PART I Business TPI Composites is the sole independent global manufacturer of composite wind blades, serving leading OEMs and expanding into transportation composites Overview TPI Composites is the sole independent global wind blade manufacturer, with 95% of 2021 net sales from wind and $2.2 billion in minimum contract commitments - The company is the only independent manufacturer of composite wind blades with a global manufacturing footprint, serving leading wind turbine OEMs15 - Wind blade and precision molding systems manufacturing accounted for approximately 95% of total net sales for the year ended December 31, 202118 - As of February 24, 2022, the company's supply agreements provide for minimum aggregate volume commitments of approximately $2.2 billion and a total potential contract value of approximately $3.5 billion through the end of 202418 - The company is expanding its transportation business, with orders for approximately 450,000 components in 2022 and 1,000,000 in 202317 Business Strategy The company's strategy focuses on capitalizing on decarbonization and vehicle electrification, expanding OEM relationships, leveraging global footprint, and driving down LCOE - Capitalize on the long-term global trends of decarbonization of the electric sector and the electrification of vehicles21 - Grow existing relationships and develop new ones with leading industry OEMs, who represent a significant portion of the global onshore wind market2122 - Leverage its global footprint to capitalize on the continuing outsourcing trend in wind blade manufacturing and evaluate opportunities in the offshore wind market23 - Continue to drive down the Levelized Cost of Energy (LCOE) through larger blade models, advanced technology, and collaborative engineering23 - Expand the field service inspection and repair business, which is expected to have higher operating margins than the wind blade manufacturing business in the future23 Wind Blade Manufacturing and Supply Agreements TPI has produced over 75,000 wind blades, but faced $38 million adverse impact in 2021 from raw material price increases and supply constraints - Key raw materials include fiberglass fabrics, carbon reinforcements, resin, and balsa wood, with significant price increases and supply constraints for resin and carbon fiber, along with increased logistics costs, adversely affecting results of operations by approximately $38 million in 202126 - The company's largest customer sources all critical raw materials directly, which limits TPI's control over supply chain risks, leading to production delays in 2021 at facilities in Mexico and Turkey due to customer-sourced material shortages27 - Current wind blade customers include Vestas, GE Wind, Nordex, and ENERCON, which collectively represented a significant share of the global onshore wind market34 - Supply agreements provide downside protection through minimum annual volume commitments and incentivize higher volumes with better pricing, with raw material price changes typically shared with customers3536 Competition The company faces competition in wind blade manufacturing from independent and in-house OEM producers, and in transportation from conventional and composite material suppliers - Competitors in the wind blade market include LM Wind Power (a subsidiary of GE), other independent manufacturers, and the in-house production of vertically integrated wind turbine OEMs4748 - Principal competitive factors in the wind blade market are reliability, total delivered cost, manufacturing capability, product quality, and engineering capability49 - In the transportation market, competitors include suppliers of conventional steel and aluminum products and other advanced composites-based manufacturers57 Regulation and Human Capital Operations are subject to global regulations and government incentives like the U.S. PTC, with over 14,000 employees globally as of December 2021 - The business is affected by government subsidies for wind energy, with the expiration of the U.S. Production Tax Credit (PTC) at the end of 2021 creating near-term uncertainty and decreased demand for wind blades64 - Globally, renewable energy is promoted through initiatives like the EU's 2030 greenhouse gas reduction goals and carbon neutrality targets in China (2060) and India (2070)66 - As of December 31, 2021, the company employed over 14,000 full-time employees, with the largest concentrations in Mexico (6,300), Turkey (4,100), India (1,600), and China (1,400)67 - Certain employees in Turkey and Matamoros, Mexico are represented by labor unions67 Risk Factors The company faces significant risks from customer concentration, product defects, raw material volatility, U.S. market dependence, international operations, and preferred stockholders' influence Risks Related to Our Wind Business Wind business faces customer concentration (87.5% from top 3 in 2021), product defect risks, raw material volatility ($38 million impact in 2021), and U.S. market dependence Customer Concentration (as % of Total Net Sales) | Customer | 2021 | 2020 | 2019 | | :--- | :--- | :--- | :--- | | Vestas | 40.4% | 49.7% | 46.1% | | GE Wind | 24.7% | 23.4% | 25.7% | | Nordex | 22.4% | 15.3% | 16.1% | - The company is exposed to significant warranty and product liability claims for defects in materials and workmanship, with warranty periods typically ranging from two to five years8384 - Significant price increases and supply constraints for raw materials like resin and carbon fiber, along with logistics cost increases, adversely affected 2021 results by approximately $38 million92 - The business is heavily dependent on demand for wind energy in the U.S., which is subject to regulatory uncertainty regarding the extension of the Production Tax Credit (PTC)91108 Risks Related to Our Business as a Whole Overall business risks include COVID-19 impacts, unpredictable financial results, foreign currency exposure from 90% international sales, capital needs, and debt covenant compliance - The COVID-19 pandemic adversely affected operations in 2020 and 2021, causing temporary production suspensions and shutdowns112114 - Approximately 90% of net sales for the year ended December 31, 2021, were derived from international operations, exposing the company to foreign currency, legal, and political risks100 - The company was not in compliance with certain financial covenants of its senior secured credit facility as of September 30, 2021, and obtained a temporary waiver123 - Approximately 48% of the workforce as of December 31, 2021, is covered by collective bargaining agreements in Turkey and Matamoros, Mexico, which could lead to work disruptions130 Risks Related to Our Series A Preferred Stock and Common Stock Issuance of $350 million Series A Preferred Stock in 2021 grants Oaktree significant influence and preferential rights, posing dilution and liquidity risks to common stockholders - In November 2021, the company issued 350,000 shares of Series A Preferred Stock for aggregate gross proceeds of $350.0 million to Oaktree Capital Management affiliates, who can designate one board member and have consent rights over certain corporate actions135136 - The Series A Preferred Stock has rights senior to common stock regarding dividends, liquidation, and redemption, which could adversely affect the company's liquidity and financial condition139 - Warrants to purchase 4,666,667 shares of common stock were issued to the Series A Preferred Stockholders, which could cause dilution upon exercise145 Properties The company operates its headquarters in Scottsdale, Arizona, with key manufacturing and service facilities globally across the U.S., China, Mexico, Turkey, India, and Europe Key Manufacturing Facilities | Location | Segment | Type | Description | | :--- | :--- | :--- | :--- | | Newton, IA, U.S. | U.S. | Leased | Wind Blade & Transportation Manufacturing | | Yangzhou, China | Asia | Leased | Wind Blade Manufacturing Facility | | Juárez, Mexico | Mexico | Leased | Multiple Wind Blade & Precision Molding Facilities | | Matamoros, Mexico | Mexico | Leased | Wind Blade Manufacturing Facility | | Izmir, Turkey | EMEA | Leased | Two Wind Blade Manufacturing Facilities | | Chennai, India | India | Leased | Wind Blade Manufacturing Facility | PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'TPIC,' with no history of cash dividends, as earnings are retained for growth, subject to Chinese subsidiary dividend restrictions - The company's common stock began trading on NASDAQ under the symbol "TPIC" on July 22, 2016160 - The company has never declared or paid cash dividends on its capital stock and does not anticipate doing so in the future, intending to retain earnings for business growth165 Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales rose to $1.73 billion in 2021, but a net loss of $159.5 million resulted from higher costs and restructuring charges, leading to a $350 million preferred stock issuance for liquidity Results of Operations In 2021, net sales increased to $1.73 billion, but a gross loss of $31.6 million and a net loss of $159.5 million were driven by higher costs and $23.8 million in restructuring charges Consolidated Statement of Operations Summary (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net sales | $1,732,583 | $1,670,137 | | Gross profit (loss) | $(31,580) | $64,099 | | Income (loss) from operations | $(97,698) | $18,766 | | Net loss | $(159,548) | $(19,027) | Net Sales by Segment (in thousands) | Segment | 2021 | 2020 | % Change | | :--- | :--- | :--- | :--- | | U.S. | $181,839 | $181,941 | -0.1% | | Asia | $260,197 | $527,083 | -50.6% | | Mexico | $608,098 | $495,839 | 22.6% | | EMEA | $482,220 | $373,545 | 29.1% | | India | $200,229 | $91,729 | 118.3% | - Total cost of goods sold as a percentage of net sales increased to 101.8% in 2021 from 96.2% in 2020, driven by higher direct material and labor costs and unfavorable currency fluctuations217218 - Restructuring charges increased significantly to $23.8 million in 2021 from $4.1 million in 2020, primarily due to the closure of facilities in Iowa, Taicang (China), and Dafeng (China)222223 Liquidity and Capital Resources Liquidity was impacted in 2021, leading to a $350 million preferred stock issuance and debt repayment, resulting in $242.2 million cash and $25.5 million net cash used in operations - In November 2021, the company issued 350,000 shares of Series A Preferred Stock for aggregate gross proceeds of $350.0 million to address near-term liquidity challenges237 - $181.2 million of the proceeds from the preferred stock issuance was used to repay all outstanding debt under the senior secured credit facility, which was then terminated237 Key Liquidity and Cash Flow Metrics (in thousands) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $242,165 | $129,857 | | Total debt, net | $74,646 | $216,867 | | Net cash (used in) provided by operating activities | $(25,525) | $37,570 | | Capital expenditures | $37,119 | $65,666 | - Anticipated capital expenditures for fiscal year 2022 are approximately $30 million248 Critical Accounting Policies and Estimates Key accounting policies requiring significant management judgment include revenue recognition (cost-to-cost method), income taxes (valuation allowances), and warranty expense estimation - Revenue is primarily recognized over time using a cost-to-cost input measure of progress, which requires significant estimates of total contract costs and variable consideration257258 - A full valuation allowance was recorded for all U.S. deferred tax assets in 2021 due to uncertainty about their realizability263 - Warranty expense is estimated based on future rates of product failure and repair costs, with the accrued warranty reserve at $42.0 million as of December 31, 2021, down from $50.9 million in 2020253265 Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from foreign currency (10% change impacting $33.2 million income), commodity prices (10% resin change impacting $12.4 million income), and has mitigated interest rate risk with fixed-rate debt - The company is exposed to foreign currency transaction and translation risk, where a hypothetical 10% change in exchange rates would have impacted income from operations by approximately $33.2 million for the year ended December 31, 2021270 - The company is subject to commodity price risk for raw materials, especially resin, where a 10% change in the price of resin would have impacted income from operations by approximately $12.4 million for the year ended December 31, 2021, before customer cost-sharing272 - As of December 31, 2021, all outstanding debt and finance lease obligations are fixed-rate instruments, mitigating interest rate risk273 Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal year 2021, including balance sheets, income statements, cash flows, and accompanying notes and audit report Consolidated Balance Sheet Summary (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $660,271 | $548,159 | | Total Assets | $1,007,701 | $956,257 | | Total Current Liabilities | $469,110 | $406,108 | | Total Liabilities | $634,775 | $755,222 | | Mezzanine Equity | $250,974 | $0 | | Total Stockholders' Equity | $121,952 | $201,035 | Consolidated Statement of Cash Flows Summary (in thousands) | | 2021 | 2020 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(25,525) | $37,570 | | Net cash used in investing activities | $(37,119) | $(65,666) | | Net cash provided by financing activities | $198,919 | $88,612 | | Net change in cash | $122,022 | $58,447 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a conclusion affirmed by KPMG LLP's audit report - The Chief Executive Officer and Interim Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2021276 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2021278 PART III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10-14, including directors, executive compensation, and security ownership, is incorporated by reference from the company's 2022 Annual Meeting proxy statement - The information required by Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's definitive proxy statement for the 2022 Annual Meeting of Stockholders284285286 PART IV Exhibits and Financial Statement Schedules This section provides a list of financial statements and an index of all exhibits filed with the Annual Report on Form 10-K, including corporate governance and material contracts - This item contains the financial statements and an index of all exhibits filed with the Annual Report on Form 10-K290291
TPI Composites(TPIC) - 2021 Q4 - Annual Report