EDGAR 10-K Filing

Company CIK: 1455684
Filing Year: 2021
Filename: 1455684_10-K_2021_0001564590-21-008945.json

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ITEM 1. BUSINESS
Item 1. Business
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 or we). 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.
Overview
We are the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. We enable many of the industry’s leading wind turbine original equipment manufacturers (OEM) to outsource the manufacturing of some of their wind blades through our global footprint of advanced manufacturing facilities strategically located to serve large and growing wind markets in a cost-effective manner. Given the importance of wind energy capture, turbine reliability and cost to power producers, the size, quality and performance of wind blades is highly strategic to our OEM customers. As a result, we have become a key supplier to our OEM customers in the manufacture of wind blades and related precision molding and assembly systems. We have entered into long-term supply agreements pursuant to which we dedicate capacity at our facilities to our customers in exchange for their commitment to purchase minimum annual volumes of wind blade sets (which consist of three wind blades). This collaborative dedicated supplier model provides us with contracted volumes that generate significant revenue visibility, drive capital efficiency and allow us to produce wind blades at a lower total delivered cost, while ensuring critical dedicated capacity for our customers.
We also provide field service inspection and repair services to our OEM customers and wind farm owners and operators. Our field service inspection and repairs services include diagnostic, repair and maintenance service offerings for wind blades that have been installed on wind turbines located at wind farms. Our field service inspection and repair services can be performed up-tower, where a blade technician performs these services in the air or from the wind turbine tower on a wind turbine blade, or down tower, where a blade is first removed from a wind turbine and these services are performed on the ground at the wind farm site or in a repair facility.
We also leverage our advanced composite technology and history of innovation to supply high strength, lightweight and durable composite products to the transportation market. In November 2017, we signed a five- year supply agreement with Proterra Inc. (Proterra) to supply Proterra Catalyst® composite bus bodies. In February 2018, we entered into an agreement with Navistar, Inc. (Navistar) to design and develop an all composite Class 8 tractor cab. This collaborative development project was entered into in connection with Navistar’s award under the Department of Energy’s (DOE) Super Truck II investment program, which is designed to promote fuel efficiency in commercial vehicles. In 2019, we also agreed to develop prototype composite body delivery vehicles for Workhorse Group. In 2019, we made a capital investment of approximately $11.5 million to develop a highly automated manufacturing line for the electric vehicle market within our Warren, Rhode Island facility, and we are currently in the process of commissioning this line. We expect this investment will enable us to further develop our technology, create defensible product and process intellectual property (IP) and demonstrate our capability to manufacture composite components cost effectively at automotive volume rates. We also expect this automated manufacturing line will also help our current and potential customers to de-risk the decision-making process to commit to TPI for high-volume manufacturing programs in the future.
Our wind blade and precision molding and assembly systems manufacturing businesses accounted for approximately 96%, 96%, and 95% of our total net sales for each of the years ended December 31, 2020, 2019 and 2018, respectively. As of February 24, 2021, our long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.8 billion and encourage our
customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $4.6 billion through the end of 2024.
Financial Information about Segments and Geographic Areas
We divide our business operations into five geographic operating segments - (1) the United States (U.S.), (2) Asia, (3) Mexico, (4) Europe, the Middle East and Africa (EMEA) and (5) India as follows:
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Our U.S. segment includes (1) the manufacturing of wind blades at our Newton, Iowa facility, (2) the manufacturing of precision molding and assembly systems used for our transportation business at our Warren, Rhode Island facility, (3) the manufacturing of composite solutions for the transportation industry, which we also conduct at our Warren, Rhode Island facility, (4) wind blade inspection and repair services, (5) our advanced engineering center in Kolding, Denmark, which provides technical and engineering resources to our manufacturing facilities, (6) our engineering center in Berlin, Germany and (7) our corporate headquarters.
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Our Asia segment includes (1) the manufacturing of wind blades at our facilities in Dafeng, China and Yangzhou, China, (2) the manufacturing of precision molding and assembly systems at our Taicang Port, China facility and (3) wind blade inspection and repair services.
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Our Mexico segment includes (1) the manufacturing of wind blades at our three facilities in Juárez, Mexico and a facility in Matamoros, Mexico, (2) the manufacturing of precision molding and assembly systems and composite solutions for the transportation industry at our fourth Juárez, Mexico facility and (3) wind blade inspection and repair services.
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Our EMEA segment manufactures wind blades at our two facilities in Izmir, Turkey and also performs wind blade inspection and repair services.
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Our India segment manufactures wind blades at our new manufacturing facility in Chennai, India, which commenced operations in the first quarter of 2020.
For additional information regarding our operating segments and geographic areas, see Note 19 - Segment Reporting of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Business Strategy
Our long-term success will be driven by our business strategy. The key elements of our business strategy are as follows:
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Capitalize on the long-term, global trends of decarbonization of the electric sector and the electrification of vehicles. We believe we are well-positioned to participate and benefit from the continued global growth of renewable energy, and in particular, wind energy. Global demand for renewable energy has increased significantly in recent years and we expect that this trend will continue and potentially accelerate in the coming years due to a multitude of factors, including: increased cost competitiveness of wind energy compared to fossil fuel generated electricity; increased demand from corporations and utility providers for renewable energy; recent international policy initiatives designed to promote the growth of renewable energy; and the Biden administration’s proposed plans to promote renewable energy growth in the United States. We believe our global footprint of manufacturing facilities will allow us to capitalize on the continued global growth of wind energy in the coming years.
Similarly, we believe we are well-positioned to capitalize on the projected growth of electric vehicles. As the global vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. We believe vehicle manufacturers and vehicle owners will also benefit from the lower cost of total ownership due to the durability and the non-corrosive properties of composites compared to metallic materials along with the ability to scale production with lower production investment costs. As a result, we expect there will be an increased demand for composites products for electric vehicles. In addition, we believe there is a potential demand in other strategic markets for composites as to replace aluminum or other more expensive composite materials such as carbon.
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Grow our existing relationships and develop new relationships with leading industry OEMs. We plan to continue growing and expanding our relationships with existing customers who, according to data from BloombergNEF (Bloomberg), represented approximately 52% of the global onshore wind energy market, approximately 88% of that market excluding China, and 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2019, based on megawatts (MWs) of energy capacity installed, as well as developing new relationships with other leading industry OEMs. We expect to be presented with opportunities to expand our existing relationships and develop new relationships with industry OEMs as they seek to capitalize on the benefits of outsourced wind blade manufacturing while maintaining high quality customization and dedicated capacity. In July 2020, General Electric International, Inc. and its affiliates (GE Wind) agreed to extend our existing supply agreement in one of our Mexico plants by two years to 2022, and our existing supply agreement in our Newton Iowa plant by one year through 2021 with an option to extend through 2022, and added one additional wind blade manufacturing line in Mexico to provide blades for GE Wind’s turbine technologies in North America. In July 2020, we entered into a supply agreement with Nordex SE (Nordex) for two additional manufacturing lines in our Chennai, India facility, where we plan to start production in the first quarter of 2021. In August 2020, we reached an agreement with Vestas to extend our supply agreement at one of our Izmir, Turkey plants by one year through 2022.
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Leverage our footprint in large and growing wind markets, capitalize on the continuing outsourcing trend, evaluate building wind blades for the growing offshore wind market and evaluate strategic acquisitions. As the wind energy market continues to expand globally and many wind turbine OEMs continue to shift towards increased outsourcing of wind blade manufacturing, we believe we are well-positioned with our global footprint. We utilize our strengths in composites technology and manufacturing, combined with our collaborative dedicated supplier model to provide our customers with an efficient solution for their expansion in large and growing onshore wind markets. We also are evaluating opportunities to manufacture wind blades for the growing offshore wind market. In addition, our demonstrated ability to enter into new markets and the strength of our manufacturing capabilities afford us the optionality to build new factories or grow through strategic acquisitions.
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Continue to drive down costs of wind energy. We continue to work with our customers on larger size wind blade models that maximize the capture of wind energy and drive down the levelized cost of energy (LCOE). We also continue to utilize our advanced technology, regional manufacturing facilities strategically located to cost effectively serve large and growing wind markets and ability to source materials globally at competitive costs to deliver high-performing, composite wind blades. Our collaborative engineering approach and our advanced precision molding and assembly systems allow us to integrate our customer’s design requirements with cost-efficient, replicable and scalable manufacturing processes. This collaborative engineering approach with our customers also allows us to reduce manufacturing cycle times, new line and factory start up times and new blade model transition times. We also continue to work with our customers to drive down the cost of materials and production, the benefit of which we typically share with our customers contractually in a manner that reduces LCOE for customers, further strengthens our customer relationships and improves our margins.
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Expand our field service inspection and repair business. Although sales from our field service inspection and repair business currently represent a very small percentage of our total revenue, we plan to expand our field service inspection and repair business by leveraging our existing wind blade manufacturing and composites expertise and global footprint. We believe there is an increasing demand and growing market for experienced wind blade inspection and repair services worldwide as the number of wind turbines installed worldwide continues to grow and the fleet of existing wind turbines continues to age. We also expect that the operating margins at our field service inspection and repair business will be higher than the operating margins of our wind blade manufacturing business.
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Focus on continuing innovation. We have a history of innovation in advanced composite technologies and production techniques and use several proprietary technologies related to wind blade manufacturing. With this culture of innovation and a collaborative “design for manufacturability” approach, we continue to address increasing physical dimensions, demanding technical specifications and strict quality control requirements for our customers’ most advanced wind blades. We also invest in ongoing simplification and selective automation of production processes for increased efficiency and precision. In addition, we plan to leverage our history of composite industry-first innovations to grow our business in the transportation market, in which we believe there is a demand for high precision, structural composites manufacturing as well as high speed, high volume manufacturing of structural composite components, particularly in the transportation market.
Wind Blade Manufacturing Operations and Process
We have developed significant expertise in advanced composite technology and use high performance composite materials, precision molding and assembly systems including modular tooling, and advanced process technology, as well as sophisticated measurement, inspection, testing and quality assurance tools, allowing us to produce over 65,000 wind blades since 2001 with a strong, long-term field performance record in a market where reliability is critical to our customers’ success. We manufacture or have manufactured wind blades ranging from 30 meters to approximately 80 meters across our global facilities and have the capability to manufacture wind blades of greater lengths as required by existing or new customers. In combination with our advanced technologies, we seek to create manufacturing processes that are replicable and scalable in our manufacturing facilities located worldwide, regardless of cultural or language barriers. Using continuous improvement principles, we can customize each manufacturing step, from raw materials to finished products. This also allows us to systematically design for the entire manufacturing process so that we can achieve better quality control and increase production efficiencies. We believe that our focus on simplifying and, where feasible, automating production processes is critical to manufacturing high-precision, lightweight and durable products at a reasonable cost to our customers. We produce high unit volumes of near-aerospace grade products at industrial costs.
Raw Materials
The key raw materials for the wind blades we manufacture include highly advanced fiberglass fabrics, select carbon reinforcements, foam, balsa wood, resin, adhesives for assembly of molded components, gel coat or paint for preparation of cosmetic surfaces and attachment hardware including steel components. Most of these materials are available in multiple geographic regions and in reasonably close proximity to our manufacturing facilities. Our agreements for the supply of raw materials are designed to guarantee volumes that we believe will be required to fulfill our customers’ wind blade commitments. A portion of our raw materials are subject to price volatility, such as the resins used in our manufacturing processes. Although the majority of materials incorporated into our products are available from a number of sources, certain materials are available only from a relatively limited number of suppliers. We seek multiple suppliers for our raw materials and continually evaluate potential new supplier relationships.
Precision Molding and Assembly Systems
Over the last decade, we have produced hundreds of precision molding and assembly systems, ranging from 30 meters to approximately 80 meters in length, to support our global operations. We began these operations in our tooling technology center in Warren, Rhode Island. We also manufacture our precision molding and assembly systems production capabilities at a facility in Taicang Port, China, which serves customers around the globe. While capable of cost-effectively delivering precision molding and assembly systems across all of our facilities, our Rhode Island tooling technology center primarily serves the North American market. In 2020, we transitioned most of our North American precision molding and assembly system production capabilities from Warren, Rhode Island to a new facility in Juárez, Mexico, which can serve customers globally. Our precision molding and assembly systems have been used to build tens of thousands of wind blades worldwide.
Our tooling solutions include precision wind blade patterns, precision molding and assembly systems, including modular tooling techniques. We believe that our technological and production expertise are key factors in
our continued competitiveness, as we address continually increasing physical dimensions, demanding technical specifications, and strict quality control requirements for wind blades.
Wind Blade Production Process
Production of wind blades requires adherence to the unique specifications of each of our customers, who design their wind turbines and wind blades to optimize performance, reliability and total delivered cost. With our culture of innovation and a collaborative “design for manufacturability” approach, we have the capability and expertise to manufacture wind blades of different designs, utilizing fiberglass, carbon or other advanced composite materials to meet unique customer specifications. We also have the flexibility to quickly transition our manufacturing facilities to produce different wind blade models and sizes using our precision molding and assembly systems, including modular tooling techniques.
We have developed a highly dependable method for making high-quality wind blades. In conjunction with our continuous improvement principles, we design our proprietary manufacturing processes to be replicable, scalable and transferable to each of our advanced manufacturing facilities worldwide. As a result, we can repeatedly move a product from its design phase to volume production while maintaining quality, even in developing regions of the world. Similarly, we have developed the manual portions of our manufacturing processes based on proven technologies and production methods that can be learned and implemented rapidly by line personnel. We focus on consistency and quality control across our facilities, using hands-on training methods and employing repeatable manufacturing processes.
We use an advanced form of vacuum-assisted resin transfer tooling process to pull liquid resin into a dry lay-up, resulting in light, strong, and reliable composite structures. In our manufacturing process, fiber reinforcements and core materials are laid up in a mold while dry, followed by a vacuum bag that is placed over the layup and sealed to the mold. The wind blade component is then placed under vacuum. The resin is introduced into the wind blade component via resin inlet ports and then distributed through the reinforcement and core materials via a flow medium and a series of channels, saturating the wind blade component. The vacuum removes air and gases during processing, thereby eliminating voids. Pressure differentials drive resin uniformly throughout the wind blade component, providing a consistent laminate. By using a variety of reinforcement and core materials, the structural characteristics of the wind blade can be highly engineered to suit the custom specifications of our customers. Although only occasionally required by our customers, we are also capable of employing additional composite fabrication processes, such as pre-impregnated laminates, in addition to our vacuum infusion process.
Wind Blade Long-Term Supply Agreements
Our current wind blade customers, which include Vestas, GE Wind, Nordex, Siemens Gamesa Renewable Energy S.A. (Siemens Gamesa) and ENERCON GmbH (ENERCON), are some of the world’s largest wind turbine manufacturers. According to data from Bloomberg, our customers represented approximately 52% of the global onshore wind energy market, approximately 88% of that market excluding China, and 99% of the U.S. onshore wind turbine market over the three years ended December 31, 2019, based on MWs of energy capacity installed. In our collaborative dedicated supplier model, our customers are incentivized to maximize the volume of wind blades purchased through lower pricing at higher purchase volumes. As of February 24, 2021, our existing wind blade supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.8 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $4.6 billion through the end of 2024, which we believe provides us with significant future revenue visibility and helps to insulate us from potential short-term fluctuations or legislative changes in any one market. Our supply agreements generally contain liquidated damages provisions in the event of late delivery, however, we generally do not bear the responsibility for transporting the wind blades we manufacture to our customers.
Our long-term supply agreements with our customers generally encourage our customers to maximize the volume of wind blades they purchase from us, since purchasing less than a specified amount typically triggers higher pricing, as well as provide downside protection for us through minimum annual volume commitments. Some of our long-term supply agreements also provide for annual sales price reductions reflecting assumptions regarding increases in our manufacturing efficiency and productivity. We work to continue to drive down the cost of materials and production through innovation and global sourcing, a portion of the benefit of which we share with our
customers contractually, further strengthening our deep customer relationships. Wind blade pricing is based on annual commitments of volume as established in the customer’s contract, with orders less than committed volume resulting in additional costs per wind blade to customers. Orders in excess of annual commitments may but generally do not result in discounts to customers from the contracted price for the committed volume. Customers may utilize early payment discounts, which are reported as a reduction of revenue at the time the discount is taken.
Vestas
In 2014, we entered into a new supply agreement with Vestas to supply wind blades from a manufacturing facility in Dafeng, China. Based on the success of this manufacturing arrangement, we expanded our relationship with Vestas through additional supply agreements to manufacture wind blades at our manufacturing facilities in Turkey, Matamoros, Mexico and Yangzhou, China. Additionally, in 2018, we entered into a supply agreement with Vestas to supply wind blades from a new manufacturing facility that was built in Chennai, India and we commenced operations at this facility in the first quarter of 2020. In August 2020, we reached an agreement with Vestas to extend our supply agreement at our Turkey facility by one year through 2022. Each of the supply agreements with Vestas provide for a minimum number of wind blade sets to be purchased by Vestas each year during the term, the schedule for which is established at the outset of the agreement. In return, we commit to dedicate a specific number of manufacturing lines to Vestas for each of the years under the supply agreements. Additionally, we create some of the model-specific tooling for Vestas. If either party commits a material breach of the supply agreement, the non-breaching party may terminate the supply agreement if the breach is not remedied or if the parties have not mutually agreed to plan for cure within 30 days after notice of breach has been given.
GE Wind
We have entered into multiple supply agreements with GE Wind to manufacture wind blades from two manufacturing facilities in Juárez, Mexico and our Newton, Iowa manufacturing facility. Each of the supply agreements with GE Wind provide for a minimum number of wind blade sets to be purchased by GE Wind each year during the term, the schedule for which is established at the outset of the agreement. In return, we commit to dedicate a specific number of manufacturing lines to GE Wind for each of the years under the supply agreements. In August 2018, GE Wind agreed to extend our existing supply agreement for one of our Mexico manufacturing facilities by two years to 2022 and increased the number of wind blade manufacturing lines in that facility from three to five. In addition, GE Wind agreed to transition to a larger blade model in our Newton, Iowa plant in early 2019 and to eliminate its option to terminate its supply agreement at this location prior to its December 2020 expiration. In July 2020, GE Wind agreed to extend our existing supply agreement in one of our Mexico plants by two years to 2022 and our existing supply agreement in our Newton Iowa plant by one year to 2021 with an option to extend through 2022 and added one additional wind blade manufacturing line in Mexico to provide blades for GE Wind’s turbine technologies in North America in 2021. Unless otherwise terminated or renewed, our supply agreements with GE Wind are in effect until the end of 2021 for our Iowa facility and until the end of 2022 for our two Mexico facilities. In addition, either party may terminate these supply agreements upon a material breach by the other party which goes uncured for 30 days after written notice has been provided.
Other Long-Term Supply Agreements
We have entered into other long-term supply agreements in China, Mexico, Turkey and India with Nordex, Siemens Gamesa and ENERCON. With respect to these supply agreements, we agree to dedicate capacity for a set number of wind blades for each calendar year during the term of the agreement in exchange for commitments to purchase minimum annual volumes of wind blade sets. Unless otherwise terminated, these supply agreements generally remain in effect for a period of five years and either party may terminate their respective supply agreements upon a material breach by the other party which goes uncured. Some of these supply agreements contain provisions that allow for our customers to purchase less volume in later years of these supply agreements, reduce the number of dedicated manufacturing lines or to terminate the supply agreement upon notice for reasons such as our failure to deliver the contracted wind blade volumes or our failure to meet certain mutually agreed upon cost reduction targets. See “Risk Factors-Risks Related to Our Wind Blade Business- Some of our long-term supply agreements with our customers are subject to early termination and volume reductions at the discretion of our customers, and any early termination of or reduced volumes of wind blades purchased under these agreements
would materially harm our business, financial condition and results of operations” included in Part I, Item 1A of this Annual Report on Form 10-K.
Research and Development
We have a long history of developing composite products as well as the development of new and advanced materials, tooling, manufacturing processes and inspection methods. Our knowledge and experience of composite materials and manufacturing originates with our predecessor company, Tillotson Pearson Inc., a leading manufacturer of high-performance recreational sail and powerboats along with a wide range of composite structures used in other industrial applications. Leveraging our knowledge and experience, we realized the opportunity to specialize in wind energy and other industrial end-markets where there was a demand for high precision composite manufacturing capabilities.
We conduct research and development in close collaboration with our customers on the design, development and deployment of innovative manufacturing processes, including automation, advanced materials and sophisticated product quality inspection tools. We have partnered with the U.S. DOE, government laboratories, universities and our customers to innovate through cost sharing Advanced Manufacturing Innovation Initiative programs. In 2021, we will be collaborating with the University of Maine pursuant to a grant from the U.S. DOE’s Office of Energy Efficiency and Renewable Energy to develop a rapid, low-cost additive manufacturing solution (3D printing) for fabricating large, segmented wind blade molds. In February 2018, we entered into an agreement with Navistar to design and develop an all composite Class 8 tractor cab. This collaborative development project was entered into in connection with Navistar’s recent award under the DOE’s Super Truck II investment program, which is designed to promote fuel efficiency in commercial vehicles. We believe incorporating composite materials into a Class 8 tractor cab offers multiple potential performance and efficiency advantages compared to traditional metals in terms of weight savings, reduced part counts, and non-corrosion. In the first quarter of 2019, we executed a joint development agreement with GE Wind to cooperatively develop advanced blade technology for future wind turbines.
We employ a highly experienced workforce of engineers in various facets of our business, from research and development projects, to the ongoing, real-time development and implementation of incremental manufacturing and material improvements. Our research and development effort places a priority on improving quality through process and procedure improvement, in addition to reducing cost through specification changes and sourcing of more cost-effective suppliers. Other areas of emphasis include composite design, in-house fabrication of precision molding and assembly systems, prototyping, testing, optimization and volume production capabilities. We also encourage our employees to invent and develop new technologies to maintain our competitiveness in the marketplace. In addition to our internal research and development activities, from time to time, we also conduct research and development activities pursuant to funded development arrangements with our customers and other third parties, and intend to continue to seek opportunities for product development programs that could create recurring revenue and increase our overall profitability over the long term.
In July 2019, we acquired certain intellectual property and hired a team of engineering resources from the EUROS group, based in Berlin, Germany. This team of technical experts focuses on blade design, tooling, materials and process technology development, strengthened our technical capabilities in support of our global operations and growth. In addition, we established an advanced engineering center in Kolding, Denmark which provides technical and engineering resources to our manufacturing facilities and our customers.
Competition
The wind blade market is highly concentrated, competitive and subject to evolving customer needs and expectations. In 2017, GE Wind, our largest customer at the time, completed its acquisition of LM Wind Power (LM), our largest competitor. We also compete primarily with other independent wind blade manufacturers such as Sinoma Science & Technology Co. Ltd., Shanghai Aeolon Wind Energy Technology Development (Group) Co., Ltd., Aeris Industria E Comercio De Equipamentos Para Geracao De Energia S.A. and ZhongFu Lianzhong Composites Group Co., Ltd., as well as regional wind blade suppliers in geographic areas where our current or prospective manufacturing facilities are located.
We also compete with, and in a number of cases supplement, vertically integrated wind turbine OEMs that manufacture their wind blades. We believe that a number of other established companies are manufacturing wind blades that will compete directly with our offerings, and some of our competitors noted above, may have significant financial and institutional resources.
The principal competitive factors in the wind blade market include reliability, total delivered cost, manufacturing capability, product quality, engineering capability and timely completion of wind blades. We believe we compete favorably with our competitors on the basis of the foregoing factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of manufacturing capability, timely completion and product quality.
Transportation Products
We seek to create additional recurring revenue opportunities through the supply of other composite structures outside the wind energy market. We believe transportation products, including buses, trucks, electric vehicles and high-performance automotive products, are ideally suited for our advanced composite technology because of the benefits derived from weight reduction, corrosion resistance, strength and durability. These benefits should allow us to develop structural composite solutions to assist our customers in developing electric vehicles, including light, medium and heavy-duty trucks, buses and automobiles with clean propulsion systems or in meeting new and developing fuel economy standards.
In addition, by producing a range of composite structures, we are able to leverage the materials and manufacturing process technology and expertise developed through one project to maximize production quality, improve performance and minimize costs across our other manufacturing efforts, including our wind blade business. Our projects for customers in the transportation market have historically generated project-related revenues for a specific duration. We intend to seek collaborations with additional customers in these markets that will provide recurring revenue and business opportunities for us, in addition to the opportunities provided by our existing customers and relationships, and contribute to our overall profitability over the long term.
Our facilities in Warren, Rhode Island and Juárez, Mexico manufacture products for customers in the transportation market using a similar proprietary and replicable manufacturing processes that we use to produce wind blades. Our projects for customers in the transportation market include, or have included, the supply of all-composite bodies for electric buses and automated people mover systems for airports. We ceased manufacturing composite bus bodies from our Newton, Iowa facility in the first quarter of 2020. In 2019, we made a capital investment of approximately $11.5 million to develop a highly automated manufacturing line for the electric vehicle market within our Warren, Rhode Island facility, and we are currently in the process of commissioning this line. We expect this investment will enable us to further develop our technology, create defensible product and process IP and demonstrate our capability to manufacture composite components cost effectively at automotive volume rates.
Our current principal competitors in the transportation market include suppliers of conventional steel and aluminum products and non-structural automotive fiberglass and other advanced composites-based manufacturers for transportation applications.
Intellectual Property
We have a variety of intellectual property rights, including patents issued, filed and applied-for in a number of jurisdictions, including the United States, Germany, the European Union and China, trademarks and copyrights, but we believe that our continued success and competitive position depend, in large part, on our proprietary materials, tooling, process and inspection technologies and our ability to innovate. Accordingly, we take measures to protect the confidentiality and control the disclosure of our proprietary technology. We rely primarily on a combination of patents, know-how and trade secrets to establish and protect our proprietary rights and preserve our competitive position. We also seek to protect our proprietary technology, in part, by confidentiality agreements with our customers, employees, consultants and other contractors. Trade secrets, however, are difficult to protect. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our customers, employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.
Backlog
As of December 31, 2020 and 2019, our backlog for wind blades and related products totaled $1,197.7 million and $1,038.9 million, respectively. Our backlog includes purchase orders issued in connection with our long-term supply agreements. We generally record a purchase order into backlog when the following requirements have been met: a signed long-term supply agreement or other contractual agreement has been executed with our customer, a purchase order has been issued by our customer and we expect to ship wind blades to or produce the related products for such customer in satisfaction of any purchase order within 12 months. Backlog as of any particular date should not be relied upon as indicative of our revenue for any future period.
Regulation
Wind Energy
Our operations are subject to various foreign, federal, state and local regulations related to environmental protection, health and safety, labor relationships, general business practices and other matters. These regulations are administered by various foreign, federal, state and local environmental agencies and authorities, including the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration of the U.S. Department of Labor and comparable agencies in China, Mexico, Turkey, India and individual U.S. states. In addition, our manufacturing operations in China, Mexico, Turkey and India are subject to those countries’ wage and price controls, currency exchange control regulations, investment and tax laws, laws restricting our ability to repatriate profits, trade restrictions and laws that may restrict foreign investment in certain industries. Some of these laws have only been recently adopted or are subject to further rulemaking or interpretation, and their impact on our operations, including the cost of complying with these laws, is uncertain. We believe that our operations currently comply, in all material respects, with applicable laws and regulations. Further, as a U.S. corporation, we are subject to The Foreign Corrupt Practices Act of 1977 (FCPA), which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business.
In addition, our business has been and will continue to be affected by subsidization of the wind turbine industry with its influence declining over time as wind energy reaches grid parity with traditional sources of energy. In the United States, the federal government has encouraged capital investment in renewable energy primarily through tax incentives. Production tax credits for new renewable energy projects were first established in 1992. The Production Tax Credit for Renewable Energy (PTC) provided the owner of a wind turbine placed in operation before January 1, 2015 with a 10-year credit against its U.S. federal income tax obligations based on the amount of electricity generated by the wind turbine.
The PTC was extended in 2015 for wind power projects through December 31, 2019, and was to be phased down over the term of the PTC extension. Specifically, the PTC was kept at the same rate in effect at the end of 2014 for wind power projects that either commenced construction or met certain safe harbor requirements by the end of 2016, and thereafter was to be reduced by 20% per year in 2017, 2018 and 2019, respectively. In December 2019, Congress extended the PTC through the end of 2020 and increased the rate from 40% to 60% for projects that either
commenced construction or met certain safe harbor requirements by the end of 2020 and are commissioned by the end of 2024. In December 2020, Congress extended the PTC through the end of 2021, continuing the rate of 60% for projects that either commenced construction or met certain safe harbor requirements by the end of 2021 and are commissioned by the end of 2025. In January 2021, the Biden administration announced several executive orders to promote renewable energy.
At the state level, as of December 31, 2020, 30 states, the District of Columbia and Puerto Rico have implemented renewable portfolio standard (RPS) programs that generally require that, by a specified date, a certain percentage of a utility’s electricity supplied to consumers within such state is to be from renewable sources (ranging from 10% to 100% and from between the present and 2050).
In addition, there are also increasing regulatory efforts globally to promote renewable power. In December 2020, the European Union (EU) agreed to reduce EU greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. Similarly, in December 2020, China announced its goal to reach carbon neutrality by 2060, and in September 2019, India targeted to increase its renewable energy capacity to 450 gigawatts by 2030 and to 40% non-fossil fuel energy by 2030. Additionally, Turkey enacted Law No. 5346 in 2005, which was recently amended and extended in January 2021, to promote renewable-based electricity generation within their domestic electricity market through feed-in- tariffs and purchase obligations for distribution companies requiring purchases from certified renewable energy producers.
Human Capital
As of December 31, 2020, we employed over 14,900 full-time employees, approximately 1,300 of whom were located in the United States, 2,000 in China, 6,000 in Mexico, 4,100 in Turkey and 1,500 in India. Certain of our employees in Turkey and at our manufacturing facility in Matamoros, Mexico are represented by a labor union. We believe that our relations with our employees are generally good.
Our human capital strategy focuses on creating an exceptional employee experience and ensuring that we foster a learning culture where our employees want to grow with us. Our primary focus areas of our human capital strategy are as follows:
Culture
We believe our unique culture is a key strategic advantage for us. Our associates are highly engaged and committed to the company, their teams, and the jobs they perform based on our most recent employee engagement surveys. This strong employee engagement is due in part to a strong sense of purpose given our role in the broader renewable energy supply chain. We believe strong employee engagement translates into a strong quality focus and orientation. It is through the efforts of our nearly 15,000 employees at year-end 2020 that we have been able to continue to achieve high levels of performance. When we select new persons to join our team, we ensure that the individuals have high levels of commitment and adaptability in addition to the skills needed for the role. Our employees embrace our core values of safety, operational excellence, commitment, integrity and leadership. Our team members bring our values to life by applying their diverse backgrounds and skillsets to the jobs they are performing, demonstrating high discretionary effort, and embracing our values in their day-to-day lives.
Safety
Safety is our most important and first core value. We strongly believe that all accidents are preventable and that every associate should return at the end of their shift to their families in the same healthy condition in which they showed up for work. To help drive these beliefs it is our goal to continuously improve our zero-harm culture and implement a global behavior-based safety program resulting in zero unsafe behaviors. Our 13 manufacturing facilities have safety management systems in place that cover their associates and activities. We ensure the safety of our associates to support our zero-harm culture in a variety of ways, starting with safety education. Safety education is the foundation for our other safety measures. Associates receive regular training on environmental, health and safety (EHS) related topics. This training includes but is not limited to:
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general awareness EHS training
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ergonomics training
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compliance training
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hazard-specific training as required for the job or task
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fire hazard and prevention training
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hazardous material training
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equipment-specific safety training
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safety incident and corrective action training
Diversity, Equity and Inclusion
We value diversity in all forms, especially diversity of thought, and aspire to create an environment that recognizes and celebrates the benefits that come with a diverse workforce. We know that diversity of our employee population makes us better and strive to continue to improve and act with intention in these areas.
As a global business, we have an incredible opportunity to benefit from the diversity we have in our company. We can and will do more to maximize the positive impact that diversity, equity, inclusion, and a feeling of belonging can bring. We believe that this and the rest of our vision statement for diversity, equity and inclusion is a solid representation of what we believe in, are committed to, and how we will hold associates and leaders accountable. We recognize that one of our greatest areas of opportunity is to increase the representation of women and overall racial and ethnic diversity at all levels of leadership as we add more talent to our leadership levels.
Talent
We market open jobs across multiple platforms such as our website, LinkedIn, internal postings and local job boards to ensure that our candidate pool is as diverse as possible. We promote having diversity on the interviewing and selection panel to ensure different points of view are considered as part of the final selection process. We enjoy high levels of retention across all of our geographies. Our overall turnover rate has continued to decline over the past three years on a global basis. We facilitate an annual talent review process in all regions and functional teams to promote the internal development and promotion of internal talent. We have enjoyed high participation in employee surveys, high engagement levels against industry normative data, and also facilitated a COVID and diversity equity and inclusion survey in 2020.
Environmental, Health and Safety
We are subject to various environmental, health and safety laws, regulations and permit requirements in the jurisdictions in which we operate governing, among other things, health, safety, pollution and protection of the environment and natural resources, the handling and use of hazardous substances, the generation, storage, treatment and disposal of wastes, and the cleanup of any contaminated sites. We are not aware of any pending environmental compliance or remediation matters that are reasonably likely to have a material adverse effect on our business, financial position or results of operations. However, failure by us to comply with applicable environmental and other requirements could result in fines, penalties, enforcement actions, third party claims, remediation actions, and could negatively impact our reputation with customers. We have adopted environmental, health and safety policies outlining our commitment to environmental responsibility and accountability. These policies apply to the company as a whole, and our vendors and suppliers and are available on our website. We have a company-wide focus on safety and have implemented a number of measures to promote workplace safety. Customers are increasingly focused on safety records in their sourcing decisions due to increased regulations to report all incidents that occur at their sites and the costs associated with such incidents.
Available Information
Our website address is www.tpicomposites.com. All of our filings with the Securities and Exchange Commission (SEC), including this Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, statements of changes in beneficial ownership and amendments to those reports, are available free of charge on our website as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on our website is neither a part of, nor incorporated by reference into, this Annual
Report on Form 10-K. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, like us, that file electronically with the SEC. The address of that website is www.sec.gov.
Our investor relations website address is https://ir.tpicomposites.com/websites/tpicomposites/English/0/investor-relations.html and includes key information about our corporate governance initiatives, including our Nominating and Corporate Governance Committee charter, charters of the Audit and Compensation committees and our Code of Business Conduct & Ethics.
Information about our Executive Officers
The following table sets forth certain information regarding our Executive Officers as of February 24, 2021:
Name
Age
Position
William E. Siwek
President, Chief Executive Officer and Director
Bryan R. Schumaker
Chief Financial Officer
Ramesh Gopalakrishnan
Chief Operating Officer, Wind
James M. Hilderhoff
Chief Commercial Officer
Thomas J. Castle
Senior Vice President-Operations, Strategic Markets
Steven G. Fishbach
General Counsel and Secretary
William E. Siwek. Mr. Siwek joined us in August 2013 as our Chief Financial Officer. In May 2019, Mr. Siwek was named our President and ceased serving as our Chief Financial Officer. In May 2020, Mr. Siwek assumed the role of Chief Executive Officer and was elected to the Board of Directors. Prior to joining us, Mr. Siwek previously served as the Chief Financial Officer for T.W. Lewis Company, an Arizona-based real estate investment company, from September 2012 to September 2013. From May 2010 until September 2012, he was an independent consultant assisting companies in the real estate, construction, insurance and renewable energy industries. Prior to that, Mr. Siwek was Executive Vice President and Chief Financial Officer of Talisker Mountain, Inc., from January 2009 to April 2010. Prior to that, he was President and Chief Financial Officer of the Lyle Anderson Company from December 2002 to December 2008. Prior to that, Mr. Siwek spent 18 years, from September 1984 to May 2002, with Arthur Andersen where he became a Partner in both Audit and Business Consulting Divisions. Mr. Siwek also serves on the Board of Directors of the American Clean Power Association, a renewable energy industry trade group, which commenced operations in January 2021. Mr. Siwek holds B.S. degrees in Accounting and Economics from University of Redlands and is a Certified Public Accountant.
Bryan R. Schumaker. Mr. Schumaker joined us in May 2019 as our Chief Financial Officer. Prior to joining us, Mr. Schumaker served as the Chief Accounting Officer of First Solar, Inc. from July 2015 to May 2019 and the Chief Financial Officer of 8point3 Energy Partners, a publicly-traded limited partnership formed by First Solar and Sunpower Corporation to own, operate and acquire solar energy generation projects from July 2016 to July 2018. Mr. Schumaker also served as Assistant Corporate Controller of First Solar from April 2008 to December 2011 and Vice President, Corporate Controller from December 2011 to July 2015. Prior to working at First Solar, Mr. Schumaker worked for Swift Transportation from January 2003 to April 2008 in multiple roles, including Vice President, Corporate Controller. Prior to that, Mr. Schumaker worked for KPMG, LLP as a Supervising Senior for the Assurance Practice and for a BDO Alliance Firm as a Senior Audit Associate. Mr. Schumaker holds a B.B.A. degree in Accounting from the University of New Mexico. Mr. Schumaker also serves on the Board of Directors of the Arizona Manufacturing Extension Partnership.
Ramesh Gopalakrishnan. Mr. Gopalakrishnan joined us in September 2016 as Vice President, Technology, Transfer and Launch, and was promoted to Senior Vice President, Technology and Industrialization in August 2017 and Senior Vice President, Global Quality, Technology and Latin American Operations in February 2019. In May 2019, Mr. Gopalakrishnan was named our Chief Operating Officer - Wind. Prior to joining us, Mr. Gopalakrishnan served as Executive Vice President, Manufacturing for Senvion GmbH from May 2015 to August 2016 and Senior Vice President, Global Blades from February 2013 to April 2015. Prior to joining Senvion GmbH, Mr. Gopalakrishnan served as the Chief Executive Officer of Suzlon Energy Composites from February 2011 to January 2014, where he oversaw blade and mold factories in the United States, China and India and engineering centers in Europe. Prior to joining Suzlon Energy Composites, Mr. Gopalakrishnan served in various operations, supply chain and engineering roles at Halliburton Company and General Electric Company. Mr. Gopalakrishnan
holds a B.S. in Mechanical Engineering from the Indian Institute of Technology and a M.S. and Ph.D in Mechanical Engineering from the State University of New York at Stony Brook.
James M. Hilderhoff. Mr. Hilderhoff joined us in August 2020 as our Chief Commercial Officer. Prior to joining us, Mr. Hilderhoff served as the Chief Commercial Officer - North America for Wabtec Corporation, a publicly-traded leading global provider of equipment, systems, digital solutions, and value-added services for the freight and transit rail sectors, from February 2019 to July 2020. Prior to Wabtec Corporation's merger with General Electric Company's transportation business in February 2019, Mr. Hilderhoff served in sales, service, operations and marketing roles in various businesses of General Electric Company for over thirty years, including GE's transportation and power businesses. Mr. Hilderhoff served as General Manager, Global Sales and Marketing of GE's transportation business from January 2016 to February 2019, and also served as General Manager, Americas Services Operation for GE's transportation business from 2010 to December 2015. Mr. Hilderhoff holds an M.B.A. in Business Administration from the University of Pennsylvania, Wharton School of Business and a B.S. degree in Engineering Science from Pennsylvania State University.
Thomas J. Castle. Mr. Castle joined us in November 2015 as our Senior Vice President-North American Wind Operations and Global Operational Excellence. In February 2019, Mr. Castle was named our Senior Vice President-U.S. and Transportation Operations. In May 2019, Mr. Castle was named our Senior Vice President - Operations, Strategic Markets. Prior to joining us, Mr. Castle was with Honeywell Aerospace from 2007 to 2015. Mr. Castle served as the Vice President of Integrated Supply Chain, Americas Electronics Operations Center from 2014 to 2015. From 2012 to 2014, he was the Global Vice President of the Honeywell Operating System for Aerospace. Prior to that, Mr. Castle held various positions at the Americas Services Organization from 2007 to 2012. From 1996 to 2007, Mr. Castle was with GE Aviation in roles of increasing responsibility, most recently as the Managing Director of a manufacturing facility in Thailand from 2005 to 2007. Mr. Castle holds a B.S. degree in Aeronautics from St. Louis University.
Steven G. Fishbach. Mr. Fishbach has served as our General Counsel since January 2015. Prior to joining us, Mr. Fishbach served as Deputy General Counsel of Global Cash Access Holdings, Inc. from 2011 to 2015 and Associate General Counsel from 2009 to 2011. Prior to that, Mr. Fishbach served in various senior roles in the legal department of Fidelity National Information Services, Inc./eFunds Corporation from 2005 to 2008. Mr. Fishbach also practiced corporate and securities law at Squire Sanders (now Squire Patton Boggs) from 2000 to 2005. Mr. Fishbach holds a B.A. degree in American Studies from Georgetown University and a J.D. degree from William & Mary Law School.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
You should carefully consider the following risk factors. If any of the events contemplated by the following discussion of risks should occur, our business, results of operations, financial condition, growth prospects and cash flows could suffer significantly. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business. Certain statements below are forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this Annual Report on Form 10-K.
Risks Related to Our Wind Blade Business
A significant portion of our business is derived from a small number of customers, and two wind blade customers in particular, therefore any loss of or reduction in purchase orders, failure of these customers to fulfill their obligations or our failure to secure long-term supply agreement renewals from these customers could materially harm our business.
Substantially all of our revenues are derived from four wind blade customers. Two customers, Vestas and GE Wind, accounted for 49.7% and 23.4%, respectively, of our total net sales for the year ended December 31, 2020, and 46.1% and 25.7%, respectively, of our total net sales for the year ended December 31, 2019, and 32.0% and 31.7%, respectively, of our total net sales for the year ended December 31, 2018. In addition, two customers, Nordex and Siemens Gamesa accounted for 15.3% and 4.7%, respectively, of our net sales for the year ended December 31, 2020, 16.1% and 5.1%, respectively, of our net sales for the year ended December 31, 2019, and 19.0% and 11.2%, respectively, of our net sales for the year ended December 31, 2018. Accordingly, we are substantially dependent on continued business from our current wind blade customers, and Vestas and GE Wind in particular. If one or more of our wind blade customers were to reduce or delay wind blade orders, file for bankruptcy or become insolvent, fail to pay amounts due or satisfactorily perform their respective contractual obligations with us or otherwise terminate or fail to renew their long-term supply agreements with us, our business, financial condition and results of operations could be materially harmed.
Defects in materials and workmanship or wind blade failures could harm our reputation, expose us to product warranty or other liability claims, decrease demand for wind blades we manufacture, or materially harm existing or prospective customer relationships, and our reserves for warranty expenses might not be sufficient to cover all future costs.
Defects in the wind blades we manufacture are unpredictable and an inherent risk in manufacturing technically advanced products that involve a significant amount of manual labor and processes. Defects may arise from multiple causes, including design, engineering, materials, manufacturing and components failures as well as deficiencies in our manufacturing processes. Under our supply agreements, we warranty the materials and workmanship of the wind blades while our customers are responsible for the fitness of use and design of the wind blades. We have experienced wind blade failures and defects at some of our facilities during the startup manufacturing phase of new products, and we may experience failures or defects in the future. Wind blades that we have manufactured have also failed in the field. Any wind blade failures or other product defects in the future could materially harm our existing and prospective customer relationships. Specifically, negative publicity about the quality of the wind blades we manufacture or defects in the wind blades supplied to our customers could result in a reduction in wind blade orders, increased warranty claims, product liability claims and other damages or termination of our long-term supply agreements or business relationships with current or new customers. Any of the foregoing could materially harm our business, operating results and financial condition.
We provide warranties for all of the wind blades and precision molding and assembly systems we produce, including parts and labor, for periods that typically range from two to five years depending on the product sold. Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, shipping and handling and de-installation and re-installation costs at customers’ sites. Our assumptions could be materially different from the actual performance of our products and these remediation expenses in the future. The expenses associated with wind blade repair and remediation activities can be substantial and may include changes to our manufacturing processes. If our estimates prove materially incorrect, we could incur warranty expenses that exceed our reserves and be required to make material unplanned cash expenditures, which could materially harm our business, operating results and financial condition.
We operate in an industry characterized by changing customer demands and associated transition costs, which could materially harm our business.
The wind energy industry is competitive and is characterized by evolving customer demands. As a result, we must adapt quickly to customer requests for changes to wind blade specifications, which increases our costs and can provide periods of reduced revenue and margins. For instance, during 2020 and into 2021, we have undertaken and will undertake model transitions at several of our facilities for various customer demands. In 2020, we had several manufacturing lines in transition which adversely impacted our revenue and profitability. We currently expect to have manufacturing lines in transition during 2021 which could adversely affect our revenue and profitability in 2021. We typically share transition costs with the customer in connection with these changing customer demands, but any sharing is usually the subject of negotiation and the amount is not always contractually defined. If we do not receive transition payments from our customers sufficient to cover our transition costs or lost margins, our business, financial condition, and results of operations could be materially harmed.
We have experienced, and could in the future experience, quality or operational issues in connection with plant construction or expansion, which could result in losses and cause delays in our ability to complete our projects and may therefore materially harm our business, financial condition and results of operations.
We dedicate most of the capacity of our current wind blade manufacturing facilities to existing customers and, as a result, we may need to build additional manufacturing capacity or facilities to serve the needs of new customers or expanded needs of existing customers. Since the third quarter of 2016, we have commenced operations at four new manufacturing facilities in Mexico, one in Turkey, one in Yangzhou, China and one in Chennai, India. The construction of new plants and the expansion of existing plants involves significant time, cost and other risks. We generally expect our plants to generate losses in their first 12 to 18 months of operations related to production startup costs. Additionally, numerous factors can contribute, and have in the past contributed, to delays or difficulties in the startup of, or the adoption of our manufacturing lines to produce larger wind blade models, which we refer to as model transitions, in our manufacturing facilities. These factors include permitting, construction or renovation delays, defects or issues with product tooling, the engineering and fabrication of specialized equipment, the modification of our general production know-how and customer-specific manufacturing processes to address the specific wind blades to be tested and built, changing and evolving customer specifications and expectations and the hiring and training of plant personnel. Any delays or difficulties in plant startup or expansion may result in cost overruns, production delays, contractual penalties, loss of revenues, reduced margins and impairment of customer relationships, which could materially harm our business, financial condition and results of operations. For example, in 2019, we experienced construction and startup delays with respect to our new manufacturing facility in Yangzhou, China. These delays resulted in us paying liquidated damages of $7.8 million to one of our customers in 2019 and 2020.
Some of our long-term supply agreements with our customers are subject to early termination and volume reductions at the discretion of our customers, and any early termination of or reduced volumes of wind blades purchased under these agreements could materially harm our business, financial condition and results of operations.
Our current long-term supply agreements expire between the end of 2021 and the end of 2024. Some of our long-term supply agreements contain provisions that allow for the early termination of these agreements upon the customer providing us with advance written notice and paying an early termination fee. Our wind blade supply agreements generally establish annual purchase requirements on which we rely for our future production and financial forecasts. However, the timing and volume of purchases, within certain parameters, may be subject to change by our customers. The amount of the annual purchase requirements typically decline in the later years of our long-term supply agreements. Our customers may not continue to maintain long-term supply agreements with us in the future. For example, Vestas has notified us that it does not intend to renew our Dafeng, China supply agreement, which expires at the end of 2021. If one or more of our customers terminate, or reduce the number of manufacturing lines and volumes of wind blades purchased, or fail to renew their long-term supply agreements with us, it would materially harm our business, financial condition and results of operations.
Many of our long-term supply agreements contain liquidated damages provisions, which may require us to make unanticipated payments to our customers.
Many of our long-term supply agreements contain liquidated damages provisions in the event that we fail to perform our obligations thereunder in a timely manner or in accordance with the agreed terms, conditions and standards. Our liquidated damages provisions generally require us to make a payment to the customer if we fail to deliver a product or service on time. We generally try to limit our exposure under any individual long-term supply agreement to a maximum penalty. Nevertheless, if we incur liquidated damages, they may materially harm our business, operating results and financial condition.
Our wind turbine OEM customers are facing increasing competition and pricing pressure due to the increasing prevalence of auction-based tenders in wind energy markets, and correspondingly our margins and results of operations may be adversely affected.
Many governments are shifting from feed-in tariffs, which typically provide producers of wind energy with favorable prices for wind generated electricity, to unsubsidized, auction-based tenders as a means of promoting the development and growth of renewable energy sources such as wind energy. As a result of this shift, our wind turbine OEM customers are experiencing intense pricing pressure with respect to the sale of their turbines. As a result of this pricing pressure, we will be required to further reduce the costs we incur to manufacture wind blades to remain competitive. We typically share the benefit of cost reductions related to manufacturing wind blades with our customers pursuant to the terms of our long-term supply agreements. If these pricing pressures continue, we may choose to reduce our margins or pass on a greater percentage of the savings to our OEM customers obtained from manufacturing cost reductions than required under our supply agreements to remain competitive, each of which may materially harm our business, financial condition and results of operations.
Although a majority of our manufacturing facilities are located outside the United States, our business is still heavily dependent upon the demand for wind energy in the United States and any downturn in demand for wind energy in the United States could materially harm our business.
We have developed a global footprint to serve the growing wind energy market worldwide and have wind blade manufacturing facilities in the United States, China, Mexico, Turkey and India. Although a majority of our manufacturing facilities are located outside of the United States, historically more than half of the wind blades that we produced were deployed in wind farms located within the United States. Our Iowa and Mexico manufacturing facilities manufacture wind blades that are generally deployed within the United States. In addition, many of our wind blades are exported from our China, Turkey and India manufacturing facilities to the United States. In addition, tariffs imposed on components of wind turbines from China, including wind blades, has had a negative impact on demand for our wind blades manufactured in our Chinese manufacturing facilities. Consequently, demand for wind energy and our wind blade sales could be adversely affected by a variety of reasons and factors, and any downturn in demand for wind energy in the United States could materially harm our business.
We could experience shortages of raw materials or components critical to our manufacturing needs, which may hinder our ability to perform under our supply agreements.
We rely upon third parties for raw materials, such as fiberglass, carbon, resins, foam core and balsa wood, and various components for the wind blades we manufacture. Some of these raw materials and components may only be purchased from a limited number of suppliers. For example, balsa wood is only grown and produced in a limited number of geographies and is only available from a limited number of suppliers. Additionally, our ability to purchase the appropriate quantities of raw materials is constrained by our customers’ transitioning wind blade designs and specifications. As a result, we maintain relatively low inventory and acquire raw materials and components as needed. Due to significant international demand for these raw materials from many industries, we may be unable to acquire sufficient quantities or secure a stable supply for our manufacturing needs. For example, in 2019, we experienced shortages in the supply of balsa wood and other core materials. If shortages or delays occur, we may be unable to provide our products to our customers on time, or at all. In some instances, our customers directly control the purchase of certain key raw materials and components and if they are unable to procure and provide us with such raw materials and components, it could cause delays and disruptions with respect to our business and operations. In 2020, we procured approximately 25% of our raw materials from China so any weather events, strikes, other force majeure events or geopolitical developments impacting China could disrupt our supply chain. In addition, a disruption in any aspect of our global supply chain caused by transportation delays, customs
delays, cost issues or other factors could result in a shortage of raw materials or components critical to our manufacturing needs. For example, in 2020 and 2021, we have experienced several delays in receipt of certain raw materials used to make our products primarily due to COVID-19 outbreaks amongst port workers at certain ports in the United States. Any supply shortages, delays in the shipment of materials or components from third party suppliers, or changes in the terms on which they are available could disrupt or materially harm our business, operating results and financial condition.
Demand for the wind blades we manufacture may fluctuate for a variety of reasons, including the growth of the wind industry, and decreases in demand could materially harm our business and may not be sufficient to support our growth strategy.
Our revenues, business prospects and growth strategy heavily depend on the continued growth of the wind industry and our customers’ continuing demand for wind blades. Customer demand could decrease from anticipated levels due to numerous factors outside of our control that may affect the development of the wind energy market generally, portions of the market or individual wind project developments, including:
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general economic conditions;
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the general availability and demand for electricity;
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wind energy market volatility;
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cost-effectiveness, availability and reliability of alternative sources of energy and competing methods of producing electricity, including solar and non-renewable sources such as natural gas;
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foreign, federal and state governmental tariffs, subsidies and tax or regulatory policies;
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delays or cancellations of government tenders or auctions for wind energy projects;
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the availability of financing for wind development projects;
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the development of electrical transmission infrastructure and the ability to implement a proper grid connection for wind development projects;
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foreign, federal and state laws and regulations regarding avian protection plans, noise or turbine setback requirements and other environmental laws and regulations;
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our customers’ cost of transporting wind blades from our manufacturing facilities to wind farms;
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increases in the price or lack of availability of raw materials used to produce our wind blades;
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administrative and legal challenges to proposed wind development projects; and
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public perception and localized community responses to wind energy projects.
In addition to factors affecting the wind energy market generally, our customers’ demand may also fluctuate based on other factors beyond our control. Any decline in customer demand below anticipated levels could materially harm our revenues and operating results and could delay or impede our growth strategy.
We have experienced in the past, and our future wind blade production could be affected by, operating problems at our facilities, which may materially harm our operating results and financial condition.
Our wind blade manufacturing processes and production capacity have in the past been, and could in the future be, disrupted by a variety of issues, including:
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production outages to conduct maintenance activities that cannot be performed safely during operations;
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prolonged power failures or reductions;
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breakdowns, failures or substandard performance of machinery and equipment;
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our inability to comply with material environmental requirements or permits;
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inadequate transportation infrastructure, including problems with railroad tracks, bridges, tunnels or roads;
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supply shortages of key raw materials and components;
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damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the COVID-19 pandemic; and
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labor unrest or shortages in skilled labor.
The cost of repeated or prolonged interruptions, reductions in production capacity, or the repair or replacement of complex and sophisticated tooling and equipment may be considerable and could result in damages under or the termination of our long-term supply agreements or penalties for regulatory non-compliance, any of which could materially harm our business, operating results and financial condition.
We operate a substantial portion of our business in international markets and we may be unable to effectively manage a variety of currency, legal, regulatory, economic, social and political risks associated with our global operations and those in developing markets.
We currently operate manufacturing facilities in the United States, China, Mexico, Turkey, and India. Since the third quarter of 2016, we have commenced operations at four new manufacturing facilities in Mexico, one in Turkey, one in Yangzhou, China and one in Chennai, India. For the years ended December 31, 2020, 2019 and 2018, approximately 89%, 88% and 84%, respectively, of our net sales were derived from our international operations and we expect that a substantial portion of our projected revenue growth will be derived from those operations. Our overall success depends, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions. The global nature of our operations is subject to a variety of risks, including:
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difficulties in staffing and managing multiple international locations;
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increased exposure to foreign currency exchange rate risk or currency exchange controls imposed by foreign countries;
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the risk of import, export and transportation regulations and tariffs on foreign trade and investment, including boycotts and embargoes;
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taxation and revenue policies or other restrictions, including royalty and tax increases, retroactive tax claims and the imposition of unexpected taxes;
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the imposition of, or rapid or unexpected adverse changes in, foreign laws, regulatory requirements or trade policies;
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restrictions on repatriation of earnings or capital or transfers of funds into or out of foreign countries;
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limited protection for intellectual property rights in some jurisdictions;
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inability to obtain adequate insurance;
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difficulty administering internal controls and legal and compliance practices in countries with different cultural norms and business practices;
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the possibility of being subjected to the jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States;
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the misinterpretation of local contractual terms, renegotiation or modification of existing long-term supply agreements and enforcement of contractual terms in disputes before local courts;
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the inability to maintain or enforce legal rights and remedies at a reasonable cost or at all; and
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the potential for political unrest, expropriation, nationalization, revolution, war or acts of terrorism in countries in which we operate.
As we continue to operate our business globally, our success will depend, in part, on our ability to anticipate and effectively manage these and other related risks. We may be unsuccessful in developing and implementing policies and strategies that will be effective in managing these risks in each country where we do business or conduct operations. Our failure to manage these risks successfully could materially harm our business, operating results and financial condition.
We may not achieve the long-term growth we anticipate if wind turbine OEMs do not continue to shift from in-house production of wind blades to outsourced wind blade suppliers and if we do not expand our customer relationships and add new customers.
Many wind turbine OEMs rely on in-house production of wind blades for some or all of their wind turbines. Our growth strategy depends in large part on the continued expansion of our relationships with our current wind blade customers, and the addition of new key customers. All of our customers possess the financial, engineering and technical capabilities to produce their own wind blades and many source wind blades from multiple suppliers. Our existing customers may not expand their wind energy operations or, if they do, they may not choose us to supply them with new or additional quantities of wind blades. Our collaborative dedicated supplier model for the manufacture of wind blades is a significant departure from traditional vertically integrated methods. As is typical for rapidly evolving industries, customer demand for new business models is highly uncertain. Although we have entered into long-term supply agreements with customers that also produce wind blades for their wind turbines in-house, we may not be able to maintain these customer relationships or enter into similar arrangements with new customers that produce wind blades in-house in the future. In addition, although GE Wind historically outsourced all of their wind blade production requirements prior to its acquisition of LM, we expect that GE Wind will continue to utilize LM for a substantial percentage of its wind blade production in the future. Our business and growth strategies depend in large part on the continuation of the trend toward outsourcing manufacturing. If that trend does not continue or we are unsuccessful in persuading wind turbine OEMs to shift from in-house production to the outsourcing of their wind blade manufacturing, we may not achieve the long-term growth we anticipate and our market share could be limited.
A drop in the price of energy sources other than wind energy, or our inability to deliver wind blades that compete with the price of other energy sources, may materially harm our business, financial condition and results of operations.
We believe that the decision to purchase wind energy is, to a significant degree, driven by the relative cost of electricity generated by wind turbines compared to the applicable price of electricity from traditional (i.e. thermal) and other renewable energy sources. Decreases in the prices of electricity from traditional or renewable energy sources other than wind energy, such as solar, would harm the market for wind energy. In particular, a drop in natural gas prices could lessen the appeal of wind-generated electricity. Technological advancements or the construction of a significant number of power generation plants, including nuclear, coal, natural gas or power plants utilizing other renewable energy technologies, government support for other forms of renewable energy or construction of additional electric transmission and distribution lines could reduce the price of electricity produced by competing methods, thereby making the purchase of wind energy less attractive. The ability of energy conservation technologies, public initiatives and government incentives to reduce electricity consumption or support other forms of renewable energy could also lead to a reduction in the price of electricity, which would undermine the attractiveness of wind energy and thus wind turbines, and, ultimately wind blades. If prices for electricity generated by wind turbines are not competitive, our business, financial condition and results of operations may be materially harmed.
We encounter intense competition for limited customers from other wind blade manufacturers, as well as in-house production by wind turbine OEMs, which may make it difficult to enter into long-term supply agreements, keep existing customers and potentially get new customers.
We face significant competition from other wind blade manufacturers, and this competition may intensify in the future. The wind turbine market is characterized by a relatively small number of large OEMs. The competitive environment in the wind energy industry may become more challenging in the years ahead, particularly in the event of further consolidation in the industry, which could lead to us having even fewer customers. In addition, a significant percentage of wind turbine OEMs, including all of our current customers, produce some of their own
wind blades in-house. As a result, we compete for business from a limited number of customers that outsource the production of wind blades. We also compete with a number of wind blade manufacturers in China, who are growing in terms of their technical capability and aspire to expand outside of China. Some of our competitors have more experience in the wind energy industry, as well as greater financial, technical or human resources than we do, which may limit our ability to compete effectively with them and maintain or improve our market share. Additionally, our long-term supply agreements dedicate capacity at our facilities to our customers, which may also limit our ability to compete if our facilities cannot accommodate additional capacity. If we are unable to compete effectively for the limited number of customers that outsource production of wind blades, our ability to enter into long-term supply agreements with potential new and existing customers may be materially harmed.
We rely on our research and development efforts to remain competitive, and we may fail to develop on a timely basis new wind blade manufacturing technologies that are commercially attractive or permit us to keep up with customer demands.
The market for wind blades is subject to evolving customer needs and expectations. Our research and development is invested in developing faster and more efficient manufacturing processes in order to build the new wind blades designed by our customers that more effectively capture wind energy and are adaptable to new growth segments of the wind energy market. Research and development activities are inherently uncertain and the results of our in-house research and development may not be successful. In addition, our competition may adopt more advanced technologies or develop wind blades that are more effective or commercially attractive. We believe that our future success will depend in large part upon our ability to be at the forefront of technological innovation in the wind energy industry and to rapidly and cost-effectively adapt our wind blade manufacturing processes to keep pace with changing technologies, new wind blade design and changing customer needs. If we are unable to do so, our business, operating results, financial condition and reputation could be materially harmed.
Various legislation, regulations and incentives that are expected to support the growth of wind energy in the United States and around the world may not be extended or may be discontinued, phased out or changed, or may not be successfully implemented, which could materially harm wind energy programs and materially decrease demand for the wind blades we manufacture.
The U.S. wind energy industry has been dependent in part upon governmental support through certain incentives including federal tax incentives and state RPS programs and may not be economically viable if a large number of these incentives are not continued. Government-sponsored tax incentive programs including the PTC, and the Investment Tax Credit (ITC), are expected to continue to support the U.S. growth of wind energy. The PTC and ITC were recently extended for an additional year through the end of 2021. In addition, there are also increasing regulatory efforts globally to promote renewable power.
Because of the long lead times necessary to develop wind energy projects, any uncertainty or delay in adopting, extending or renewing the PTC, ITC or other incentives promoting wind energy beyond their current or future expiration dates could negatively impact potential wind energy installations and result in industry volatility. There can be no assurance that the PTC, the ITC, tender offers, auctions or other governmental programs or subsidies for renewable energy will remain in effect in their present form or at all, and the elimination, reduction, or modification of these programs or subsidies could materially harm wind energy programs in the United States and international markets and materially decrease demand for the wind blades we manufacture and, in turn, materially harm our business, operating results and financial condition.
Our long-term growth and success is dependent upon retaining our senior management and attracting and retaining qualified personnel.
Our growth and success depends to a significant extent on our ability to attract and retain highly qualified research and development, management, manufacturing and other key personnel including engineers in our various locations. In addition, we rely heavily on our management team, including William E. Siwek, our President and Chief Executive Officer; Ramesh Gopalakrishnan, our Chief Operating Officer - Wind; Bryan Schumaker, our Chief Financial Officer; and other senior management. Although we have executed an employment agreement with each of these executives, these executives and other senior management can resign with little or no notice to us. The inability to recruit and retain key personnel or the unexpected loss of key personnel may materially harm our business, operating results and financial condition. Hiring those persons may be especially difficult because of the
specialized nature of our business and our international operations. If we cannot attract and retain qualified personnel, or if we lose the services of Messrs. Siwek, Gopalakrishnan, or Schumaker, other key members of senior management or other key personnel, and we do not have adequate succession plans in place, our ability to successfully execute our business plan, market and develop our products and serve our customers could be materially and adversely affected. In addition, because of our reliance on our management team, our future success depends, in part, on its ability to identify and develop talent to succeed its senior management. The retention of key personnel and appropriate senior management succession planning will continue to be critical to the successful implementation of our future strategies.
Risks Related to our Transportation Business
Our efforts to expand our transportation business and enter into other strategic markets may not be successful.
While our primary focus has been to manufacture composite wind blades, our strategy is to expand our transportation business and to enter into other strategic markets. In 2018, we expanded our relationship with Proterra and began supplying bus bodies from a new manufacturing facility in Newton, Iowa in addition to our manufacturing facility in Warren, Rhode Island. We experienced startup challenges and incurred significant losses in connection with the supply of bus bodies to Proterra from our Newton, Iowa manufacturing facility. As result, we closed our Newton, Iowa bus body manufacturing facility in the first quarter of 2020, and consolidated our bus body manufacturing operation into our Warren, Rhode Island manufacturing facility and a manufacturing facility in Juárez, Mexico. The expansion of our transportation business and our entry into other strategic markets will require improved execution in terms of our start up activity and ongoing manufacturing performance as well as significant levels of investment. There can be no assurance that our transportation business or other strategic markets will develop as anticipated or that we will have success in any such markets, and if we do not, we may be unable to recover our investment, which could adversely impact our business, financial condition and results of operations.
We may incur material losses and costs as a result of product liability and warranty claims, litigation and other disputes and claims.
We are exposed to warranty and product liability claims if our transportation products fail to perform as expected. We may in the future be required to participate in a recall of these products or the vehicles incorporating our products. If public safety concerns are raised, we may have to participate in a recall even if our products are ultimately found not to be defective. Vehicle manufacturers have experienced increasing recall campaigns in recent years. Our customers may look to us for contribution when faced with recalls and product liability claims. If our customers demand higher warranty-related cost recoveries, or if our transportation products fail to perform as expected, our business, financial condition and results of operations could materially suffer.
Risks Related to Our Business as a Whole
Our business, operations and financial condition during the year ended December 31, 2020 were adversely affected by the COVID-19 pandemic and we cannot estimate the duration of the COVID-19 pandemic and our business may be adversely affected in the future if the COVID-19 pandemic persists.
The COVID-19 pandemic adversely affected our business and operations during the year ended December 31, 2020. During the first quarter of 2020, our China manufacturing facilities were adversely impacted by the COVID-19 pandemic in the form of reduced production levels and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. During the second quarter of 2020, all of our manufacturing facilities with the exception of our China manufacturing facilities and our Rhode Island manufacturing facility were required to temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. By the end of the second quarter of 2020, most of our manufacturing facilities had returned to operating at or near normal production levels. We may be required to reinstate temporary production suspensions or volume reductions at our other manufacturing facilities to the extent there is a resurgence of COVID-19 cases in the regions where we operate or there is an outbreak of positive COVID-19 cases in any of our manufacturing facilities. In addition, although we currently have not experienced any significant disruptions in our global supply chain due to the COVID-19 pandemic, our global supply chain may in the future be adversely affected if the COVID-19 pandemic persists.
Our financial position, revenue, operating results, profitability and cash flows are difficult to predict and may vary from quarter to quarter, which could cause our share price to decline significantly.
Our quarterly revenue, operating results, profitability and cash flows have varied in the past and are likely to vary significantly from quarter to quarter in the future. For example, our quarterly results have ranged from operating income of $29.0 million for the three months ended September 30, 2020 to an operating loss of $15.4 million for the three months ended March 31, 2020. The factors that are likely to cause these variations include:
•
operating and startup costs of new manufacturing facilities;
•
wind blade model transitions;
•
differing quantities of wind blade production;
•
unanticipated contract or project delays or terminations;
•
changes in the costs of raw materials or disruptions in raw material supply;
•
scrap of defective products;
•
payment of liquidated damages to our customers for late deliveries of our products;
•
warranty expense;
•
availability of qualified personnel;
•
employee wage levels;
•
costs incurred in the expansion of our existing manufacturing capacity;
•
volume reduction requests from our customers pursuant to our customer agreements;
•
damage or production delays caused by earthquakes, fires, floods, tornadoes, hurricanes, extreme weather conditions such as windstorms, hailstorms, drought, temperature extremes, typhoons or other natural disasters or terrorism or health epidemics such as the COVID-19 pandemic;
•
changes in our effective tax rate;
•
general economic conditions; and
•
the complexity of the financial assumptions we must use for forecasting our revenue, profitability and operating results under the revenue recognition standard and the impact that unanticipated blade transitions have on those estimates.
As a result, our revenue, operating results, profitability and cash flows for a particular period are difficult to predict and may decline in comparison to corresponding prior periods regardless of the strength of our business. It is also possible that in some future periods our revenue, operating results and profitability may not meet the expectations of securities analysts or investors. If this occurs, the trading price of our common stock could fall substantially, either suddenly or over time, and our business, operating results and financial condition would be materially harmed.
The fluctuation of foreign currency exchange rates could materially harm our financial results.
Since we conduct a significant portion of our operations internationally, our business is subject to foreign currency risks, including currency exchange rate fluctuations. The exchange rates are affected by, among other things, changes in political and economic conditions. For example, an increase in our Turkey sales and operations will result in a larger portion of our net sales and expenditures being denominated in the Euro and Turkish Lira. Significant fluctuations in the exchange rate between the Turkish Lira and the U.S. dollar, the Turkish Lira and the Euro or the Euro and the U.S. dollar may adversely affect our revenue, expenses, as well as the value of our assets and liabilities. To the extent our future revenues and expenses are generated outside of the United States in currencies other than the U.S. dollar, including the Euro, the Turkish Lira, the Chinese Renminbi, Mexican Peso or India Rupee, among others, we will be subject to increased risks relating to foreign currency exchange rate fluctuations which could materially harm our business, financial condition and operating results.
Our manufacturing operations and future growth are dependent upon the availability of capital, which may be insufficient to support our capital expenditures.
Our current wind blade manufacturing activities and future growth will require substantial capital investment. For the years ended December 31, 2020 and 2019, our capital expenditures were $65.8 million and $80.2 million, respectively, including assets acquired under finance leases in 2020 and 2019 of $0.2 million and $5.8 million, respectively. We have recently entered into lease agreements with third parties to lease new manufacturing facilities in China, India and Mexico. Major projects expected to be undertaken include purchasing equipment for our new manufacturing facility in Chennai, India and the continued investment in our Turkey, Mexico, China and Iowa facilities. Our ability to grow our business is predicated upon us making significant additional capital investments to expand our existing manufacturing facilities and build and operate new manufacturing facilities in existing and new markets. We generally estimate that the startup of a new multi-line manufacturing facility requires cash for net operating expenses and working capital of between $20 million to $25 million and additional capital expenditures primarily for machinery and equipment of between $40 million to $50 million. In addition, we estimate our annual maintenance capital expenditures to be between $1 million to $3 million per facility. We may not have the capital to undertake these capital investments. In addition, our capital expenditures may be significantly higher if our estimates of future capital investments are incorrect and may increase substantially if we are required to undertake actions to comply with new regulatory requirements or compete with new technologies. The cost of some projects may also be affected by foreign exchange rates if any raw materials or other goods must be paid for in foreign currency. We cannot assure you that we will be able to raise funds on favorable terms, if at all, or that future financings would not be dilutive to holders of our capital stock. We also cannot assure you that completed capital expenditures will yield the anticipated results. If we raise additional funds by obtaining loans from third parties, the terms of those financing arrangements may include negative covenants, or other restrictions on our business that could impair our operational flexibility, and would require us to fund additional interest expense. If we are unable to obtain sufficient capital at a reasonable cost or at all, we may not be able to expand production sufficiently to take advantage of changes in the marketplace or may be required to delay, reduce or eliminate some or all of our current operations, which could materially harm our business, operating results and financial condition.
As a U.S. corporation with international operations, we are subject to the U.S. Foreign Corrupt Practices Act of 1977, which could impact our ability to compete in certain jurisdictions.
As a U.S. corporation, we are subject to the FCPA, which generally prohibits U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business. We have manufacturing facilities in China, Mexico, Turkey and India, countries with a fairly high risk of corruption. Those facilities are subject to routine government oversight. In addition, a number of our raw materials and components suppliers are state-owned, particularly in China. Moreover, due to our need to import raw materials across international borders, we also routinely have interactions, directly or indirectly, with customs officials. In many foreign countries, under local custom, businesses engage in practices that may be prohibited by the FCPA or other similar laws and regulations. Additionally, we continue to hire employees around the world as we continue to expand. Although we have implemented certain procedures and controls designed to ensure compliance with the FCPA and similar laws, there can be no guarantee that all of our employees and agents, as well as those companies to which we outsource certain of our business operations, have not taken and will not take actions that violate our policies and the FCPA, which could subject us to fines, penalties, disgorgement, and loss of business, harm our reputation and impact our ability to compete in certain jurisdictions. In addition, these laws are complex and far-reaching in nature, and, as a result, we may be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Moreover, our competitors may not be subject to the FCPA or comparable legislation, which could provide them with a competitive advantage in some jurisdictions.
Effective internal controls are necessary for us to provide reliable financial reports and effectively address fraud risks.
We maintain a system of internal controls to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (GAAP). The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to establish and maintain a system of internal controls that will be adequate to satisfy the reporting obligations of a public company. The effectiveness of our internal controls depends in part on the cooperation of senior managers worldwide.
Any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. Any failure to maintain that system, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and harm our business, and lead to our becoming subject to litigation, sanctions or investigations by The NASDAQ Global Market (NASDAQ), the SEC or other regulatory governmental agencies and bodies. Furthermore, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm our stock price.
Our indebtedness may adversely affect our business, results of operations and financial condition.
Our indebtedness could adversely affect our business, results of operations and financial condition by, among other things:
•
requiring us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt, which would reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;
•
limiting our ability to borrow additional amounts to fund debt service requirements, working capital, capital expenditures, acquisitions, execution of our growth strategy and other general corporate purposes;
•
making us more vulnerable to adverse changes in general economic, industry and regulatory conditions and in our business by limiting our flexibility in planning for, and making it more difficult to react quickly to, changing conditions;
•
placing us at a competitive disadvantage compared with those of our competitors that have less debt and lower debt service requirements;
•
requiring us to potentially incur additional expenses to amend our London Interbank Offered Rate (LIBOR)-indexed loans to a new reference rate due to the planned phase out of the use of LIBOR;
•
making us more vulnerable to increases in interest rates since some of our indebtedness is subject to variable rates of interest; and
•
making it more difficult for us to satisfy our financial obligations.
In addition, we may not be able to generate sufficient cash flow from our operations to repay our outstanding indebtedness when it becomes due and to meet our other cash needs or to comply with the financial covenants set forth therein. If we are not able to pay our debts as they become due, we could be in default under our senior secured credit facility or other indebtedness. We might also be required to pursue one or more alternative strategies to repay indebtedness, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell assets, it may negatively affect our ability to generate revenues.
Much of our intellectual property consists of trade secrets and know-how that is very difficult to protect. If we experience loss of protection for our trade secrets or know-how, our business would be substantially harmed.
We have a variety of intellectual property rights, including patents, trademarks and copyrights, but much of our most important intellectual property rights consist of trade secrets and know-how and effective intellectual property protection may be unavailable, limited or outside the scope of the intellectual property rights we pursue in the United States and in foreign countries such as China where we operate. Although we strive to protect our intellectual property rights, there is always a risk that our trade secrets or know-how will be compromised or that a competitor could lawfully reverse-engineer our technology or independently develop similar or more efficient technology. We have confidentiality agreements with each of our customers, suppliers, key employees and
independent contractors in place to protect our intellectual property rights, but it is possible that a customer, supplier, employee or contractor might breach the agreement, intentionally or unintentionally. For example, we believe a key former employee may have shared some of our intellectual property with a competitor in China and this former employee or the competitor may use this intellectual property to compete with us in the future. It is also possible that our confidentiality agreements with customers, suppliers, employees and contractors will not be effective in preserving the confidential nature of our intellectual property rights. The patents we own could be challenged, invalidated, narrowed or circumvented by others and may not be of sufficient scope or strength to provide us with any meaningful protection or commercial advantage. Once our patents expire, or if they are invalidated, narrowed or circumvented, our competitors may be able to utilize the inventions protected by our patents. Additionally, the existence of our intellectual property rights does not guarantee that we will be successful in any attempt to enforce these rights against third parties in the event of infringement, misappropriation or other misuse, which may materially and adversely affect our business. Because our ability to effectively compete in our industry depends upon our ability to protect our proprietary technology, we might lose business to competitors and our business, revenue, operating results and prospects could be materially harmed if we suffer loss of trade secret and know-how protection or breach of our confidentiality agreements.
We may be subject to significant liabilities and costs relating to environmental and health and safety requirements.
We are subject to various environmental, health and safety laws, regulations and permit requirements in the jurisdictions in which we operate governing, among other things, health, safety, pollution and protection of the environment and natural resources, the handling and use of hazardous substances, the generation, storage, treatment and disposal of wastes, and the cleanup of any contaminated sites. In June 2018, Iowa’s Occupational Safety and Health Administration, a division of the Iowa Department of Labor, issued a citation and notification of penalty to us alleging that certain of our workplace practices and conditions at our Newton, Iowa wind blade manufacturing facility had violated the Iowa Occupational Safety and Health Act. Specifically, the citation cited us for multiple alleged violations and proposed that we pay an aggregate penalty of $0.2 million. In March 2019, we entered into a settlement agreement with the Iowa Department of Labor pursuant to which we agreed to make a settlement payment of $0.1 million and to implement certain safety enhancements at our Newton, Iowa manufacturing facility to fully resolve this matter.
We have incurred, and expect to continue to incur, capital and operating expenditures to comply with such laws, regulations and permit requirements. While we believe that we currently are in material compliance with all such laws, regulations and permit requirements, any noncompliance may subject us to a range of enforcement measures, including the imposition of monetary fines and penalties, other civil or criminal sanctions, remedial obligations, and the issuance of compliance requirements restricting our operations.
There can be no assurance that we will not in the future become subject to compliance requirements, obligations to undertake cleanup or related activities, or claims or proceedings relating to environmental, health or safety matters, hazardous substances or wastes, contaminated sites, or other environmental or natural resource damages, that could impose significant liabilities and costs on us and materially harm our business, operating results or financial condition.
Claims that we infringe, misappropriate or otherwise misuse the intellectual property rights of others could subject us to significant liability and disrupt our business.
Our competitors and third-party suppliers of components and raw materials used in our products protect their intellectual property rights by means such as trade secrets and patents. In the future we may be sued for violations of other parties’ intellectual property rights, and the risk of this type of lawsuit will likely increase as our size, geographic presence and market share expand and as the number of competitors in our market increases. Any such claims or litigation, whether meritorious or not, could disrupt our business and materially harm our operating results and financial condition. In addition, intellectual property disputes have in the past arisen between our customers which negatively affected such customers’ demand for wind blades manufactured by us. If such intellectual property disputes involving, or between, one or more of our customers should arise in the future, our business could be materially harmed.
Work disruptions resulting from our collective bargaining agreements could result in increased operating costs and materially harm our business, operating results and financial condition.
Certain of our employees in Turkey and Matamoros, Mexico, which in the aggregate represented approximately 38% of our workforce as of December 31, 2020, are covered by collective bargaining agreements. Our collective bargaining agreement for our Turkey facilities are in effect through the end of 2020 and we are in the process of negotiating an amendment for calendar year 2021. In March 2018, we entered into a collective bargaining agreement with a labor union for certain of our employees in our Matamoros, Mexico facility. In January 2019, thousands of workers employed in dozens of manufacturing facilities in Matamoros, Mexico, went on strike. In general, these workers, who were represented by several different labor unions, demanded an increase in their wage rate and an annual bonus. In February 2019, our manufacturing production employees in Matamoros, Mexico, who are represented by a labor union, went on strike also demanding an increase in their hourly wage rate and the payment of an annual bonus. During this strike, our Matamoros manufacturing facility stopped production for several weeks until we reached a revised agreement with our labor union. We recently amended our Matamoros collective bargaining agreement to adjust the salaries and bonuses payable to our associates for calendar year 2021 that are covered by this agreement.
Additionally, our other employees working at other manufacturing facilities may vote to be represented by a labor union in the future. There can be no assurance that we will not experience labor disruptions such as work stoppages or other slowdowns by workers at any of our facilities. Should significant industrial action, threats of strikes or related disturbances occur, we could experience further disruptions of operations and increased labor costs in Turkey, Mexico or other locations, which could materially harm our business, operating results or financial condition. Any such work stoppage or slow-down at any of our facilities could also result in additional expenses and possible loss of revenue for us.
Our information technology infrastructure could experience serious failures or disruptions, the failure of which could materially harm our business, operating results and financial condition.
Information technology is part of our business strategy and operations. It enables us to streamline operation processes, facilitate the collection and reporting of business data, and provide for internal and external communications. There are risks that information technology system failures, network disruptions, breaches of data security and phishing and ransomware attacks could disrupt our operations. Any significant disruption or breach may materially harm our business, operating results or financial condition.
We are faced with increasingly complex tax issues in many jurisdictions, and we could be obligated to pay additional taxes in various jurisdictions.
We may be subject to taxation in many jurisdictions in the United States and around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes we pay in these jurisdictions could increase substantially as a result of changes in the applicable tax laws, including increased tax rates or revised interpretations of existing tax laws and precedents, which could harm our liquidity and operating results. In addition, the taxing authorities in these jurisdictions could review our tax returns, or authorities in jurisdictions in which we do not file tax returns could assert that we are subject to tax in those jurisdictions, and in
either case could impose additional tax, interest and penalties. Further, the authorities could claim that various withholding requirements apply to us or our subsidiaries or assert that benefits of tax treaties are not available to us or our subsidiaries, or that our transfer pricing arrangements with our foreign subsidiaries are improper, any of which could have a material adverse impact on us and the results of our operations.
Risks Related to Ownership of Our Common Stock
The price of our common stock may fluctuate substantially and your investment may decline in value.
The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to many factors, including:
•
actual or anticipated fluctuations in our results of operations;
•
our ability to provide products due to shipments subject to delayed delivery and deferred revenue arrangements;
•
loss of or changes in our relationship with one or more of our customers;
•
failure to meet our earnings estimates;
•
conditions and trends in the energy and manufacturing markets in which we operate and changes in estimates of the size and growth rate of these markets;
•
announcements by us or our competitors of significant contracts, developments, acquisitions, strategic partnerships or divestitures;
•
availability of equipment, labor and other items required for the manufacture of wind blades;
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changes in governmental policies;
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our ability to successfully grow our transportation business;
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additions or departures of members of our senior management or other key personnel;
•
changes in market valuation or earnings of our competitors;
•
sales of our common stock, including sales of our common stock by our directors and officers or by our other principal stockholders;
•
the trading volume of our common stock; and
•
general market and economic conditions.
These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, securities class-action litigation has often been instituted against a company following periods of volatility in the market price of that company’s securities. Securities class-action litigation, if instituted against us, could result in substantial costs or damages and a diversion of management’s attention and resources, which could materially harm our business and operating results.
A significant portion of our total outstanding shares may be sold into the public market in future sales, which could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial number of shares of our common stock in the public market can occur at any time. These sales, or the market perception that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of December 31, 2020, we had 36,563,798 shares of common stock outstanding. All shares can now be sold, subject to any applicable volume limitations under federal securities laws. We may issue debt or equity securities under our automatic shelf registration statement, which we filed in September 2020, or in other registered or unregistered convertible debt or equity offerings.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material
portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you and may cause the market price of our common stock to drop significantly.
The exercise of options and warrants and other issuances of shares of common stock or securities convertible into common stock under our equity compensation plans will dilute your interest.
Under our existing equity compensation plans, as of December 31, 2020, we had outstanding options to purchase 1,499,586 shares of our common stock, 668,454 restricted stock units and 650,523 performance stock units to our employees and non-employee directors. From time to time, we expect to grant additional options and other stock awards. The exercise of options and warrants at prices below the market price of our common stock could adversely affect the price of shares of our common stock. Additionally, any issuance of our common stock that is not made solely to then-existing stockholders proportionate to their interests, such as in the case of a stock dividend or stock split, will result in dilution to each stockholder by reducing their percentage ownership of the total outstanding shares. If we issue options or warrants to purchase our common stock in the future and those options or warrants are exercised or we issue stock, stockholders may experience further dilution.
Provisions of Delaware law or our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management.
Provisions of Delaware law and our amended and restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include: a classified board of directors; limitations on the removal of directors; advance notice requirements for stockholder proposals and nominations; the inability of stockholders to act by written consent or to call special meetings; the ability of our board of directors to make, alter or repeal our amended and restated by-laws; and the authority of our board of directors to issue preferred stock with such terms as our board of directors may determine.
The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, is necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. In addition, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.
As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Our headquarters is located in Scottsdale, Arizona, and we own or lease various other facilities in the United States, China, Mexico, Turkey, India, Denmark and Germany. We believe that our properties are generally in good condition, are well maintained and are generally suitable and adequate to carry out our business at expected capacity for the foreseeable future. The table below lists various information regarding our facilities as of February 24, 2021:
Operating
Year
Leased or
Approximate
Location
Segment
Commenced
Owned
Square Footage
Description of Use
Newton, IA, United States
U.S.
Leased
337,922
Wind Blade Manufacturing Facility
Newton, IA, United States
U.S.
Leased
114,078
Transportation Manufacturing Facility
Dafeng, China
Asia
Leased
381,102
Wind Blade Manufacturing Facility
Dafeng, China
Asia
Leased
446,034
Wind Blade Manufacturing Facility
Taicang Port, China
Asia
Owned
208,445
Precision Molding Facility
Yangzhou, China
Asia
Leased
934,133
Wind Blade Manufacturing Facility
Juárez, Mexico
Mexico
Leased
345,984
Wind Blade Manufacturing Facility
Juárez, Mexico
Mexico
Leased
453,096
Wind Blade Manufacturing Facility
Juárez, Mexico
Mexico
Leased
339,386
Wind Blade Manufacturing Facility
Juárez, Mexico
Mexico
Leased
300,277
Precision Molding Manufacturing Facility
Matamoros, Mexico
Mexico
Leased
527,442
Wind Blade Manufacturing Facility
Izmir, Turkey
EMEA
Leased
343,000
Wind Blade Manufacturing Facility
Izmir, Turkey
EMEA
Leased
817,078
Wind Blade Manufacturing Facility
Warren, RI, United States
U.S.
Leased
108,750
Precision Molding Development and Manufacturing and Research and Development Facility, Transportation Manufacturing Facility
Santa Teresa, NM, United
States
Mexico
Leased
503,710
Wind Blade Storage Facility
Scottsdale, AZ, United States
U.S.
Leased
22,508
Corporate Headquarters
Kolding, Denmark
U.S.
Leased
2,583
Advanced Engineering Center
Chennai, India
India
Leased
776,280
Wind Blade Manufacturing Facility
Berlin, Germany
U.S.
Leased
4,684
Engineering Center

---

ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
For a discussion of our legal proceedings, refer to Note 14 - Commitments and Contingencies - (b) Legal Proceedings of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

---

ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not applicable.
PART II

---

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
On July 22, 2016, our common stock began trading on NASDAQ under the symbol “TPIC.” Prior to that time, there was no public market for our stock.
Performance Graph
The following graph and table illustrate the total stockholder return from July 22, 2016 through December 31, 2020, on our common stock, the Russell 2000 Index, the S&P Small Cap 600 Energy (Sector) Index and the NASDAQ Clean Edge Green Energy Index, assuming an investment of $100.00 on July 22, 2016 including the reinvestment of dividends.
Base Period
7/22/16
12/30/16
12/29/17
12/31/18
12/31/19
12/31/20
TPI Composites, Inc.
$
100.00
$
118.29
$
150.88
$
181.27
$
136.50
$
389.23
Russell 2000
$
100.00
$
111.89
$
126.60
$
111.19
$
137.56
$
162.82
S&P Small Cap 600 Energy (Sector)
$
100.00
$
133.11
$
97.60
$
55.64
$
47.19
$
28.17
NASDAQ Clean Edge Green Energy
$
100.00
$
102.59
$
134.16
$
116.50
$
163.93
$
462.91
Holders
As of January 29, 2021, there was one stockholder of record of our common stock, although there is a much larger number of beneficial owners.
Dividends
We have never declared or paid any cash dividends on shares of our capital stock. We currently intend to retain earnings, if any, to finance the development and growth of our business and do not anticipate paying cash dividends on the common stock in the future. Any payment of any future dividends will be at the discretion of the board of directors, subject to compliance with certain covenants in our loan agreements, after taking into account various factors, including our financial condition, operating results, capital requirements, restrictions contained in any future financing instruments, growth plans and other factors the board deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” included in Part II, Item 7 of this Annual Report on Form 10-K.
Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.6 million) of registered capital is contributed to a surplus reserve, our China operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, our China operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. As of December 31, 2020, the amount of the surplus reserve fund was $7.0 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations- Liquidity and Capital Resources” included in Part II, Item 7 of this Annual Report on Form 10-K.
Securities Authorized for Issuance under Equity Compensation Plans
The information required in response to Item 201(d) of Regulation S-K is set forth in Part III, Item 12 of this Annual Report on Form 10-K which is incorporated herein by reference.
Recent Sales of Unregistered Securities
None.
Use of Proceeds from Registered Securities
None
Purchases of Equity Securities by the Issuer
The following table summarizes the total number of shares of our common stock that we repurchased during the three months ended December 31, 2020 from certain employees who surrendered common stock to pay the taxes in connection with the vesting of restricted stock units.
Period
Total Number
of Shares Purchased
Average Price
Paid per Share
Total Number
of Shares Purchased as Part of Publicly Announced Program
Maximum Number of Shares That May
Yet Be Purchased Under the Program
October (October 1 - October 31)
-
$
-
-
-
November (November 1 - November 30)
-
-
-
-
December (December 1 - December 31)
31,880
52.78
-
-
Total
31,880
$
52.78
-
-

---

ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Not applicable.

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes included in Part II, Item 8 of this Annual Report on Form 10-K and other financial information appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Annual Report on Form 10-K, particularly those under “Risk Factors” included in Part I, Item 1A of this Annual Report on Form 10-K.
OVERVIEW
Our Company
We are the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. We deliver high-quality, cost-effective composite solutions through long term relationships with leading original equipment manufacturers in the wind and transportation markets. We also provide field service inspection and repair services to our OEM customers and wind farm owners and operators, and supply high strength, lightweight and durable composite products to the transportation market. We are headquartered in Scottsdale, Arizona and operate factories throughout the U.S., China, Mexico, Turkey, and India. We operate additional engineering development centers in Denmark and Germany. For a further overview of our Company, refer to the discussion in “Business-Overview” included in Part I, Item 1 of this Annual Report on Form 10-K.
Our business operations are defined geographically into five geographic operating segments - (1) the United States (U.S.), (2) Asia, (3) Mexico, (4) Europe, the Middle East and Africa (EMEA) and (5) India. For further information regarding our operating segments, refer to Note 19 - Segment Reporting of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Key Trends Affecting our Business
We have identified the following material trends affecting our business:
•
The COVID-19 pandemic adversely affected our business and operations during the year ended December 31, 2020. During the first quarter of 2020, our China manufacturing facilities were adversely impacted by the COVID-19 pandemic in the form of reduced production levels and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. During the second quarter of 2020, all of our manufacturing facilities with the exception of our China manufacturing facilities and our Rhode Island manufacturing facility were required to temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. By the end of the second quarter of 2020, most of our manufacturing facilities had returned to operating at or near normal production levels. Although all of our manufacturing facilities currently are operating at or near normal production levels, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities or at our other locations to the extent there is a resurgence of COVID-19 cases in the regions where we operate or there is an outbreak of positive COVID-19 cases in any of our facilities.
•
Our business seeks to capitalize on two major global trends: (i) increasing worldwide demand for renewable energy; and (ii) increasing worldwide demand for electric vehicles.
•
The wind power generation industry has grown rapidly and expanded worldwide over the last five years to meet global demand for electricity and the expanded use of renewable energy. Our sales of wind blades to our wind turbine customers have grown rapidly over the last several years in response to these trends. In 2020, our net sales grew to $1.67 billion compared to net sales of $1.44 billion in 2019.
•
We believe the long term global demand for wind energy will continue to be strong and potentially accelerate in the coming years due to a multitude of factors, including: increased cost competitiveness of wind energy compared to fossil fuel generated electricity; increased demand from corporations and utility providers for renewable energy; recent international policy initiatives designed to promote the growth of renewable energy; and the Biden administration’s proposed plans to promote renewable energy growth in the United States. However, many of the recently announced domestic and international policy initiatives to expand renewable energy have yet to be implemented into concrete legislation and regulations. As such, we expect our revenue in 2021 to continue to grow but at a rate lower than our revenue growth rate in 2020 due primarily to lower expected demand for wind blades manufactured in our China manufacturing facilities, but partially offset by stronger expected demand for wind blades manufactured in our Mexico, Turkey and India manufacturing facilities. We expect to produce slightly less wind blades sets in 2021 compared to 2020, but we expect that the average sales price per set in 2021 will be higher than in 2020 because we plan to produce larger wind blades in 2021.
•
During the last several years, many wind turbine OEMs have increased the outsourced production of wind blades and other key components to specialized manufacturers to meet the increasing global demand for wind energy in a cost-effective manner in new and growing markets. That shift, together with the overall expansion of the wind power generation industry, has increased our addressable market. Given our growth in production, we have hired several thousand new employees globally in the past two years. In addition, we have expanded our wind turbine OEM customer base from one to five OEM customers since 2012, capitalizing on the growth and expansion of the wind energy generation industry generally as well as the specific trend of most wind turbine OEMs increasing the outsourcing of the manufacturing of wind blades for growth and diversification.
•
Changing customer demands, including shifts to bigger wind turbines with larger wind blades, have driven some of our customers to require us to transition to new wind blade models one or two times during the term of a long-term supply agreement. Although we generally receive transition payments to compensate us for certain costs incurred during these transitions, these payments generally do not fully cover the transition costs and lost margin. In 2020, we postponed several wind blade model transitions due to the COVID-19 pandemic and also had a significant number of lines starting up in our new manufacturing facility in Chennai, India, which had an adverse impact on our results of operations and profitability in 2020. As such, we expect to have a larger number of lines in transition during 2021, which will have an adverse impact on our results of operations for 2021. We expect these line transitions to provide a foundation for longer term revenue growth and profitability as these lines ramp up to full production levels.
•
We expect our new manufacturing facilities to generally generate operating losses in their first 12 to 18 months of operations due to production and overhead expenses as they initially operate far below capacity during the pre-production and production ramp up periods. As a result, this generally has a negative impact on our results of operations during these ramp-up periods. In addition, construction of new facilities and expansion of existing facilities, including the fabrication of precision molding and assembly systems to outfit those facilities, is complex and involves inherent risks.
•
The long-term supply agreements we sign with our customers provide us with significant visibility of future production demands due in part to the annual minimum purchase commitments of our customers contained in those agreements. These annual minimum purchase commitments generally require our customers to purchase a negotiated percentage of the manufacturing capacity that we have agreed to dedicate to them. Generally, this percentage begins at 100% of the manufacturing capacity for the first few years of the supply agreement, and the percentage declines over time in subsequent years according to the terms of the agreement, but generally remains above 50%. It is our experience that our customers will generally order wind blades from us in a volume that exceeds (sometimes substantially) the annual minimum purchase commitments contained in our supply agreements, particularly in the later years of a supply agreement when the annual minimum purchase commitment percentage declines. As of February 24, 2021, our long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.8 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $4.6 billion through the end of 2024. As noted elsewhere in this Annual Report on Form 10-K, some of our long-term supply agreements are subject to early termination by our customers if our customers pay an early termination fee. We caution investors that the annual minimum purchase commitments in our long-term supply agreements can understate the forecasted net sales that we are likely to generate in a given period or periods if all of our long-term supply agreements remain in place and pricing remains materially unchanged, and they could potentially overstate the forecasted net sales that we are likely to generate in a given period or periods if one or more of our agreements were to be terminated by our customers for any reason, or our plants are underutilized due to market conditions. See “Business-Wind Blade Long-Term Supply Agreements” included in Part 1, Item 1A of this Annual Report on Form 10-K for additional information.
•
As the global vehicle electrification trend continues, reducing the weight of these vehicles is critical to expanding range and/or providing more room for additional batteries or reducing the number of batteries. We believe there is an increasing demand for composites products for electric vehicles. As part of our diversification strategy, we have made significant investments to expand our transportation business during the last several years. In 2018 through 2020, we experienced significant losses relating to our transportation business and experienced operational challenges as we are expanding this business. Specifically, we experienced extended startup delays and challenges with respect to our Newton, Iowa transportation facility, which had an adverse impact on our results of operations in 2019 and 2020. We ceased manufacturing composite bus bodies from our Newton, Iowa manufacturing facility in the first quarter of 2020 and consolidated these operations into our Warren, Rhode Island manufacturing facility. From 2018 to 2020, we invested approximately $50 million in our transportation business. We expect our transportation business will continue to operate at a loss in 2021 and expect to invest between approximately $15 million and $20 million in our transportation business in 2021.
COMPONENTS OF RESULTS OF OPERATIONS
Net Sales
We recognize revenue from manufacturing services over time as our customers control the product as it is produced, and we may not use or sell the product to fulfill other customers’ contracts. Net sales include amounts billed to our customers for our products, including wind blades, precision molding and assembly systems and other products and services, as well as the progress towards the completion of the performance obligation for products in progress, which is determined on a ratio of direct costs incurred to date in fulfillment of the contract to the total estimated direct costs required to complete the performance obligation.
Cost of Goods Sold
Cost of goods sold includes the costs we incur at our production facilities to make products saleable on both products invoiced during the period as well as products in progress towards the completion of each performance obligation. Cost of goods sold includes such items as raw materials, direct and indirect labor and facilities costs, including purchasing and receiving costs, plant management, inspection costs, production process improvement activities, product engineering and internal transfer costs. In addition, all depreciation associated with assets used in the production of our products is also included in cost of goods sold. Direct labor costs consist of salaries, benefits and other personnel related costs for employees engaged in the manufacturing of our products and services.
Startup and transition costs are primarily unallocated fixed overhead costs and underutilized direct labor costs incurred during the period production facilities are transitioning wind blade models and ramping up manufacturing. All direct labor costs are included in the measure of progress towards completion of the relevant performance obligation when determining revenue to be recognized during the period. The cost of sales for the initial wind blades from a new model manufacturing line is generally higher than when the line is operating at optimal production volume levels due to inefficiencies during ramp-up related to labor hours per blade, cycle times per blade and raw material usage. Additionally, these costs as a percentage of net sales are generally higher during the period in which a facility is ramping up to full production capacity due to underutilization of the facility. Manufacturing overhead at each of our facilities includes virtually all indirect costs (including share-based compensation costs) incurred at the plants, including engineering, finance, information technology, human resources and plant management.
General and Administrative Expenses
General and administrative expenses primarily relate to the unallocated portion of costs incurred at our corporate headquarters and our research facilities and include salaries, benefits and other personnel related costs for employees engaged in research and development, engineering, finance, internal audit, information technology, human resources, business development, global operational excellence, global supply chain, in-house legal and executive management. Other costs include outside legal and accounting fees, risk management (insurance), share-based compensation and certain other administrative and global resources costs.
The unallocated research and development expenses incurred at our Warren, Rhode Island location as well as at our Kolding, Denmark advanced engineering center and our Berlin, Germany engineering center are also included in general and administrative expenses. For the years ended December 31, 2020, 2019 and 2018, total research and development expenses totaled $1.0 million, $1.0 million and $0.8 million, respectively.
Loss on Sale of Assets and Asset Impairments
Loss on sale of assets represents the losses on the sale of certain receivables, on a non-recourse basis under supply chain financing arrangements with our customers, to financial institutions and losses on the sale of other assets at our corporate and manufacturing facilities. Asset impairments represent the losses on the impairment of our assets at our corporate and manufacturing facilities.
Restructuring Charges
Restructuring charges primarily consist of employee severance, one-time termination benefits and ongoing benefits related to the reduction of our workforce and other costs associated with exit activities, which may include costs related to leased facilities to be abandoned and facility and employee relocation costs.
Other Income (Expense)
Other income (expense) consists of interest expense on our debt borrowings and the amortization of deferred financing costs on such borrowings, foreign currency income and losses, interest income, losses on extinguishment of debt and miscellaneous income and expense.
Income Taxes
Income taxes consists of federal, state, provincial, local and foreign taxes based on income in jurisdictions in which we operate, including in the U.S., China, Mexico, Turkey and India. The income tax rate, tax provisions, deferred tax assets and liabilities vary according to the jurisdiction in which the income or loss arises. Tax laws are complex and subject to different interpretations by management and the respective governmental taxing authorities and require us to exercise judgment in determining our income tax provision, our deferred tax assets and liabilities and the valuation allowance recorded against our net deferred tax assets.
KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE
In addition to measures of financial performance presented in our consolidated financial statements in accordance with GAAP, we use certain other financial measures and operating metrics to analyze our performance. These “non-GAAP” financial measures consist of EBITDA, adjusted EBITDA, free cash flow and net cash (debt), which help us evaluate growth trends, establish budgets, assess operational efficiencies, oversee our overall liquidity, and evaluate our overall financial performance. The key operating metrics consist of wind blade sets produced, estimated megawatts of energy capacity to be generated by wind blade sets produced, utilization, dedicated manufacturing lines, and manufacturing lines installed, which help us evaluate our operational performance. We believe that these measures are useful to investors in evaluating our performance.
Key Financial Measures
The key financial measures as of and for the years ended December 31 are as follow:
(in thousands)
Net sales
$
1,670,137
$
1,436,500
$
1,029,624
Net income (loss)
(19,027
)
(15,708
)
5,279
EBITDA(1)
52,323
54,009
42,308
Adjusted EBITDA(1)
94,498
85,841
68,173
Capital expenditures
65,666
74,408
52,688
Net cash provided by (used in) operating activities
37,570
57,084
(3,258
)
Free cash flow(1)
(28,096
)
(17,324
)
(55,946
)
Total debt, net of debt issuance costs and discount
216,867
141,389
137,623
Net debt(1)
(88,061
)
(71,779
)
(53,155
)
(1)
See below for more information and a reconciliation of EBITDA, adjusted EBITDA, free cash flow and net debt to net income (loss), net income (loss), net cash provided by (used in) operating activities and total debt, net of debt issuance costs, respectively, the most directly comparable financial measures calculated and presented in accordance with GAAP.
EBITDA and adjusted EBITDA
We define EBITDA, a non-GAAP financial measure, as net income or loss plus interest expense (including losses on extinguishment of debt and net of interest income), income taxes and depreciation and amortization. We define adjusted EBITDA as EBITDA plus any share-based compensation expense, plus or minus any foreign currency losses or income, plus or minus any losses or gains from the sale of assets and asset impairments, plus any restructuring charges. Adjusted EBITDA is the primary metric used by our management and our board of directors to establish budgets and operational goals for managing our business and evaluating our performance. In addition, our credit agreement (the Credit Agreement) that we entered into in April 2018 contains minimum EBITDA (as defined in the Credit Agreement) covenants with which we must comply. We monitor adjusted EBITDA as a supplement to our GAAP measures, and believe it is useful to present to investors, because we believe that it facilitates evaluation of our period-to-period operating performance by eliminating items that are not operational in nature, allowing comparison of our recurring core business operating results over multiple periods unaffected by differences in capital structure, capital investment cycles and fixed asset base. In addition, we believe adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies, and other parties in evaluating companies in our industry as a measure of financial performance and debt-service capabilities.
Our use of adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;
•
adjusted EBITDA does not reflect the interest expense or the cash requirements necessary to service interest or principal payments on our indebtedness;
•
adjusted EBITDA does not reflect losses on extinguishment of debt relating to prepayment penalties, termination fees and the write off of any remaining debt discount and debt issuance costs upon the repayment or refinancing of our debt;
•
adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and adjusted EBITDA does not reflect capital expenditure requirements relating to the future need to augment or replace those assets;
•
adjusted EBITDA does not reflect share-based compensation expense on equity-based incentive awards to our officers, employees, directors and consultants;
•
adjusted EBITDA does not reflect the foreign currency income or losses in our operations;
•
adjusted EBITDA does not reflect the gains or losses on the sale of assets and asset impairments;
•
adjusted EBITDA does not reflect restructuring charges; and
•
other companies, including companies in our industry, may calculate EBITDA and adjusted EBITDA differently, which reduces their usefulness as comparative measures.
In evaluating EBITDA and adjusted EBITDA, you should be aware that in the future, we will incur expenses similar to the adjustments noted herein. Our presentations of EBITDA and adjusted EBITDA should not be construed as suggesting that our future results will be unaffected by these expenses or any unusual or non-recurring items. When evaluating our performance, you should consider EBITDA and adjusted EBITDA alongside other financial performance measures, including our net income (loss) and other GAAP measures.
Free cash flow
We define free cash flow as net cash provided by (used in) operating activities less capital expenditures. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our business for purposes such as repaying maturing debt and funding business acquisitions.
Net cash (debt)
We define net cash (debt) as total unrestricted cash and cash equivalents less the total principal amount of debt outstanding. The total principal amount of debt outstanding is comprised of the long-term debt and current maturities of long-term debt as presented in our consolidated balance sheets adding back any debt issuance costs. We believe that the presentation of net cash (debt) provides useful information to investors because our management reviews net cash (debt) as part of our oversight of overall liquidity, financial flexibility and leverage. Net cash (debt) is important when we consider opening new manufacturing facilities and expanding existing manufacturing facilities, as well as for capital expenditure requirements.
The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measures:
EBITDA and adjusted EBITDA for the years ended December 31 are reconciled as follows:
(in thousands)
Net income (loss)
$
(19,027
)
$
(15,708
)
$
5,279
Adjustments:
Depreciation and amortization
49,667
38,580
26,429
Interest expense (net of interest income)
10,399
8,022
10,236
Loss on extinguishment of debt
-
-
3,397
Income tax provision (benefit)
11,284
23,115
(3,033
)
EBITDA
52,323
54,009
42,308
Share-based compensation expense
10,352
5,681
7,795
Foreign currency loss, net
19,986
4,107
13,489
Loss on sale of assets and asset impairments
7,748
18,117
4,581
Restructuring charges, net
4,089
3,927
-
Adjusted EBITDA
$
94,498
$
85,841
$
68,173
Free cash flow for the years ended December 31 is reconciled as follows:
(in thousands)
Net cash provided by (used in) operating activities
$
37,570
$
57,084
$
(3,258
)
Less capital expenditures
(65,666
)
(74,408
)
(52,688
)
Free cash flow
$
(28,096
)
$
(17,324
)
$
(55,946
)
Net debt as of December 31 is reconciled as follows:
(in thousands)
Cash and cash equivalents
$
129,857
$
70,282
$
85,346
Less total debt, net of debt issuance costs
(216,867
)
(141,389
)
(137,623
)
Less debt issuance costs
(1,051
)
(672
)
(878
)
Net debt
$
(88,061
)
$
(71,779
)
$
(53,155
)
Key Operating Metrics (1)
The key operating metrics as of and for the year ended December 31 are as follows:
Sets
3,544
3,189
2,423
Estimated megawatts
12,080
9,598
6,560
Utilization
%
%
%
Dedicated manufacturing lines
Manufacturing lines installed
(1)
See below for more information on each of our key operating metrics.
Sets represents the number of wind blade sets, consisting of three wind blades each, which we produced worldwide during the period. We monitor sets and believe that presenting sets to investors is helpful because we believe that it is the most direct measurement of our manufacturing output during the period. Sets primarily impact net sales.
Estimated megawatts are the energy capacity to be generated by wind blade sets produced during the period. Our estimate is based solely on name-plate capacity of the wind turbine on which the wind blades we manufacture
are expected to be installed. We monitor estimated megawatts and believe that presenting estimated megawatts to investors is helpful because we believe that it is a commonly followed measurement of energy capacity across our industry and provides an indication of our share of the overall wind blade market.
Utilization represents the percentage of the number of wind blades invoiced during the period compared to the total potential wind blade capacity of the manufacturing lines installed during the period. We monitor utilization because we believe it helps investors to better understand how close we are to operating at maximum production capacity.
Dedicated manufacturing lines are the number of wind blade manufacturing lines that we have dedicated to our customers pursuant to our long-term supply agreements at the end of the period. We monitor dedicated manufacturing lines and believe that presenting this metric to investors is helpful because we believe that the number of dedicated manufacturing lines is the best indicator of demand for the wind blades we manufacture for customers under our long-term supply agreements in any given period. Lines become dedicated upon the execution of a long-term supply agreement; this means that lines are typically dedicated before they are installed.
Manufacturing lines installed represents the number of wind blade manufacturing lines installed and either in operation, startup or transition during the period. We believe that total manufacturing lines installed provides an understanding of the number of manufacturing lines installed and either in operation, startup or transition. From time to time, we have manufacturing lines installed that are not dedicated to our customers pursuant to a long-term supply agreement.
RESULTS OF OPERATIONS
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table summarizes certain of our operating results as a percentage of net sales for the years ended December 31 that have been derived from our consolidated statements of operations:
Net sales
100.0
%
100.0
%
Cost of sales
93.5
89.8
Startup and transition costs
2.7
4.8
Total cost of goods sold
96.2
94.6
Gross profit
3.8
5.4
General and administrative expenses
2.0
2.8
Loss on sale of assets and asset impairments
0.5
1.3
Restructuring charges, net
0.2
0.2
Income from operations
1.1
1.1
Total other expense
(1.6
)
(0.6
)
Income (loss) before income taxes
(0.5
)
0.5
Income tax provision
(0.6
)
(1.6
)
Net loss
(1.1
)
%
(1.1
)
%
Net sales
Consolidated discussion
The following table summarizes our net sales by product/service for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
1,580,055
$
1,328,717
$
251,338
18.9
%
Precision molding and
assembly systems sales
28,073
48,680
(20,607
)
-42.3
%
Transportation sales
36,196
28,870
7,326
25.4
%
Other sales
25,813
30,233
(4,420
)
-14.6
%
Total net sales
$
1,670,137
$
1,436,500
$
233,637
16.3
%
The increase in net sales of wind blades was primarily driven by a 11% increase in the number of wind blades produced during the year ended December 31, 2020 as compared to the same period in 2019 as a result of increased production at our China, Mexico, India and Iowa facilities. The increase was also due to a higher average sales price due to the mix of wind blade models produced during the year ended December 31, 2020 compared to the same period in 2019. Net sales from the manufacturing of precision molding and assembly systems decreased, primarily in Asia, during the year ended December 31, 2020 as compared to the same period in 2019, primarily due to our customers deferring a number of blade model transitions due to the COVID-19 pandemic. Additionally, there was an increase in transportation and other sales during the year ended December 31, 2020 as compared to the same period in 2019. The fluctuating U.S. dollar against the Euro in our Turkey operations and the Chinese Renminbi in our China operations had a favorable impact of 0.1% on consolidated net sales for the year ended December 31, 2020 as compared to 2019. Although our net sales increased for the year ended December 31, 2020 compared to the same period in 2019, we estimate that our net sales were adversely impacted by approximately $148.0 million, based upon 352 wind blade sets, which we had forecasted to produce at our Mexico, China, Iowa, Turkey and India manufacturing facilities in the periods under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels primarily during the first and second quarters of 2020 as a result of certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates.
Segment discussion
The following table summarizes our net sales by our five geographic operating segments for the years ended December 31:
Change
$
%
(in thousands)
U.S.
$
181,941
$
169,317
$
12,624
7.5
%
Asia
527,083
393,809
133,274
33.8
%
Mexico
495,839
435,606
60,233
13.8
%
EMEA
373,545
437,081
(63,536
)
-14.5
%
India
91,729
91,042
NM
Total net sales
$
1,670,137
$
1,436,500
$
233,637
16.3
%
NM - not meaningful.
U.S. Segment
The following table summarizes our net sales by product/service for the U.S. segment for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
135,415
$
120,125
$
15,290
12.7
%
Precision molding and
assembly systems sales
-
3,774
(3,774
)
NM
Transportation sales
33,849
28,523
5,326
18.7
%
Other sales
12,677
16,895
(4,218
)
-25.0
%
Total net sales
$
181,941
$
169,317
$
12,624
7.5
%
The increase in the U.S. segment’s net sales of wind blades was primarily due to a 14% increase in the number of wind blades produced in the year ended December 31, 2020 as compared to the same period in 2019, as well as a higher average sales price due to the mix of wind blade models produced in the comparable periods. Although our U.S. net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our U.S. net sales were adversely impacted due to reduced production levels at our U.S. manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020.
Asia Segment
The following table summarizes our net sales by product/service for the Asia segment for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
511,090
$
366,206
$
144,884
39.6
%
Precision molding and
assembly systems sales
13,134
25,203
(12,069
)
-47.9
%
Other sales
2,859
2,400
19.1
%
Total net sales
$
527,083
$
393,809
$
133,274
33.8
%
The increase in the Asia segment’s net sales of wind blades was primarily due to a 22% net increase in the number of wind blades produced in the year ended December 31, 2020 as compared to the same period in 2019 and an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. Although our Asia net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our Asia net sales were adversely impacted due to reduced production levels at our Asia manufacturing facilities due to the COVID-19 pandemic primarily during the first quarter of 2020. Net sales from the manufacturing of precision molding and assembly systems during the 2020 period decreased by $12.1 million as compared to the 2019 period primarily due to our customers deferring a number of blade model transitions due to the COVID-19 pandemic.
Mexico Segment
The following table summarizes our net sales by product/service for the Mexico segment for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
472,994
$
410,337
$
62,657
15.3
%
Precision molding and
assembly systems sales
14,939
19,703
(4,764
)
-24.2
%
Transportation sales
2,347
2,000
NM
Other sales
5,559
5,219
6.5
%
Total net sales
$
495,839
$
435,606
$
60,233
13.8
%
The increase in the Mexico segment’s net sales of wind blades reflects a 18% net increase in overall wind blade volume and an increase in the average sales price of wind blades due to a change in the mix of wind blades produced in the two comparative periods. In addition, our 2019 net sales were impacted by the employees strike at our Matamoros production facility. Although our Mexico net sales increased for the year ended December 31, 2020 compared to the same period in 2019, our Mexico net sales were adversely impacted due to reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020.
EMEA Segment
The following table summarizes our net sales by product/service for the EMEA segment for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
368,907
$
431,362
$
(62,455
)
-14.5
%
Other sales
4,638
5,719
(1,081
)
-18.9
%
Total net sales
$
373,545
$
437,081
$
(63,536
)
-14.5
%
The decrease in the EMEA segment’s net sales of wind blades was driven by a 22% decrease in wind blade production at our two Turkey plants due to transitions and reduced production levels at these manufacturing facilities due to the COVID-19 pandemic primarily during the second quarter of 2020. The decrease was partially offset by an increase in the average sales price of wind blades delivered in the comparative periods and an increase in the year over year number of wind blades still in the production process at the end of the period. The fluctuating U.S. dollar relative to the Euro had a favorable impact of 0.3% on net sales during the year ended December 31, 2020 as compared to the 2019 period.
India Segment
The following table summarizes our net sales by product/service for the India segment for the years ended December 31:
Change
$
%
(in thousands)
Wind blade sales
$
91,649
$
$
90,962
NM
Other sales
-
NM
Total net sales
$
91,729
$
$
91,042
NM
The increase in the India segment’s net sales of wind blades was driven by the startup of production in 2020. No material production took place in 2019.
Total cost of goods sold
The following table summarizes our total cost of goods sold for the years ended December 31:
Change
$
%
(in thousands)
Cost of sales
$
1,561,432
$
1,290,619
$
270,813
21.0
%
Startup and transition costs
44,606
68,033
(23,427
)
-34.4
%
Total cost of goods sold
$
1,606,038
$
1,358,652
$
247,386
18.2
%
% of net sales
96.2
%
94.6
%
1.6
%
Total cost of goods sold for the year ended December 31, 2020 was $1,606.0 million and included $25.9 million related to lines in startup and $18.7 million related to lines in transition during the period. This compares to total cost of goods sold for the year ended December 31, 2019 of $1,358.7 million and included $48.5 million related to lines in startup and $19.5 million related to lines in transition during the period. Cost of goods sold as a percentage of net sales increased by approximately two percentage points during the year ended December 31, 2020 as compared to the same period in 2019, driven primarily by the increase in warranty costs primarily relating to a remediation campaign for a specific wind blade model for one of our customers, and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, partially offset by a decrease in startup and transition costs, the impact of savings in raw material costs and foreign currency fluctuations. The fluctuating U.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso had a favorable impact of 1.5% on consolidated cost of goods sold for the year ended December 31, 2020 as compared to 2019.
General and administrative expenses
The following table summarizes our general and administrative expenses for the years ended December 31:
Change
$
%
(in thousands)
General and
administrative expenses
$
33,496
$
39,916
$
(6,420
)
-16.1
%
% of net sales
2.0
%
2.8
%
-0.8
%
The decrease in general and administrative expenses as a percentage of net sales for the year ended December 31, 2020 as compared to the same period in 2019 was primarily driven by lower travel and training costs due to the COVID-19 pandemic.
Loss on sale of assets and asset impairments
The following table summarizes our loss on sale of assets and asset impairments for the years ended December 31:
Change
$
%
(in thousands)
Loss on sale of assets
and asset impairments
$
7,748
$
18,117
$
(10,369
)
-57.2
%
% of net sales
0.5
%
1.3
%
-0.8
%
The decrease in the loss on sale of assets and asset impairments for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to: (i) a decrease of $4.4 million in asset impairment charges primarily related to the shutdown of our second Newton, Iowa facility in 2019, (ii) a decrease of $4.1 million in losses on the sale of assets at our corporate and manufacturing facilities, and (iii) lower losses on the sale of receivables under supply chain financing arrangements with our customers in the current year period due to decreasing interest rates as compared to the equivalent prior year period.
Restructuring charges, net
Restructuring charges, net, for the year ended December 31, 2020 totaled $4.1 million. These charges primarily related to downsizing at our Dafeng, China manufacturing facility, comprised of $3.8 million of severance benefits to terminated employees, and $0.2 million of other charges, primarily related to exit costs, at our second Newton, Iowa facility. The $3.8 million of severance benefits relating to our Dafeng, China facility were paid to terminated employees in January 2021. Restructuring charges, net, for the year ended December 31, 2019 totaled $3.9 million. These charges primarily related to the closing of our Taicang City, China manufacturing facility, comprised of $3.3 million of severance benefits to terminated employees and $0.6 million of other charges, primarily related to exit costs.
Income (loss) from operations
Segment discussion
The following table summarizes our income (loss) from operations by our five geographic operating segments for the years ended December 31:
Change
$
%
(in thousands)
U.S.
$
(40,991
)
$
(78,278
)
$
37,287
47.6
%
Asia
62,869
24,132
38,737
160.5
%
Mexico
(9,611
)
3,533
(13,144
)
NM
EMEA
23,331
70,449
(47,118
)
-66.9
%
India
(16,832
)
(3,948
)
(12,884
)
NM
Total income from
operations
$
18,766
$
15,888
$
2,878
18.1
%
% of net sales
1.1
%
1.1
%
0.0
%
U.S. Segment
The decrease in the loss from operations in the U.S. segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to: (i) the decreased costs related to the shutdown of our Newton, Iowa transportation facility, (ii) the decrease in transition costs at our Newton, Iowa blade facility, (iii) the increase in wind blade volume, (iv) the increase in the average sales price of wind blades and (v) a decrease in general and administrative expenses, partially offset by increased direct material costs at our Newton, Iowa blade facility. Although our U.S. loss from operations decreased for the year ended December 31, 2020 compared to the same period in 2019, our income from operations for the year ended December 31, 2020 was adversely impacted due to reduced production levels at our U.S. blade manufacturing facility due to the COVID-19 pandemic during the
second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.
Asia Segment
The increase in the income from operations in the Asia segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to the net increase in overall wind blade volume and increase in the average sales price of wind blades, a decrease in the startup and transition costs and lower direct labor costs. The fluctuating U.S. dollar against the Chinese Renminbi had an unfavorable impact of 0.3% on cost of goods sold for the year ended December 31, 2020 as compared to the 2019 period. Although our Asia income from operations increased for the year ended December 31, 2020 as compared to the same period in 2019, our income from operations was adversely impacted due to reduced production levels at our Asia manufacturing facilities due to the COVID-19 pandemic during the first quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.
Mexico Segment
The decrease in income from operations in the Mexico segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to increased warranty costs, the reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. These increased costs were partially offset by the overall increase in wind blade volume, an increase in the average sales price of wind blades, decreased startup and transition costs, favorable foreign currency fluctuations as well as from savings in raw material costs. The fluctuating U.S. dollar relative to the Mexican Peso had a favorable impact of 1.9% on cost of goods sold for the year ended December 31, 2020 as compared to 2019.
EMEA Segment
The decrease in income from operations in the EMEA segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily driven by increased warranty costs, decreased wind blade production at our two Turkey manufacturing facilities due to the COVID-19 pandemic during the second quarter of 2020 and COVID-19 related costs associated with the health and safety of our associates and non-productive labor, the increased transition costs at one of our Turkey manufacturing facilities, partially offset by favorable foreign currency fluctuations. The fluctuating U.S. dollar relative to the Turkish Lira and Euro had a favorable impact of 3.2% on cost of goods sold for the year ended December 31, 2020 as compared to 2019.
India Segment
The increase in the loss from operations in the India segment for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to the increased startup costs related to our India manufacturing facility during 2020.
Other income (expense)
The following table summarizes our total other income (expense) for the years ended December 31:
Change
$
%
(in thousands)
Interest income
$
$
$
(55
)
-35.0
%
Interest expense
(10,501
)
(8,179
)
(2,322
)
-28.4
%
Foreign currency loss, net
(19,986
)
(4,107
)
(15,879
)
NM
Miscellaneous income
3,876
3,648
6.3
%
Total other expense
$
(26,509
)
$
(8,481
)
$
(18,028
)
NM
The increase in the total other expense for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to increases in foreign currency loss, net primarily due to net Euro liability exposure against the Turkish Lira in the current year period as compared to the same period in 2019.
Income tax provision
The following table summarizes our income tax provision for the years ended December 31:
Change
$
%
(in thousands)
Income tax provision
$
11,284
$
23,115
$
(11,831
)
-51.2
%
Effective tax rate
-145.7
%
312.1
%
The decrease in the income tax provision for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to tax benefits from the effect of tax law changes and the release of valuation allowances in certain jurisdictions, partially offset by lower pretax income related to the earnings mix by jurisdiction and unrecognized tax benefits in the year ended December 31, 2020 as compared to the same period in 2019.
Net loss
The following table summarizes our net loss for the years ended December 31:
Change
$
%
(in thousands)
Net loss
$
19,027
$
15,708
$
3,319
21.1
%
The increase in the net loss for the year ended December 31, 2020 as compared to the same period in 2019 was primarily due to the reasons set forth above. In addition, we estimate that our net loss during the year ended December 31, 2020 was adversely impacted by approximately $26.5 million, net of taxes, based upon the forecasted gross margin on the wind blade sets we had forecasted to produce at our Mexico, China, Iowa, Turkey and India manufacturing facilities in the period under non-cancellable purchase orders associated with our long-term contracts but were unable to do so as a result of the COVID-19 pandemic. The COVID-19 pandemic required these manufacturing facilities to either temporarily suspend production or operate at reduced production levels due primarily to certain applicable government-mandated stay at home orders in response to the COVID-19 pandemic, demands from certain of our labor unions to suspend or reduce production and general safety concerns of our associates. In addition, during the period we incurred $15.5 million, net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The diluted net loss per share was $0.54 for the year ended December 31, 2020, compared to a diluted net loss per share of $0.45 for the year ended December 31, 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
For a comparison of our results of operations for the years ended December 31, 2019 and 2018, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations” included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 2, 2020 incorporated herein by reference.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the uncertainty relating to: (i) the rapidly evolving nature, magnitude and duration of the COVID-19 pandemic, (ii) the variety of measures implemented by governments around the world to address its effects and (iii) the impact on our manufacturing operations, we have and will continue to manage our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the year ended December 31, 2020, we had net borrowings of $58.7 million under our Credit Agreement. In addition, during the year ended December 31, 2020, we entered into or amended four unsecured credit agreements with four Turkish financial institutions resulting in net borrowings of $25.1 million and current availability of $52.9 million.
Our primary needs for liquidity have been, and in the future will continue to be, capital expenditures, new facility startup costs, the impact of transitions, working capital, debt service costs and warranty costs. Our capital expenditures have been primarily related to machinery and equipment for new facilities or facility expansions. Historically, we have funded our working capital needs through cash flows from operations, the proceeds received from our credit facilities and from proceeds received from the issuance of stock. We had net borrowings under our financing arrangements of $75.7 million for the year ended December 31, 2020 as compared to net repayments under our financing arrangements of $2.1 million and $8.9 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2020 and 2019, we had $217.9 million and $142.1 million in outstanding indebtedness, excluding debt issuance costs, respectively. As of December 31, 2020, we had an aggregate of $120.5 million of remaining capacity and $94.2 million of remaining availability under our various credit facilities. Working capital requirements have increased as a result of our overall growth and the need to fund higher accounts receivable and inventory levels as our business volumes have increased. Based upon current and anticipated levels of operations, we believe that cash on hand, available credit facilities and cash flow from operations will be adequate to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our indebtedness over the next twelve months.
We anticipate that any new facilities and future facility expansions will be funded through cash flows from operations, the incurrence of other indebtedness and other potential sources of liquidity. At December 31, 2020 and 2019, we had unrestricted cash, cash equivalents and short-term investments totaling $129.9 million and $70.3 million, respectively. The December 31, 2020 balance includes $61.0 million of cash located outside of the United States, including $47.4 million in China, $6.0 million in Turkey, $5.0 million in India, $2.1 million in Mexico and $0.5 million in other countries. In February 2020, we entered into an Incremental Facility Agreement with the current lenders to our Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of our revolving credit facility under the Credit Agreement was increased from $150.0 million to $205.0 million.
Our ability to repatriate funds from China to the United States is subject to a number of restrictions imposed by the Chinese government. We repatriate funds through several technology license and corporate/administrative service agreements. We are compensated quarterly based on agreed upon royalty rates for such intellectual property licenses and quarterly fees for those services. Certain of our subsidiaries are limited in their ability to declare dividends without first meeting statutory restrictions of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.6 million) of registered capital is contributed to a surplus reserve, our China operations can only pay dividends equal to 90% of after-tax profits (10% must be contributed to the surplus reserve). Once the surplus reserve fund requirement is met, our China operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. At December 31, 2020, the amount of the surplus reserve fund was $7.0 million.
Cash Flow Discussion
The following table summarizes our key cash flow activity for the years ended December 31:
$ Change
(in thousands)
Net cash provided by operating activities
$
37,570
$
57,084
$
(19,514
)
Net cash used in investing activities
(65,666
)
(75,510
)
9,844
Net cash provided by financing activities
88,612
87,642
Impact of foreign exchange rates on cash, cash
equivalents and restricted cash
(2,069
)
(171
)
(1,898
)
Net change in cash, cash equivalents and restricted cash
$
58,447
$
(17,627
)
$
76,074
Operating Cash Flows
Net cash provided by operating activities decreased by $19.5 million for the year ended December 31, 2020 as compared to the same period in 2019 primarily as the result of decreased operating results and certain changes in our working capital.
Investing Cash Flows
Net cash used in investing activities decreased by $9.8 million for the year ended December 31, 2020 as compared to the same period in 2019 primarily as the result of a decrease in capital expenditures.
We anticipate fiscal year 2021 capital expenditures of between $55 million to $65 million and we estimate that the cost that we will incur after December 31, 2020 to complete our current projects in process will be approximately $13.8 million. We have used, and will continue to use, cash flows from operations, the proceeds received from our credit facilities and the proceeds received from the issuance of stock for major projects currently being undertaken, which include our manufacturing facility in Chennai, India and the continued investment in our existing Turkey, Mexico, China and U.S. facilities.
Financing Cash Flows
Net cash provided by financing activities increased by $87.6 million for the year ended December 31, 2020 as compared to the same period in 2019 primarily as the result of increased borrowings on our revolving loans and other growth-related debt, as well as increased proceeds from the exercise of stock options.
Our Indebtedness
For a discussion of our indebtedness, refer to Note 11 - Long-Term Debt, Net of Debt Issuance Costs and Current Maturities of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Other Contingencies
For a discussion of our legal proceedings, refer to Note 14 - Commitments and Contingencies - (b) Legal Proceedings of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
The wind blades and other composite structures that we produce are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade or the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade (which could include significant transportation and installation costs) at our sole expense. At December 31, 2020 and 2019, we had accrued warranty reserves totaling $50.9 million and $47.6 million, respectively.
As of December 31, 2020, we had no material operating expenditures for environmental matters, including government imposed remedial or corrective actions, during the year ended December 31, 2020.
Off-Balance Sheet Transactions
We are not presently involved in any off-balance sheet arrangements, including transactions with unconsolidated special-purpose or other entities that would materially affect our financial position, results of operations, liquidity or capital resources, other than our accounts receivable assignment agreements described below. Furthermore, we do not have any relationships with special-purpose or other entities that provide off-balance sheet financing; liquidity, market risk or credit risk support; or engage in leasing or other services that may expose us to liability or risks of loss that are not reflected in the consolidated financial statements and related notes.
Our segments enter into accounts receivable assignment agreements with various financial institutions. Under these agreements, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to our segment’s customers at an agreed-upon discount rate.
The following table summarizes certain key details of each of the accounts receivable assignment agreements in place as of December 31, 2020:
Year Of Initial Agreement
Segment(s) Related To
Current Annual Interest Rate
Mexico
LIBOR plus 0.75%
Mexico
LIBOR plus 1.25%
EMEA
EURIBOR plus 0.75%
Asia and Mexico
LIBOR plus 1.00%
Asia and Mexico
LIBOR plus 1.00%
Asia
Fixed rate of 3.85%
EMEA
EURIBOR plus 1.95%
India
LIBOR plus 1.00%
U.S.
LIBOR plus 1.25%
As the receivables are purchased by the financial institutions under the agreements noted above, the receivables are removed from our consolidated balance sheet. During the years ended December 31, 2020 and 2019, $1,251.5 million and $776.2 million, respectively, of receivables were sold under the accounts receivable assignment agreements described above.
Contractual Obligations
The following table summarizes certain of our contractual obligations as of December 31, 2020:
Payments Due by Period
Less than 1
year
1-3 years
3-5 years
More than 5
years
Total
(in thousands)
Long-term debt obligations(1)
$
32,551
$
185,150
$
$
-
$
217,918
Operating lease obligations(2)
34,798
62,644
54,004
98,764
250,210
Purchase obligations
2,568
2,465
-
5,747
Estimated interest payments(3)
7,529
8,904
-
16,439
Total contractual obligations
$
77,446
$
259,163
$
54,941
$
98,764
$
490,314
(1)
See “-Our Indebtedness” above.
(2)
Our operating lease obligations represent the contractual payments due for the lease of our corporate office in Scottsdale, Arizona in addition to our facilities in Iowa, Rhode Island, New Mexico, China, Mexico, Turkey, Denmark, Germany and India.
(3)
Includes interest on variable rate debt based on interest rates as of December 31, 2020. See “-Our Indebtedness” above.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of our assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an ongoing basis, including those related to income taxes and warranty expense. We base our estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making the judgments we make about the carrying values of our assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates.
We believe the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements.
Revenue Recognition. The majority of our revenue is generated from long-term contracts associated with manufacturing of wind blades and related services. We account for a long-term contract when it has the approval from both parties, the rights of the parties are identified, payment terms are established, the contract has commercial substance and the collectability of consideration is probable. Our manufacturing services are customer specific and involve production of items that cannot be sold to other customers due to the customers’ protected intellectual property.
Revenue is primarily recognized over time as we have an enforceable right to payment upon termination and we may not use or sell the product to fulfill other customers’ contracts. Because control transfers over time, revenue is recognized based on the extent of progress towards the completion of the performance obligation under the cost-to-cost input measure of progress as this method provides the best representation of the production progress towards satisfaction of the performance obligation. Under the cost-to-cost method, progress and the related revenue recognition is determined by a ratio of direct costs incurred to date in fulfillment of the performance obligation to the total estimated direct costs required to complete the performance obligation.
Determining the revenue to be recognized for services performed under our manufacturing contracts involves judgments and estimates relating to the total consideration to be received and the expected direct costs to complete the performance obligation. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information available to us at the time of the estimate and may materially change as additional information becomes known.
Under the cost-to-cost method, contract assets established primarily relate to our rights to consideration for work completed but not billed at the reporting date on manufacturing services contracts. The contract assets are transferred to accounts receivable when the rights become unconditional, which generally occurs when customers are invoiced upon the determination that a product conforms to the contract specifications.
See Note 1 - Summary of Operations and Summary of Significant Accounting Policies - (c) Revenue Recognition of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, for further discussion of our accounting policies related to revenue recognition, including accounting policies surrounding our non-manufacturing related services.
Income Taxes. In connection with preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves our assessment of any net operating loss carryforwards, as well as estimating our actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as reserves and accrued liabilities, for tax and accounting purposes. We also have to assess whether any portion of our earnings generated in one taxing jurisdiction might be claimed as earned by income tax authorities in a differing tax jurisdiction. Significant judgment is required in determining our annual tax rate, the allocation of earnings to various jurisdictions and the evaluation of our tax positions.
In the normal course of business, we establish valuation allowances for our deferred tax assets when the realization of the assets is not more likely than not. We intend to maintain such valuation allowances on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of the allowances. Historically, we determined that a valuation allowance for all of our U.S. deferred tax assets was appropriate, however during the third quarter of 2018, we reversed a portion of the U.S. valuation allowance, based on the available evidence at that time. In 2019 a full valuation allowance was recorded in Taicang and India. Given our anticipated future earnings in India from becoming fully operational in 2020, we reversed the valuation allowance in that jurisdiction in 2020. The effect of a change in judgment concerning the realizability of deferred tax assets is included in our income tax provision.
As of December 31, 2020, we have U.S. federal net operating losses (NOLs) of approximately $103.0 million, state NOLs of approximately $253.2 million, foreign NOLs of approximately $41.0 million and foreign tax credits of approximately $1.9 million available to offset future taxable income in the U.S., China and India.
In December 2017, the Tax Cuts and Jobs Act (Tax Reform) was signed into law, which significantly revised U.S. tax law by, among other things, lowering the statutory federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017, eliminating certain deductions, imposing a mandatory one-time transition tax, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. Tax Reform also includes many new provisions, such as changes to bonus depreciation, changes to deductions for executive compensation, interest expense limitations, NOL deduction limitations, tax on global intangible low tax income (GILTI) earned by foreign corporate subsidiaries, the base erosion anti abuse tax (BEAT), and a deduction for foreign derived intangible income (FDII).
As of December 31, 2018, we completed the accounting for the enactment-date income tax effects of Tax Reform, which resulted in an immaterial impact to our financial statements. Upon further analyses of certain aspects of Tax Reform, and refinement of calculations during 2018, we increased our provisional amount of previously untaxed foreign earnings by $13.8 million, to $88.1 million. This resulted in no change to our U.S. federal income tax expense due to the impact of foreign tax credits. In addition, the provisional net tax expense, which was estimated at approximately $0.1 million, primarily attributable to the reduction in the federal tax rate, was unchanged and we made a policy election to account for any impacts of GILTI tax in the period in which it is incurred.
Income tax expense or benefit, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions in which we operate, principally, China, Mexico, and Turkey. Significant judgements and estimates are required in determining our consolidated income tax expense. The statutory federal corporate income tax rate in the U. S. is 21% and the tax rates in China, Mexico and Turkey are 25%, 30% and 22%, respectively. Our second Turkey facility is located in a tax-free zone and is not subject to income taxes on earnings recognized from its manufacturing activities.
Warranty Expense. The wind blades we manufacture are subject to warranties against defects in workmanship and materials, generally for a period of two to five years. We are not responsible for the fitness for use of the wind blade in the overall wind turbine system. If a wind blade is found to be defective during the warranty period as a result of a defect in workmanship or materials, among other potential remedies, we may need to repair or replace the wind blade at our sole expense. We provide warranties for all of our products with terms and conditions that vary depending on the product sold. We record warranty expense based upon our estimate of future repairs using a probability-based methodology that considers previous warranty claims, identified quality issues and industry practices. Once the warranty period has expired, any remaining unused warranty accrual for the specific products is reversed against the current year warranty expense amount.
Our estimate of warranty expense requires us to make assumptions about matters that are highly uncertain, including future rates of product failure, repair costs, availability of materials, shipping and handling, and de-installation and re-installation costs at customers’ sites, among others. When a potential or actual warranty claim arises, we may accrue additional warranty reserves for the estimated cost of remediation or proposed settlement. In 2020, we accrued additional warranty expenses of approximately $12.9 million beyond the normal warranty expense describe above related to a remediation campaign for a specific wind blade model for one of our customers. We have not experienced any material warranty expenses beyond the provision described above in the years ended December 31, 2019 and 2018. However, changes in warranty reserves could have a material effect on our consolidated financial statements. For example, as of December 31, 2020, a change in the estimated warranty accrual rate of 1% across all products would change the warranty accrual by approximately $42.5 million.
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements, see Note 1 - Summary of Operations and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. These market risks are principally limited to changes in foreign currency exchange rates and commodity prices.
Foreign Currency Risk. We conduct international operations in China, Mexico, Turkey and India. Our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our consolidated financial statements. In recent years, exchange rates between these foreign currencies and the U.S. dollar have fluctuated significantly and may do so in the future. A hypothetical change of 10% in the exchange rates for the countries above would have resulted in a change to income from operations of approximately $46.2 million and $10.9 million for the years ended December 31, 2020 and 2019, respectively.
Commodity Price Risk. We are subject to commodity price risk under agreements for the supply of our raw materials. We have not hedged our commodity price exposure. We generally lock in pricing for our key raw materials for 12 months which protects us from price increases within that period. As many of our raw material supply agreements have meet or release clauses, if raw materials prices go down, we are able to benefit from the reductions in price. We believe that this adequately protects us from increases in raw material prices and also enables us to take full advantage of decreases.
Resin and resin systems are the primary commodities for which we do not have fixed pricing. Approximately 40% of the resin and resin systems we use are purchased under contracts controlled by one of our customers and therefore they receive/bear 100% of any increase or decrease in resin costs further limiting our exposure to price fluctuations. Prior to taking into account any contractual obligations of our customers to share with us the cost savings or increases resulting from a change in the price of resin and resin systems, we believe that a 10% change in the price of resin and resin systems for the customers in which we are exposed to fluctuating prices would have had an impact to income from operations of approximately $10.1 million and $9.3 million for the years ended December 31, 2020 and 2019, respectively. Under our customer supply agreements, our customers typically receive 70% of the cost savings or increases resulting from a change in the price of resin and resin systems.
In late 2019, worldwide demand for balsa wood increased as a result of shortages of other types of core materials. In addition, our supply chain for balsa wood, which is primarily sourced from Ecuador, has been further stressed due to the COVID-19 pandemic. As a result of this increased demand and supply chain disruption, we did have fixed pricing for a portion of our contracts and purchase orders for balsa wood for most of 2020. We believe that a 10% change in the price of balsa wood would have had an impact to income from operations of approximately $8.0 million for the year ended December 31, 2020.
Interest Rate Risk. As of December 31, 2020, our Credit Agreement includes interest on the unhedged principal amount of $96.2 million which is tied to LIBOR, and our EMEA segment has one general credit agreement outstanding which is tied to the Euro Interbank Offered Rate (EURIBOR). For a discussion of the interest rate swap arrangement we entered into related to our Credit Agreement, See Note 13 - Financial Instruments of the Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. The EMEA credit agreement had unsecured financing of $11.2 million and financing of capital expenditures of $4.3 million outstanding as of December 31, 2020. Our Credit Agreement and the one EMEA general credit agreement are the only variable rate debt agreements that we had outstanding as of December 31, 2020 as all remaining working capital loans, secured and unsecured financing and finance lease obligations are fixed rate instruments and are not subject to fluctuations in interest rates. Due to the relatively low LIBOR and EURIBOR rates in effect as of
December 31, 2020, a 10% change in the LIBOR or EURIBOR rate would not have had a material impact on our future earnings, fair values or cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
The financial statements required to be filed pursuant to this Item 8 are appended to this Report. An index of those financial statements is found in Item 15.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(b) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness as of December 31, 2020 of our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Report on Internal Control Over Financial Reporting
As required by Rules 13a-15(f) promulgated under the Exchange Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. Management based its assessment on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management's assessment included evaluation of elements such as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. Based on this assessment, management has concluded that our internal control over financial reporting was effective as of December 31, 2020 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.
Our internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the three months ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
Not applicable.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated by reference to “Business - Information about our Executive Officers” included in Part 1, Item 1 of this Annual Report on Form 10-K and the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2020.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2020.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2020.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the information that will be contained in our proxy statement related to the 2021 Annual Meeting of Stockholders, which we intend to file with the SEC within 120 days of the fiscal year ended December 31, 2020.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a)
Financial Statements and Schedules
The financial statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
(b)
Exhibits
See Exhibit Index.