TPI Composites(TPIC) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), changes in equity, and cash flows, along with detailed notes explaining significant accounting policies, revenue recognition, risks, debt, leases, and other financial details for the periods ended September 30, 2022 Condensed Consolidated Balance Sheets The balance sheets show a decrease in total assets and stockholders' equity from December 31, 2021, to September 30, 2022, primarily driven by a reduction in cash and cash equivalents, partially offset by increases in accounts receivable and contract assets Condensed Consolidated Balance Sheet Highlights | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Cash and cash equivalents | $129,137 | $242,165 | | Accounts receivable | $184,029 | $157,804 | | Contract assets | $211,726 | $188,323 | | Total assets | $950,366 | $1,007,701 | | Total liabilities | $561,457 | $634,775 | | Total stockholders' equity | $94,277 | $121,952 | Condensed Consolidated Statements of Operations The company reported a net loss for both the three and nine months ended September 30, 2022, though the loss significantly narrowed compared to the prior year, with net sales decreasing but gross profit improving from a loss in the three-month period Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Net sales | $459,271 | $479,599 | $1,296,509 | $1,343,120 | | Gross profit (loss) | $8,672 | $(7,130) | $8,268 | $8,466 | | Loss from operations | $(2,842) | $(23,987) | $(23,719) | $(29,227) | | Net loss | $(1,467) | $(30,677) | $(22,777) | $(72,271) | | Net loss attributable to common stockholders | $(16,443) | $(30,677) | $(66,435) | $(72,271) | | Basic net loss per common share | $(0.39) | $(0.83) | $(1.58) | $(1.96) | Condensed Consolidated Statements of Comprehensive Income (Loss) The comprehensive loss attributable to common stockholders decreased significantly for both the three and nine months ended September 30, 2022, compared to the prior year, primarily influenced by foreign currency translation adjustments Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Net loss | $(1,467) | $(30,677) | $(22,777) | $(72,271) | | Foreign currency translation adjustments | $(7,903) | $(889) | $28,120 | $(6,184) | | Comprehensive income (loss) | $(10,139) | $(32,294) | $5,592 | $(82,457) | | Comprehensive loss attributable to common stockholders | $(25,115) | $(32,294) | $(38,066) | $(82,457) | Condensed Consolidated Statements of Changes in Mezzanine Equity and Stockholders' Equity This statement details the changes in mezzanine equity and stockholders' equity, showing a decrease in total stockholders' equity from $121.9 million at December 31, 2021, to $94.3 million at September 30, 2022, influenced by net loss, preferred stock dividends, and other comprehensive loss Changes in Equity Highlights | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :-------------------------------- | :------------------------------- | | Series A Preferred Stock | $294,632 | $250,974 | | Total stockholders' equity | $94,277 | $121,952 | | Net loss (9 months) | $(22,777) | $(72,271) | | Preferred stock dividends and accretion (9 months) | $(43,658) | $0 | - In August 2022, 4,666,667 fully vested warrants were exercised, resulting in the net issuance of 4,664,155 shares of common stock[83] Condensed Consolidated Statements of Cash Flows The company experienced a significant increase in net cash used in operating activities and a shift from net cash provided by to net cash used in financing activities for the nine months ended September 30, 2022, compared to the prior year, while net cash used in investing activities decreased Condensed Consolidated Statements of Cash Flows Highlights | Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Net cash used in operating activities | $(85,095) | $(28,241) | | Net cash used in investing activities | $(11,492) | $(30,138) | | Net cash provided by (used in) financing activities | $(12,865) | $48,280 | | Net change in cash, cash equivalents and restricted cash | $(113,259) | $(11,038) | | Cash, cash equivalents and restricted cash, end of period | $138,959 | $119,158 | Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering accounting policies, revenue recognition, significant risks, debt, equity, and segment information Note 1. Significant Accounting Policies Effective January 1, 2022, the functional currency for the company's Turkish operations changed from the Turkish Lira to the Euro, reflecting increased sales to the eurozone and a majority of transactions being Euro-denominated - Functional currency for Turkish operations changed from Turkish Lira to Euro, effective January 1, 2022[33] - The change was driven by approximately 80% of Turkish sales being Euro-denominated, with a majority of expenses, debt, lease obligations, and cash balances also in Euros, and a focus on export demands to the eurozone[35] - The initial impact of the functional currency change resulted in a $44.9 million increase in net assets, recorded in the currency translation adjustment account[33] Note 2. Basis of Presentation The condensed consolidated financial statements are unaudited and prepared in accordance with SEC rules, reflecting management's estimates, and the company is evaluating the impact of recently issued accounting pronouncements, ASU 2020-04 (Reference Rate Reform) and ASU 2022-04 (Supplier Finance Programs) - The company is evaluating the impact of ASU 2020-04, Reference Rate Reform, which provides optional expedients for contracts, hedging relationships, and other transactions affected by reference rate reform[41] - ASU 2022-04, Liabilities - Supplier Finance Programs, effective January 1, 2023 (roll forward requirement effective January 1, 2024), will require disclosure of key terms of outstanding supplier finance programs[42] Note 3. Revenue From Contracts with Customers Net sales decreased for both the three and nine months ended September 30, 2022, compared to the prior year, primarily due to lower wind blade and precision molding sales, with remaining performance obligations totaling approximately $2.2 billion as of September 30, 2022, mostly expected in 2023 Net Sales by Product/Service | Product/Service | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :---------------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Wind blade sales | $425,019 | $450,725 | $1,193,636 | $1,248,608 | | Precision molding and assembly systems sales | $274 | $8,383 | $7,114 | $30,913 | | Transportation sales | $10,542 | $6,815 | $34,059 | $29,861 | | Field service, inspection and repair services sales | $19,090 | $11,033 | $43,976 | $23,634 | | Other sales | $4,346 | $2,643 | $17,724 | $10,104 | | Total net sales | $459,271 | $479,599 | $1,296,509 | $1,343,120 | Remaining Performance Obligations (as of September 30, 2022) | Year Ending December 31, | Amount (in thousands) | % of Total | | :----------------------- | :-------------------- | :--------- | | Remainder of 2022 | $304,490 | 13.9% | | 2023 | $1,513,228 | 69.1% | | 2024 | $292,208 | 13.3% | | 2025 | $79,664 | 3.6% | | Total | $2,189,590 | 100% | - Contract assets increased by $23.4 million from December 31, 2021, to September 30, 2022, due to an increase in unbilled production[50] Note 4. Significant Risks and Uncertainties The company faces significant risks including customer investment deferrals due to inflation and regulatory uncertainty, leading to expected decreased demand and lower manufacturing line utilization in 2023, with elevated raw material and logistics costs anticipated, and planned global footprint optimization resulting in material restructuring and impairment charges - Expected decreased demand for wind blades and lower manufacturing line utilization in 2023 due to customer deferrals, inflationary pressures, and regulatory uncertainty (Inflation Reduction Act of 2022, REPowerEU plan)[56] - Prices for resin, carbon fiber, other raw materials, and logistics costs are expected to remain elevated in the near term, potentially impacting results of operations[57] - Planned global footprint optimization, including headcount reductions and eliminating loss-making operations, will result in material restructuring and impairment charges during the remainder of 2022[58] Note 5. Accrued Warranty The warranty accrual decreased from $42.0 million at the beginning of 2022 to $20.2 million by September 30, 2022, primarily due to the cost of warranty services provided during the period Warranty Accrual Activity | Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :------------------------------------------ | :---------------------------------- | :---------------------------------- | | Warranty accrual at beginning of period | $42,020 | $50,852 | | Accrual during the period | $10,057 | $15,532 | | Cost of warranty services provided during the period | $(28,177) | $(21,178) | | Changes in estimate for pre-existing warranties, including expirations during the period and foreign exchange impact | $(3,688) | $(2,727) | | Warranty accrual at end of period | $20,212 | $42,479 | Note 6. Long-Term Debt, Net of Current Maturities Total principal debt decreased from $74.6 million at December 31, 2021, to $62.1 million at September 30, 2022, with long-term debt net of current maturities significantly reduced to $1.2 million Long-Term Debt Highlights | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Unsecured financing—EMEA | $44,654 | $48,444 | | Secured and unsecured working capital loans—India | $14,612 | $10,269 | | Unsecured term loan—India | $0 | $8,109 | | Equipment finance lease—Mexico | $2,535 | $5,821 | | Other debt | $3,255 | $1,994 | | Total debt—principal | $62,121 | $74,646 | | Less: Current maturities of long-term debt | $(60,894) | $(66,438) | | Long-term debt, net of current maturities | $1,227 | $8,208 | Note 7. Share-Based Compensation Plans During the nine months ended September 30, 2022, the company issued various share-based awards, including RSUs, PSUs, and stock options, resulting in a total share-based compensation expense of $10.8 million Share-Based Compensation Expense | Metric | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------------- | :---------------------------------- | :---------------------------------- | | RSUs | $8,860 | $4,533 | | Stock options | $549 | $1,657 | | PSUs | $1,372 | $1,077 | | Total share-based compensation expense | $10,781 | $7,267 | - During the nine months ended September 30, 2022, the company issued 876,492 time-based RSUs, 37,065 performance-based RSUs, 111,193 PSUs tied to stock price hurdles, 49,781 PSUs tied to strategic targets, and 254,465 stock options[65][66] Note 8. Leases The company holds operating and finance leases for its facilities and equipment, with total operating lease liabilities decreasing while operating lease right-of-use assets increased, and future minimum operating lease payments totaling $206.8 million as of September 30, 2022 Lease Costs and Liabilities | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :-------------------------------- | :------------------------------- | | Operating lease right of use assets | $147,081 | $137,192 | | Total operating lease liabilities | $154,470 | $169,160 | | Total operating lease cost (9 months) | $32,185 | $29,129 | | Total finance lease cost (9 months) | $3,352 | $3,178 | Future Minimum Lease Payments (as of September 30, 2022) | Year Ending December 31, | Operating Leases (in thousands) | Finance Leases (in thousands) | | :----------------------- | :------------------------------ | :---------------------------- | | Remainder of 2022 | $11,357 | $810 | | 2023 | $31,963 | $1,303 | | 2024 | $28,878 | $710 | | 2025 | $28,414 | $377 | | 2026 | $27,536 | $7 | | Thereafter | $78,652 | $0 | | Total future minimum lease payments | $206,800 | $3,207 | Note 9. Financial Instruments The company uses foreign exchange forward contracts to manage exposure to currency fluctuations, primarily for the Mexican Peso, with the notional value of these contracts decreasing from $20.2 million at December 31, 2021, to $14.4 million at September 30, 2022 - The company uses foreign exchange forward contracts to mitigate exposure to fluctuations in exchange rates, not for speculative purposes[73] - Notional values of foreign exchange call option contracts qualifying as cash flow hedges were approximately $14.4 million (0.3 billion Mexican Pesos) at September 30, 2022, down from $20.2 million (0.4 billion Mexican Pesos) at December 31, 2021[75] Pretax Amounts Reclassified from AOCL to Statements of Operations | Component | Line Item | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :---------- | :---------------------------------- | :---------------------------------- | | Foreign exchange forward contracts | Cost of sales | $(1,325) | $(3,037) | Note 10. Restructuring Charges, Net The company reported a net restructuring credit of $(87)k for the three months ended September 30, 2022, and a charge of $2.3 million for the nine months, primarily due to severance and other costs related to global footprint optimization and facility closures Restructuring Charges, Net | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Severance | $(145) | N/A | $1,447 | N/A | | Other restructuring costs | $58 | N/A | $869 | N/A | | Total restructuring charges, net | $(87) | $1,422 | $2,316 | $3,876 | - The restructuring liability decreased from $12.9 million at December 31, 2021, to $0.6 million at September 30, 2022[79] Note 11. Income Taxes The income tax provision increased for the three months but decreased for the nine months ended September 30, 2022, primarily due to changes in the mix of earnings from foreign jurisdictions and a decrease in the U.S. valuation allowance Income Tax Provision | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Income tax provision | $(10,111) | $(8,248) | $(19,809) | $(30,036) | | Effective tax rate | 117.0% | -36.8% | -667.4% | -71.1% | - The changes in income tax provision resulted primarily from the change in the mix of earnings of foreign jurisdictions and a decrease in U.S. valuation allowance compared to the same period in 2021[81] Note 12. Net Loss Per Common Share The net loss attributable to common stockholders and basic net loss per common share improved for both the three and nine months ended September 30, 2022, compared to the prior year, with the exercise of warrants in August 2022 resulting in the issuance of 4,664,155 common shares Net Loss Per Common Share | Metric | Three Months Ended Sep 30, 2022 (in thousands, except per share data) | Three Months Ended Sep 30, 2021 (in thousands, except per share data) | Nine Months Ended Sep 30, 2022 (in thousands, except per share data) | Nine Months Ended Sep 30, 2021 (in thousands, except per share data) | | :----------------------------------- | :---------------------------------------------------- | :---------------------------------------------------- | :--------------------------------------------------- | :--------------------------------------------------- | | Net loss attributable to common stockholders | $(16,443) | $(30,677) | $(66,435) | $(72,271) | | Basic weighted-average shares outstanding | 41,984 | 37,052 | 41,950 | 36,846 | | Basic net loss per common share | $(0.39) | $(0.83) | $(1.58) | $(1.96) | - In August 2022, 4,666,667 fully vested warrants were exercised, resulting in the net issuance of 4,664,155 shares of common stock[83] Note 13. Stockholders' Equity Accumulated Other Comprehensive Loss (AOCL) decreased from $(54.0) million at December 31, 2021, to $(25.6) million at September 30, 2022, primarily due to positive foreign currency translation adjustments in the current period Accumulated Other Comprehensive Loss (AOCL) Changes | Component | Balance at Dec 31, 2021 (in thousands) | Net current period other comprehensive income (loss) (9 months ended Sep 30, 2022) (in thousands) | Balance at Sep 30, 2022 (in thousands) | | :-------------------------- | :----------------------------------- | :------------------------------------------------------------------------------------ | :----------------------------------- | | Foreign currency translation adjustments | $(48,530) | $43,369 | $(20,410) | | Foreign exchange forward contracts | $(5,476) | $2,705 | $(5,227) | | Total AOCL | $(54,006) | $46,074 | $(25,637) | Note 14. Commitments and Contingencies The company is involved in various legal proceedings, including a $13.3 million voidance claim from the Senvion GmbH insolvency estate, which it is contesting, and management does not believe any such charges would materially affect its financial condition - The company is a party to a legal proceeding involving a $13.3 million voidance claim filed by the administrator for the Senvion GmbH insolvency estate[89] - The company believes it has meritorious defenses to the alleged voidance claims, and the ultimate outcome cannot be reasonably estimated at this time[89] Note 15. Concentration of Customers The company has significant customer concentration, with Vestas, Nordex, and GE accounting for a large portion of net sales, and Nordex, Enercon, Vestas, and GE representing substantial percentages of trade accounts receivable Net Sales Concentration (Three Months Ended September 30, 2022) | Customer | Net sales (in thousands) | % of Total | | :------- | :----------------------- | :--------- | | Vestas | $210,355 | 45.8% | | Nordex | $120,051 | 26.1% | | GE | $81,032 | 17.6% | Trade Accounts Receivable Concentration (September 30, 2022) | Customer | % of Total | | :------- | :--------- | | Nordex | 57.8% | | Enercon | 12.5% | | Vestas | 11.1% | | GE | 10.8% | Note 16. Segment Reporting The company operates in five geographic segments: U.S., Asia, Mexico, EMEA, and India, with the EMEA segment's functional currency changing to Euros effective January 1, 2022, and this section provides a breakdown of net sales and income/loss from operations by segment - The company's operating segments are U.S., Asia (China), Mexico, EMEA (Türkiye), and India[91][92] - The EMEA segment's functional currency changed from Turkish Lira to Euro effective January 1, 2022[92] Net Sales by Segment (Three Months Ended September 30, 2022) | Segment | Net sales (in thousands) | | :------ | :----------------------- | | U.S. | $26,756 | | Asia | $74,832 | | Mexico | $164,368 | | EMEA | $127,348 | | India | $65,967 | | Total | $459,271 | Income (Loss) from Operations by Segment (Three Months Ended September 30, 2022) | Segment | Income (loss) from operations (in thousands) | | :------ | :------------------------------------------- | | U.S. | $(8,636) | | Asia | $7,206 | | Mexico | $(21,030) | | EMEA | $11,019 | | India | $8,599 | | Total | $(2,842) | Note 17. Subsequent Events In October 2022, the company signed a ten-year lease extension with GE Renewable Energy for its manufacturing facility in Newton, Iowa, commencing in February 2023, with approximately $19 million in future minimum lease payments - In October 2022, the company signed a ten-year lease extension with GE Renewable Energy for its Newton, Iowa manufacturing facility, commencing February 2023[98] - The lease extension involves approximately $19 million in future minimum lease payments[98] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, highlighting key trends, recent developments, and a detailed analysis of financial performance for the three and nine months ended September 30, 2022, covering liquidity, capital resources, and critical accounting policies OVERVIEW TPI Composites, Inc. is the only independent global manufacturer of composite wind blades, also providing field services and composite products for the transportation market, operating across five geographic segments: U.S., Asia, Mexico, EMEA, and India - TPI Composites, Inc. is the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint[100] - The company also provides field service inspection and repair services and supplies composite products to the transportation market[100] - Business operations are defined geographically into five operating segments: U.S., Asia, Mexico, Europe, the Middle East and Africa (EMEA), and India[101] KEY TRENDS AND RECENT DEVELOPMENTS AFFECTING OUR BUSINESS The company anticipates decreased demand and lower manufacturing line utilization in 2023 due to inflationary pressures and regulatory uncertainty, implementing cost-saving initiatives that will incur material charges, but has secured several customer supply agreement extensions and is optimistic about long-term growth driven by the IRA and REPowerEU plan - Expected decreased demand for wind blades and lower manufacturing line utilization in 2023 due to customer investment deferrals, inflationary pressures, and regulatory guidance uncertainty (Inflation Reduction Act of 2022, REPowerEU plan)[102] - The company is commencing cost-saving initiatives, including optimizing its global manufacturing footprint, reducing headcount, and eliminating loss-making operations, with plans to cease production at its Yangzhou, China facility in December 2022, expecting material restructuring and impairment charges[103] - Recent customer arrangements include extending supply agreements with Enercon (Türkiye), securing a ten-year lease extension with GE (Newton, Iowa), agreeing in principle to extend all Mexico manufacturing lines with GE, extending supply agreements with Nordex (Türkiye), and agreeing in principle to a seven-year global partner framework agreement with Vestas[103] - The passage of the IRA and the announcement of the REPowerEU plan provide long-term incentive certainty and positive prospects for the U.S. and European wind markets[105] - Operational challenges at the Matamoros, Mexico facility negatively impacted adjusted EBITDA margin by approximately 270 basis points (3 months) and 250 basis points (9 months) ended September 30, 2022[106] - A brief labor disruption in Türkiye and a temporary production suspension in Juarez, Mexico, due to a design change, adversely impacted sales by approximately $8.9 million and $12 million, respectively, for the three months ended September 30, 2022[107][108] KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE This section outlines key financial and operating metrics used by management to assess performance, including net sales, net loss, EBITDA, Adjusted EBITDA, capital expenditures, free cash flow, total debt, net cash, and operational indicators like sets, estimated megawatts, utilization, and dedicated manufacturing lines Key Financial Measures | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :----------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Net sales | $459,271 | $479,599 | $1,296,509 | $1,343,120 | | Net loss | $(1,467) | $(30,677) | $(22,777) | $(72,271) | | EBITDA | $20,519 | $(6,478) | $34,038 | $3,221 | | Adjusted EBITDA | $16,365 | $179 | $32,770 | $30,635 | | Capital expenditures | N/A | N/A | $11,492 | $30,138 | | Free cash flow | N/A | N/A | $(96,587) | $(58,379) | Key Financial Measures (Balance Sheet) | Metric | September 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :----------------- | :-------------------------------- | :------------------------------- | | Total debt | $62,121 | $74,646 | | Net cash | $67,016 | $167,519 | Key Operating Metrics | Metric | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sets | 740 | 830 | 2,125 | 2,487 | | Estimated megawatts | 3,164 | 3,395 | 9,218 | 9,770 | | Utilization | 80% | 76% | 76% | 78% | | Dedicated manufacturing lines | 43 | 54 | 43 | 54 | | Manufacturing lines installed | 43 | 54 | 43 | 54 | RESULTS OF OPERATIONS This section provides a detailed analysis of the company's operating results, including net sales, cost of goods sold, general and administrative expenses, restructuring charges, income/loss from operations, and other income/expense, for the three and nine months ended September 30, 2022, compared to the prior year Net sales Consolidated net sales decreased by 4.2% for the three months and 3.5% for the nine months ended September 30, 2022, primarily due to lower wind blade production volumes and precision molding sales, partially offset by higher average wind blade prices, increased transportation sales, and growth in field service and other wind-related sales Consolidated Net Sales by Product/Service | Product/Service | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Change ($) | Change (%) | | :---------------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Wind blade sales | $425,019 | $450,725 | $(25,706) | (5.7)% | | Precision molding and assembly systems sales | $274 | $8,383 | $(8,109) | (96.7)% | | Transportation sales | $10,542 | $6,815 | $3,727 | 54.7% | | Field service, inspection and repair services sales | $19,090 | $11,033 | $8,057 | 73.0% | | Other sales | $4,346 | $2,643 | $1,703 | 64.4% | | Total net sales | $459,271 | $479,599 | $(20,328) | (4.2)% | - The decrease in wind blade sales was primarily driven by an 11% decrease in the number of wind blades produced for the three months, due to a temporary production stoppage in Mexico, a brief labor disruption in Türkiye, and a reduction in manufacturing lines[115] - Fluctuating U.S. dollar against the Euro had an unfavorable impact of 3.9% on consolidated net sales for the three months ended September 30, 2022[115] Segment discussion Net sales performance varied by segment: U.S. sales significantly decreased due to a facility shutdown; Asia sales increased in Q3 but decreased YTD due to line transitions; Mexico sales decreased in Q3 due to production suspension but increased YTD from a new facility; EMEA sales slightly decreased in Q3 but increased YTD; and India sales increased in Q3 but slightly decreased YTD due to line transitions Net Sales by Geographic Segment (Three Months Ended September 30) | Segment | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | | :------ | :------------------ | :------------------ | :--------- | :--------- | | U.S. | $26,756 | $50,896 | $(24,140) | (47.4)% | | Asia | $74,832 | $51,869 | $22,963 | 44.3% | | Mexico | $164,368 | $197,138 | $(32,770) | (16.6)% | | EMEA | $127,348 | $129,444 | $(2,096) | (1.6)% | | India | $65,967 | $50,252 | $15,715 | 31.3% | - U.S. segment net sales decreased due to the shutdown of production at the Newton, Iowa manufacturing facility at the end of 2021[117] - Mexico segment net sales decreased in Q3 2022 due to a 23% decrease in wind blades produced, caused by a temporary production suspension in Juarez and a facility stopping production in December 2021[120] - EMEA segment net sales were unfavorably impacted by 14.1% due to fluctuating U.S. dollar relative to the Euro for the three months ended September 30, 2022[122] Total cost of goods sold Total cost of goods sold as a percentage of net sales decreased by 3.4% for the three months ended September 30, 2022, driven by favorable currency fluctuations, reduced startup/transition costs, and operational efficiencies, despite challenges at the Matamoros, Mexico facility, while for the nine months, it remained flat, with increased direct labor costs offset by currency benefits Total Cost of Goods Sold | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Cost of sales | $445,778 | $472,188 | $(26,410) | (5.6)% | | Startup and transition costs | $4,821 | $14,541 | $(9,720) | (66.8)% | | Total cost of goods sold | $450,599 | $486,729 | $(36,130) | (7.4)% | | % of net sales | 98.1% | 101.5% | N/A | (3.4)% | - Favorable currency fluctuations (U.S. dollar against Turkish Lira, Euro, Chinese Renminbi, and Mexican Peso) had an 8.2% favorable impact on consolidated cost of goods sold for the three months ended September 30, 2022[124] - Included in cost of sales for the three and nine months ended September 30, 2022, is approximately $3.0 million and $18.1 million, respectively, in non-restructuring related operating costs associated with facilities where production has stopped (Newton, Iowa; Dafeng, China; Juarez, Mexico)[125] General and administrative expenses General and administrative expenses remained consistent as a percentage of net sales for both the three and nine months ended September 30, 2022, compared to the prior year General and Administrative Expenses | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | General and administrative expenses | $8,030 | $8,185 | $(155) | (1.9)% | | % of net sales | 1.7% | 1.7% | N/A | 0.0% | Restructuring costs, net Restructuring costs, net, decreased significantly for both the three and nine months ended September 30, 2022, primarily due to lower severance costs associated with global footprint optimization and facility closures Restructuring Costs, Net | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Severance | $(145) | N/A | $1,447 | N/A | | Other restructuring costs | $58 | N/A | $869 | N/A | | Total restructuring charges, net | $(87) | $1,422 | $2,316 | $3,876 | Income (loss) from operations Consolidated loss from operations significantly decreased for both the three and nine months ended September 30, 2022, with U.S. loss decreasing in Q3 due to lower impairment charges but increasing YTD due to ongoing costs, Mexico's loss increasing due to challenges at Matamoros and Juarez facility shutdown costs, EMEA's income increasing due to higher production and lower startup costs despite inflation and labor disruption, and India's income increasing due to higher production Income (Loss) from Operations by Segment (Three Months Ended September 30) | Segment | 2022 (in thousands) | 2021 (in thousands) | Change ($) | Change (%) | | :------ | :------------------ | :------------------ | :--------- | :--------- | | U.S. | $(8,636) | $(21,404) | $12,768 | 59.7% | | Asia | $7,206 | $(3,607) | $10,813 | NM | | Mexico | $(21,030) | $(6,996) | $(14,034) | NM | | EMEA | $11,019 | $9,423 | $1,596 | 16.9% | | India | $8,599 | $(1,403) | $10,002 | NM | | Total loss from operations | $(2,842) | $(23,987) | $21,145 | 88.2% | - The decrease in loss from operations in the U.S. segment for the three months ended September 30, 2022, was primarily due to asset impairment charges in the prior year associated with the shutdown of the Newton, Iowa manufacturing facility[129] - The increase in loss from operations in the Mexico segment was primarily due to continued challenges at the Matamoros, Mexico facility, which represented approximately 53% of the total loss from operations for the segment in the three months ended September 30, 2022[132] Other income (expense) Total other income significantly increased for both the three and nine months ended September 30, 2022, primarily driven by favorable foreign currency fluctuations due to the change in functional currency at Turkish subsidiaries and a decrease in interest expense Total Other Income (Expense) | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Change ($) | Change (%) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :--------- | :--------- | | Interest expense, net | $(1,149) | $(2,662) | $1,513 | 56.8% | | Foreign currency income (loss) | $11,362 | $3,958 | $7,404 | 187.1% | | Miscellaneous income | $1,273 | $262 | $1,011 | NM | | Total other income (expense) | $11,486 | $1,558 | $9,928 | NM | - The change was primarily due to favorable foreign currency fluctuations resulting from the change in functional currency at Turkish subsidiaries from Turkish Lira to Euro, and a decrease in interest expense due to the repayment of the outstanding senior revolving credit facility[136] Income taxes The income tax provision increased for the three months but decreased for the nine months ended September 30, 2022, mainly due to changes in the mix of foreign earnings and a reduction in the U.S. valuation allowance Income Tax Provision | Metric | Three Months Ended Sep 30, 2022 (in thousands) | Three Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2022 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | | :-------------------------- | :----------------------------------- | :----------------------------------- | :---------------------------------- | :---------------------------------- | | Income tax provision | $(10,111) | $(8,248) | $(19,809) | $(30,036) | | Effective tax rate | 117.0% | -36.8% | -667.4% | -71.1% | - The increase in the three-month provision and decrease in the nine-month provision resulted primarily from the change in the mix of earnings of foreign jurisdictions and a decrease in U.S. valuation allowance compared to the same period in 2021[81] LIQUIDITY AND CAPITAL RESOURCES The company's liquidity needs include capital expenditures, startup costs, raw materials, working capital, debt service, warranty, and restructuring, planning to fund these through cash on hand, credit facilities, and an option to issue additional Series A Preferred Stock, with cash used in operating activities increasing, cash used in investing activities decreasing, and financing activities shifting from providing to using cash, while repatriation of funds from China is subject to government restrictions - Primary liquidity needs include capital expenditures, new facility startup costs, raw materials purchases, working capital, debt service costs, warranty costs, and restructuring costs[138] - The company believes cash on hand, available credit facilities, cash flows from operations, and an option to issue an additional $50.0 million of Series A Preferred Stock will be adequate to fund requirements over the next twelve months[138] - As of September 30, 2022, the company had $62.1 million in outstanding indebtedness and $79.9 million of remaining capacity for cash and non-cash financing, including $58.8 million for cash borrowing[138] - Unrestricted cash, cash equivalents, and short-term investments totaled $129.1 million at September 30, 2022, with $53.6 million located outside the United States, including $42.3 million in China[139] - Repatriation of funds from China is subject to restrictions by the Chinese government, including statutory surplus reserve fund requirements[140] Cash Flow Discussion Net cash used in operating activities increased significantly by $56.9 million for the nine months ended September 30, 2022, primarily due to working capital usage and operating cost challenges, while net cash used in investing activities decreased by $18.6 million due to lower capital expenditures, and net cash provided by financing activities shifted to a net use of $12.9 million, a $61.1 million decrease, due to decreased borrowings and increased repayments Key Cash Flow Activity (Nine Months Ended September 30) | Metric | 2022 (in thousands) | 2021 (in thousands) | Change ($) | | :------------------------------------------ | :------------------ | :------------------ | :--------- | | Net cash used in operating activities | $(85,095) | $(28,241) | $(56,854) | | Net cash used in investing activities | $(11,492) | $(30,138) | $18,646 | | Net cash provided by (used in) financing activities | $(12,865) | $48,280 | $(61,145) | | Impact of foreign exchange rates on cash, cash equivalents and restricted cash | $(3,807) | $(939) | $(2,868) | | Net change in cash, cash equivalents and restricted cash | $(113,259) | $(11,038) | $(102,221) | - The increase in net cash used in operating activities was a result of working capital usage, primarily related to an increase in accounts receivable and a decrease in accounts payable, as well as increased contract assets and operating cost challenges[143] - Anticipated fiscal year 2022 capital expenditures are approximately $17 million[145] Off-Balance Sheet Arrangements The company is not involved in any material off-balance sheet arrangements other than accounts receivable assignment agreements with various financial institutions, under which receivables are sold on a non-recourse basis - The company is not presently involved in any material off-balance sheet arrangements, other than accounts receivable assignment agreements[147] - Under these agreements, financial institutions buy accounts receivable on a non-recourse basis at an agreed-upon discount rate[148] - During the nine months ended September 30, 2022, $840.7 million of receivables were sold under these agreements, compared to $1,001.2 million in the prior year period[149] CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no significant changes to the company's critical accounting policies as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 - No significant changes to critical accounting policies were reported since the Annual Report on Form 10-K for the year ended December 31, 2021[150] RECENT ACCOUNTING PRONOUNCEMENTS This section refers to Note 2, Basis of Presentation, for a discussion of recently issued accounting pronouncements - Refer to Note 2, Basis of Presentation, for a discussion of recent accounting pronouncements[151] ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks primarily from foreign currency exchange rates and commodity prices, using foreign exchange forward contracts to mitigate currency risk and generally locking in raw material pricing, with customers bearing a significant portion of resin and carbon fiber price fluctuations, and all remaining debt obligations being fixed rate - The company's market risks are principally limited to changes in foreign currency exchange rates and commodity prices[152] - A hypothetical 10% change in exchange rates for countries with international operations would have resulted in an approximate $13.8 million change to income from operations for the nine months ended September 30, 2022[153] - Approximately 60% of resin and resin systems, and 90% of carbon fiber, are purchased under contracts where customers bear 100% of price fluctuations, limiting the company's exposure[155] - All remaining secured and unsecured financing and finance lease obligations are fixed rate instruments, not subject to interest rate fluctuations[157] ITEM 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness of the company's disclosure controls and procedures as of September 30, 2022, and concluded they were effective, with no material changes in internal control over financial reporting occurring during the three months ended September 30, 2022 - Disclosure controls and procedures were evaluated and concluded to be effective as of September 30, 2022[159] - There were no material changes in internal control over financial reporting during the three months ended September 30, 2022[160] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings This section refers to Note 14, Commitments and Contingencies, for a discussion of legal proceedings - Refer to Note 14, Commitments and Contingencies, for details regarding legal proceedings[163] ITEM 1A. Risk Factors There have been no material changes to the Risk Factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021, as amended by its Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 - No material changes to the Risk Factors have occurred since the Annual Report on Form 10-K for 2021 and the Q1 2022 10-Q amendment[164] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section refers to Note 12, Net Loss Per Common Share, for details regarding the issuance of common stock upon the exercise of warrants - Refer to Note 12, Net Loss Per Common Share, for details regarding the issuance of common stock upon the exercise of warrants[165] ITEM 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[168] ITEM 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[169] ITEM 5. Other Information There is no other information to report for this item - None[170] ITEM 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including a lease amendment, CEO and CFO certifications, and various Inline XBRL documents - Key exhibits include the Sixth Amendment to Lease (10.1), Certification of Chief Executive Officer (31.1, 32.1), Certification of Chief Financial Officer (31.2, 32.2), and Inline XBRL Instance Document (101.INS) and related taxonomy extension documents[172] SIGNATURES The report is duly signed on behalf of TPI Composites, Inc. by Ryan Miller, Chief Financial Officer, on November 3, 2022 - The report was signed by Ryan Miller, Chief Financial Officer, on November 3, 2022[176]