

 

 

27,171

 

 

 

52,065

 

Total current liabilities

 

 

241,271

 

 

 

241,194

 

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

 

 

83,751

 

 

 

77,281

 

Other noncurrent liabilities

 

 

4,287

 

 

 

3,812

 

Total liabilities

 

 

329,309

 

 

 

322,287

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

Convertible and senior redeemable preferred shares and warrants

 

 

 

 

 

198,830

 

Shareholders’ equity (deficit):

 

 

 

 

 

 

 

 

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

   or outstanding at September 30, 2016; no shares issued, outstanding or

   authorized at December 31, 2015

 

 

 

 

 

 

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

   shares issued and outstanding at September 30, 2016; 31,104 shares

   authorized and 4,238 shares issued and outstanding at December 31, 2015

 

 

337

 

 

 

 

Paid-in capital

 

 

291,186

 

 

 

 

Accumulated other comprehensive loss

 

 

(1,194

)

 

 

(25

)

Accumulated deficit

 

 

(180,545

)

 

 

(191,172

)

Total shareholders’ equity (deficit)

 

 

109,784

 

 

 

(191,197

)

Total liabilities and shareholders’ equity (deficit)

 

$

439,093

 

 

$

329,920

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

1


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

(Unaudited)

 

Net sales

 

$

198,938

 

 

$

161,578

 

 

$

569,303

 

 

$

406,906

 

Cost of sales

 

 

171,648

 

 

 

150,732

 

 

 

499,896

 

 

 

370,824

 

Startup and transition costs

 

 

5,088

 

 

 

3,011

 

 

 

11,449

 

 

 

15,546

 

Total cost of goods sold

 

 

176,736

 

 

 

153,743

 

 

 

511,345

 

 

 

386,370

 

Gross profit

 

 

22,202

 

 

 

7,835

 

 

 

57,958

 

 

 

20,536

 

General and administrative expenses

 

 

14,065

 

 

 

3,423

 

 

 

24,154

 

 

 

9,530

 

Income from operations

 

 

8,137

 

 

 

4,412

 

 

 

33,804

 

 

 

11,006

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

27

 

 

 

11

 

 

 

76

 

 

 

149

 

Interest expense

 

 

(4,663

)

 

 

(3,620

)

 

 

(12,709

)

 

 

(10,894

)

Realized loss on foreign currency remeasurement

 

 

(243

)

 

 

(1,351

)

 

 

(700

)

 

 

(1,621

)

Miscellaneous income (expense)

 

 

(152

)

 

 

31

 

 

 

192

 

 

 

300

 

Total other expense

 

 

(5,031

)

 

 

(4,929

)

 

 

(13,141

)

 

 

(12,066

)

Income (loss) before income taxes

 

 

3,106

 

 

 

(517

)

 

 

20,663

 

 

 

(1,060

)

Income tax provision

 

 

(309

)

 

 

(1,630

)

 

 

(4,565

)

 

 

(2,734

)

Net income (loss)

 

 

2,797

 

 

 

(2,147

)

 

 

16,098

 

 

 

(3,794

)

Net income attributable to preferred shareholders

 

 

596

 

 

 

2,355

 

 

 

5,471

 

 

 

7,067

 

Net income (loss) attributable to common shareholders

 

$

2,201

 

 

$

(4,502

)

 

$

10,627

 

 

$

(10,861

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

27,284

 

 

 

4,238

 

 

 

12,042

 

 

 

4,238

 

Diluted

 

 

27,375

 

 

 

4,238

 

 

 

12,133

 

 

 

4,238

 

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08

 

 

$

(1.06

)

 

$

0.88

 

 

$

(2.56

)

Diluted

 

$

0.08

 

 

$

(1.06

)

 

$

0.88

 

 

$

(2.56

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

Net income (loss)

 

$

2,797

 

 

$

(2,147

)

 

$

16,098

 

 

$

(3,794

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(344

)

 

 

(1,678

)

 

 

(1,169

)

 

 

(3,311

)

Comprehensive income (loss)

 

$

2,453

 

 

$

(3,825

)

 

$

14,929

 

 

$

(7,105

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 


3


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Changes in Shareholders’ Equity (Deficit)

(In thousands)

 

 

 

Common

 

 

Paid-in

 

 

Accumulated

Other

Comprehensive

 

 

Accumulated

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

Total

 

 

 

(Unaudited)

 

Balance at December 31, 2015

 

 

4,238

 

 

$

 

 

$

 

 

$

(25

)

 

$

(191,172

)

 

$

(191,197

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16,098

 

 

 

16,098

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

(1,169

)

 

 

 

 

 

(1,169

)

Redeemable preferred shares fair value

   adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,471

)

 

 

(5,471

)

Issuance of common stock sold in initial public

   offering (IPO), net of underwriters discount

   and offering costs

 

 

7,188

 

 

 

72

 

 

 

67,127

 

 

 

 

 

 

 

 

 

67,199

 

Conversion of convertible preferred shares into

   common stock upon consummation of IPO

 

 

21,110

 

 

 

253

 

 

 

202,993

 

 

 

 

 

 

 

 

 

203,246

 

Conversion of subordinated convertible

   promissory notes into common stock

   upon consummation of IPO

 

 

1,080

 

 

 

11

 

 

 

11,866

 

 

 

 

 

 

 

 

 

11,877

 

Conversion of redeemable preferred share

   warrants into common stock upon

   consummation of IPO

 

 

121

 

 

 

1

 

 

 

1,083

 

 

 

 

 

 

 

 

 

1,084

 

Share-based compensation expense

 

 

 

 

 

 

 

 

8,117

 

 

 

 

 

 

 

 

 

8,117

 

Balance at September 30, 2016

 

 

33,737

 

 

$

337

 

 

$

291,186

 

 

$

(1,194

)

 

$

(180,545

)

 

$

109,784

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

TPI COMPOSITES, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income (loss)

 

$

16,098

 

 

$

(3,794

)

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,703

 

 

 

8,471

 

Share-based compensation expense

 

 

8,117

 

 

 

 

Amortization of debt discount

 

 

3,018

 

 

 

2,264

 

Amortization of debt issuance costs

 

 

1,273

 

 

 

949

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(27,237

)

 

 

(30,779

)

Inventories

 

 

(6,592

)

 

 

4,627

 

Prepaid expenses and other current assets

 

 

4,922

 

 

 

(4,608

)

Other noncurrent assets

 

 

(6,900

)

 

 

5,558

 

Accounts payable and accrued expenses

 

 

6,339

 

 

 

25,528

 

Accrued warranty

 

 

17,461

 

 

 

3,672

 

Customer deposits

 

 

4,870

 

 

 

(5,336

)

Deferred revenue

 

 

(3,571

)

 

 

(3,387

)

Other noncurrent liabilities

 

 

475

 

 

 

345

 

Net cash provided by operating activities

 

 

27,976

 

 

 

3,510

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(18,917

)

 

 

(25,161

)

Net cash used in investing activities

 

 

(18,917

)

 

 

(25,161

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock in initial public offering,

   net of underwriters discount and offering costs

 

 

67,199

 

 

 

 

Repayment of term loan

 

 

(617

)

 

 

(625

)

Net repayments of accounts receivable financing

 

 

(6,050

)

 

 

(4,738

)

Net repayments of working capital loans

 

 

(4,097

)

 

 

(7,972

)

Net proceeds from (repayments of) other debt

 

 

(3,415

)

 

 

1,131

 

Payments for acquisition of noncontrolling interest

 

 

 

 

 

(1,875

)

Restricted cash

 

 

(649

)

 

 

(642

)

Net cash provided by (used in) financing activities

 

 

52,371

 

 

 

(14,721

)

Impact of foreign exchange rates on cash and cash equivalents

 

 

(545

)

 

 

(263

)

Net change in cash and cash equivalents

 

 

60,885

 

 

 

(36,635

)

Cash and cash equivalents, beginning of year

 

 

45,917

 

 

 

43,592

 

Cash and cash equivalents, end of period

 

$

106,802

 

 

$

6,957

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

9,505

 

 

$

6,803

 

Cash paid for income taxes, net

 

 

5,191

 

 

 

2,786

 

Supplemental disclosures of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Conversion of subordinated convertible promissory notes into common stock

 

 

11,877

 

 

 

 

Equipment acquired through capital lease and financing obligations

 

 

1,464

 

 

 

2,506

 

Accrued capital expenditures in accounts payable

 

 

3,610

 

 

 

733

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

5


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.

Initial Public Offering and Stock Split

In July 2016, the Company completed an initial public offering (IPO) of 7,187,500 shares of the Company’s common stock at a price of $11.00 per share, which included 937,500 shares issued pursuant to the underwriters’ over-allotment option. Certain of the Company’s existing shareholders, a director and executive officers purchased an aggregate of 1,250,000 shares of common stock in the IPO included in the total issuance above. The net proceeds from the IPO were $67.2 million after deducting underwriting discounts and offering expenses. Immediately prior to the closing of the IPO, all shares of the then-outstanding redeemable preferred shares converted into an aggregate of 21,110,204 shares of common stock and the redeemable preferred share warrants converted on a net issuance basis into 120,923 shares of common stock. In addition, concurrent with the closing of the IPO, certain subordinated convertible promissory notes in the aggregate principal and interest amount of $11.9 million were converted into 1,079,749 shares of common stock at the public offering price of $11.00 per share.

Prior to the IPO, in July 2016 the Company amended its amended and restated certificate of incorporation to effect a 360-for-1 forward stock split of its common stock. As a result of the stock split, the Company has adjusted the share amounts authorized and issuable under the share-based compensation plans. All share and per share common stock information (including the share-based compensation plans) referenced throughout the unaudited condensed consolidated financial statements and notes thereto have been retroactively adjusted to reflect this stock split. The stock split did not cause an adjustment to the par value of the authorized shares of common stock.

Basis of Presentation

The Company divides its business operations into four geographic operating segments—the United States, Asia, Mexico and 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 in 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.

6


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

The Mexico segment manufactures wind blades from two facilities in Juárez, Mexico, one of which commenced operations in early 2014 and the second during the third quarter of 2016. The Mexico segment has also entered into a new lease agreement with a third party for a third manufacturing facility in Juárez, Mexico, and expects to commence operations in this new facility in the first quarter of 2017.

 

The EMEA segment manufactures wind blades from two facilities in Izmir, Turkey. The Company entered into a joint venture with ALKE Insaat Sanayive Ticaret A.S. (ALKE) in March 2012 to produce wind blades in the first Turkey plant and in December 2013 became the sole owner of the Turkey operation with the acquisition of the remaining 25% interest owned primarily by ALKE. The EMEA segment commenced operations in the second facility during the third quarter of 2016.

The accompanying consolidated financial statements include the accounts of TPI Composites, Inc. and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated.

The condensed consolidated financial statements included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC) and should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015 included in the Company’s Registration Statement on Form S-1. 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 September 30, 2016, and the results of the Company’s operations, comprehensive income (loss) and cash flows for the periods presented. The Company derived the December 31, 2015 condensed consolidated balance sheet data from audited financial statements, but does not include all disclosures required by GAAP. Interim results for the three and nine months ended September 30, 2016 and 2015 are not necessarily indicative of the results to be expected for the full years.

Warranty Expense

The Company provides a limited warranty for its precision molding and assembly systems and wind blade products, including parts and labor, with terms and conditions that vary depending on the product sold, for periods that range from two to five years. Warranty expense is recorded based upon estimates of future repairs using a probability-based methodology. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount.

Warranty accrual consisted of the following (in thousands):

 

 

 

2016

 

Warranty accrual at beginning of year

 

$

13,596

 

Accrual during the period

 

 

19,132

 

Cost of warranty services provided during the period

 

 

(385

)

Reduction of reserves

 

 

(1,286

)

Warranty accrual at end of the period

 

$

31,057

 

 

In June 2016, the Company entered into a settlement agreement and release with one of its customers to resolve a potential warranty claim related to wind blades primarily manufactured in 2014 in the Company’s Turkey facility. The settlement agreement and release requires the Company to make a cash payment to the customer, replace or repair a specified number of wind blades and provide margin concessions on certain products to be produced by the Company. The expected aggregate cost to the Company of fulfilling its obligations under the settlement agreement and release is estimated to be $15.0 million, all of which has been accrued.

Net Income Per Share Calculation

The basic net income per common share is computed by dividing the net income by the weighted-average number of common shares outstanding during a period. Diluted net income per common share is computed by dividing the net income, adjusted on an as-if-converted basis, by the weighted-average number of common shares outstanding plus potentially dilutive securities. The table below

7


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

reflects the calculation of the weighted-average number of common shares outstanding, on an as if converted basis, used in computing basic and diluted earnings per common share (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic weighted-average shares outstanding

 

 

27,284

 

 

 

4,238

 

 

 

12,042

 

 

 

4,238

 

Effect of dilutive stock options and warrants

 

 

91

 

 

 

 

 

 

91

 

 

 

 

Diluted weighted-average shares outstanding

 

 

27,375

 

 

 

4,238

 

 

 

12,133

 

 

 

4,238

 

 

The Company has potentially dilutive securities outstanding that are not shown in a diluted net loss per share calculation because their effect would be anti-dilutive for the three and nine months ended September 30, 2015. The potentially dilutive securities excluded from the calculation include common shares issued upon conversion or exercise of options and warrants.

 

Assuming that the IPO had occurred on January 1, 2015, diluted earnings per share would have been $0.08 and a loss of $0.06 for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, diluted earnings per share would have been $0.48 and a loss of $0.11, respectively.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. Adoption as of January 1, 2017 is permitted.

The Company expects to adopt Topic 606 as of January 1, 2017 with retrospective application to January 1, 2015 through December 31, 2016. Based on the Company’s preliminary evaluation of the new standard, revenue recognition in accordance with Topic 606 differs from the current guidance provided by GAAP as outlined in the SEC’s Staff Accounting Bulletin 104, which requires the Company to defer recognition of revenue until the risk of loss has passed to the customer and delivery has been made or a fixed delivery schedule has been provided by the customer. Since the Company’s products have no alternative use to the Company due to contractual restrictions placed by each customer on the technical specifications and design of the products, the Company’s preliminary assessment is that revenue upon adoption of Topic 606 will likely be recognized over time during the course of the production process and before the product is delivered to the customer.

8


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company expects that the adoption of Topic 606 will have a material impact on the amount of net sales, cost of goods sold and income from operations reported in the Statements of Operations in future periods. In accordance with Topic 606, revenues will be recognized over the time period of the production process, whereas currently it is recognized upon delivery to the client. Further, since revenue will be recognized over time for manufacturing contracts, future net sales will include amounts related to products that are in production as of the period end. Finally, the gross margin realized in the period may be impacted by the changes related to the timing and amount of revenue recognized for products in the production process.

The changes noted above involving the timing of revenue recognition will materially impact the amount of reported assets and liabilities associated with our manufacturing contracts. Upon adoption of Topic 606, the Company will include amounts recognized in revenue for products in production in contract assets, which differs from the current practice of including the balances in inventory and will include an amount for the margin recognized to date. The Company believes that it will no longer report inventory held for customer orders since revenue will be recognized over time during the course of the production process and before the product is delivered to the customer. Contract liabilities will be reported for amounts collected from customers in advance of the production of products. The amount of deferred revenue will be substantially reduced as revenue for products will be recognized over time.

The Company does not anticipate a change in the timing of cash receipts and payments from customers as customers will continue to be invoiced as products are completed; however, the impact to the amounts reported in the 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 December 31, 2014 through December 31, 2016. 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, 2017.

 

Share-Based Compensation

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. This standard is effective for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating if the impact of ASU 2016-09 will have a material effect on the Company’s financial positions or results of operations.

Leases

In February 2016, the FASB issued ASU 2016-02, Leases, (Topic 842). 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 positions and results of operations.

 

 

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 12, Concentration of Customers.

9


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 2016 and 2015. At September 30, 2016 and December 31, 2015, the Company had $89.8 million and $33.2 million, respectively, of cash in deposit accounts in U.S. banks, which was in excess of FDIC limits. The Company has not experienced losses in any such accounts in the past.

The Company also maintains cash in bank deposit accounts outside the U.S. with no deposit insurance. This includes $10.6 million in China, $5.8 million in Turkey and $0.6 million in Mexico as of September 30, 2016. 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 consolidated affiliates (GE) for the manufacture and supply of wind blades. In October 2016, the Company extended the term of certain of its supply agreements with GE through December 31, 2020 and entered into a new supply agreement as described in note 14, Subsequent Events. GE currently owns 8.4% of the Company’s common stock outstanding as of September 30, 2016.

For the three months ended September 30, 2016 and 2015, the Company recorded related-party sales with GE of $98.1 million and $82.2 million, respectively, and for the nine months ended September 30, 2016 and 2015, the Company recorded related-party sales with GE of $292.4 million and $213.9 million, respectively. The Company has entered into five separate supply agreements with GE to manufacture wind blades in Newton, Iowa; Taicang Port, China; Juárez, Mexico (2) and Izmir, Turkey. As a result of the supply agreements, GE is the Company’s largest customer. As of September 30, 2016 and December 31, 2015, the Company had accounts receivables related to sales to GE of approximately $29.2 million and $19.0 million, respectively.

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 under the Company’s subordinated convertible promissory notes, including accrued interest, held by certain existing stockholders, including Element Partners, Angeleno Group and Landmark Partners, were converted into an aggregate of 1,079,749 shares of common stock concurrent with the closing of the IPO at the public offering price of $11.00 per share.

 

 

Note 4. Accounts Receivable

Accounts receivable consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Trade accounts receivable

 

$

99,139

 

 

$

71,588

 

Other accounts receivable

 

 

1,011

 

 

 

1,325

 

Total accounts receivable

 

$

100,150

 

 

$

72,913

 

 

 

10


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 5. Inventories

Inventories consisted of the following (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Raw materials

 

$

29,934

 

 

$

29,022

 

Work in process

 

 

20,359

 

 

 

16,630

 

Finished goods

 

 

8,531

 

 

 

5,189

 

Total inventories

 

$

58,824

 

 

$

50,841

 

 

 

Note 6. Property, Plant, and Equipment, Net

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

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Machinery and equipment

 

$

54,771

 

 

$

49,078

 

Buildings

 

 

13,867

 

 

 

14,047

 

Leasehold improvements

 

 

17,656

 

 

 

14,259

 

Office equipment and software

 

 

3,960

 

 

 

3,691

 

Furniture

 

 

16,032

 

 

 

15,140

 

Vehicles

 

 

345

 

 

 

279

 

Construction in progress

 

 

14,513

 

 

 

4,660

 

Total

 

 

121,144

 

 

 

101,154

 

Accumulated depreciation and amortization

 

 

(42,509

)

 

 

(33,422

)

Property, plant and equipment, net

 

$

78,635

 

 

$

67,732

 

 

Total depreciation and amortization for the three months ended September 30, 2016 and 2015 was $3.5 million and $3.2 million, respectively, and for the nine months ended September 30, 2016 and 2015 was $9.7 million and $8.5 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 Discount

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

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Senior term loan—U.S.

 

$

73,758

 

 

$

74,375

 

Accounts receivable financing—Turkey

 

 

21,077

 

 

 

20,505

 

Working capital loans—Turkey

 

 

14,022

 

 

 

 

Equipment capital lease—U.S.

 

 

2,903

 

 

 

2,678

 

Equipment capital lease—Turkey

 

 

1,801

 

 

 

2,879

 

Equipment loan—Mexico

 

 

117

 

 

 

164

 

Construction financing—Mexico

 

 

100

 

 

 

1,204

 

Equipment capital lease—Mexico

 

 

91

 

 

 

37

 

Subordinated convertible promissory notes—U.S.

 

 

 

 

 

10,000

 

Working capital loans—China

 

 

 

 

 

9,548

 

Unsecured financing—Turkey

 

 

 

 

 

8,572

 

Accounts receivable financing—China

 

 

 

 

 

6,622

 

Total long-term debt

 

 

113,869

 

 

 

136,584

 

Less: Debt issuance costs

 

 

(2,947

)

 

 

(4,220

)

Less: Discount on debt

 

 

 

 

 

(3,018

)

Total long-term debt, net of debt issuance costs

   and discount

 

 

110,922

 

 

 

129,346

 

Less: Current maturities of long-term debt

 

 

(27,171

)

 

 

(52,065

)

Long-term debt, net of debt issuance costs, discount

   and current maturities

 

$

83,751

 

 

$

77,281

 

 

As discussed in note 1, concurrent with the closing of the Company’s IPO, the principal and accrued interest on the outstanding subordinated convertible promissory notes were converted into an aggregate of 1,079,749 shares of common stock at the public offering price of $11.00 per share. In connection with this conversion, the remaining beneficial conversion feature, debt discount and debt issuance costs totaling $1.3 million were fully expensed as interest expense in the accompanying condensed consolidated statements of operations.

 

 

12


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 8. Convertible and Senior Redeemable Preferred Shares and Warrants

The convertible and senior redeemable preferred shares and warrants outstanding as of December 31, 2015 automatically converted to common shares immediately prior to the closing of the IPO, consisted of the following (in thousands, except share and par value data):

 

 

 

December 31,

2015

 

 

Series A convertible preferred shares (convertible at 1 share to 3.4974 shares of

   common stock), $0.01 par value; liquidation preference equal to $50,901; 3,551

   shares authorized; 3,551 shares issued and outstanding at December 31, 2015

 

$

50,901

 

 

Series B convertible preferred shares (convertible at 1 share to 3.5636 shares of

   common stock), $0.01 par value; liquidation preference equal to $41,200; 2,813

   shares authorized; 2,287 shares issued and outstanding at December 31, 2015

 

 

41,200

 

Series B-1 convertible preferred shares (convertible at 1 share to 5.0243 shares of

   common stock), $0.01 par value; liquidation preference equal to $52,510; 2,972

   shares authorized; 2,972 shares issued and outstanding at December 31, 2015

 

 

52,510

 

 

Series C convertible preferred shares (convertible at 1 share to 3.2817 shares of

   common stock), $0.01 par value; liquidation preference equal to $17,490; 2,944

   shares authorized; 2,944 shares issued and outstanding at December 31, 2015

 

 

17,490

 

 

Senior redeemable preferred shares (convertible at 1 share to 13.2211 shares of

   common stock), $0.01 par value; liquidation preference equal to $64,722; 740

   shares authorized; 740 shares issued and outstanding December 31, 2015

 

 

27,585

 

 

Super senior redeemable preferred shares (convertible at 1 share to 13.2211

   shares of common stock), $0.01 par value; liquidation preference equal to

   $22,141; 1,024 shares authorized; 280 shares issued and outstanding

   at December 31, 2015

 

 

8,060

 

Redeemable preferred share warrants; 248 warrants issued and outstanding

   at December 31, 2015

 

 

1,084

 

Convertible and senior redeemable preferred shares and warrants

 

$

198,830

 

As discussed in note 1, immediately prior to the closing of the IPO, all of the outstanding redeemable preferred shares were converted into an aggregate of 21,110,204 shares of common stock. Prior to conversion, the Company had recorded dividends totaling $0.6 million for the period July 1, 2016 through July 22, 2016 (the date of the Company’s IPO) which are included in the net income attributable to preferred shareholders in the accompanying condensed consolidated statements of operations.

 Redeemable Preferred Share Warrants

As discussed in note 1, immediately prior to the closing of the IPO, the 248 outstanding redeemable Series B preferred share warrants were converted on a net issuance basis into an aggregate of 120,923 shares of common stock.

Common Stock Warrants

In connection with the note purchase agreement dated December 29, 2014, for the purchase of $10.0 million of subordinated convertible promissory notes, a minimum of 160,424 warrants were issued to purchase common stock with an exercise price equal to the lesser of $24.30 or 85% of the IPO price of $11.00 per share, accordingly, after the IPO, the exercise price is $9.35. The warrants are immediately exercisable and expire no later than eight years from the date of issuance. The unamortized fair value of the warrants was expensed upon conversion of the convertible promissory notes concurrent with the IPO. These warrants all remain outstanding as of September 30, 2016.

 

 

13


TPI COMPOSITES, INC. AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 9. Share-Based Compensation Plans

The Company granted stock option awards during the nine months ended September 30, 2016 to certain employees 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 and nine months ended September 30, 2016 was $8.1 million, of which approximately $6.3 million related to the service period from the grant date to through June 30, 2016. Of the $8.1 million expense, $1.2 million is included in cost of goods sold and the remaining $6.9 million included in general and administrative expenses. The amount recorded related to restricted stock units was $3.0 million while $5.1 million related to stock options. Furthermore, the total tax benefits related to share-based compensation expense was $1.8 million for the three and nine months ended September 30, 2016. No share-based compensation costs were capitalized during the nine months ended September 30, 2016.

As of September 30, 2016, the unamortized cost of the outstanding restricted stock units was $3.3 million, which the Company expects to recognize in the consolidated financial statements over a weighted-average period of approximately 1.9 years. The total unrecognized cost related to non-vested stock option awards was $8.2 million as of September 30, 2016. The Company expects to recognize such costs in the consolidated financial statements over a weighted-average period of approximately 2.2 years.

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

 

 

 

 

 

 

 

Stock Options

 

 

RSUs

 

 

 

Shares

Available

for Grant

 

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Options

Exercisable

 

 

Units

 

 

Weighted-

Average

Grant

Date Fair

Value

 

Balance as of December 31, 2015

 

 

3,392,141

 

 

 

3,261,663

 

 

$

11.90

 

 

 

35,703

 

 

 

731,880

 

 

$

10.89

 

Granted

 

 

(486,000

)

 

 

486,000

 

 

 

17.37

 

 

 

 

 

 

 

 

 

 

 

Forfeited/cancelled

 

 

519,995

 

 

 

(424,235

)

 

 

11.78

 

 

 

 

 

 

 

(95,760

)

 

 

10.87

 

Balance as of September 30, 2016

 

 

3,426,136

 

 

 

3,323,428

 

 

 

12.71

 

 

 

25,828

 

 

 

636,120

 

 

 

10.90

 

 

The following table summarizes the outstanding and exercisable stock option awards as of September 30, 2016:

 

 

 

Options Outstanding

 

 

Options Exercisable

 

Range of Exercise Prices:

 

Shares

 

 

Weighted-

Average

Remaining

Contractual

Life (in years)

 

 

Weighted-

Average

Exercise

Price

 

 

Shares

 

 

Weighted-