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MarketScreener Homepage  >  Equities  >  Nasdaq  >  TPI Composites, Inc.    TPIC

TPI COMPOSITES, INC.

(TPIC)
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TPI COMPOSITES : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/06/2020 | 04:30pm EST

You should read the following discussion and analysis of our financial condition and results of operations together with our condensed consolidated financial statements and the related notes and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q (Form 10-Q). Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-Q, including information with respect to plans and strategy for our business, 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 Form 10-Q or in our previously filed Annual Report on Form 10-K, particularly those under "Risk Factors."


OVERVIEW

Our Company

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), who have historically relied on in-house production, 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 have become 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. As of August 5, 2020, our long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from our customers of approximately $2.9 billion and encourage our customers to purchase additional volume up to, in the aggregate, a total contract value of approximately $5.4 billion through the end of 2024. 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. Our wind blade and precision molding and assembly systems manufacturing businesses accounted for approximately 95% of our total net sales for both the three months ended June 30, 2020 and 2019, respectively, and 96% of our net sales for both the six months ended June 30, 2020 and 2019, respectively. We also leverage our advanced composite technology and history of innovation to supply high strength, lightweight and durable composite products to the transportation market.

We divide our business operations into four geographic operating segments - (1) the United States (U.S.), (2) Asia, (3) Mexico and (4) Europe, the Middle East, Africa and India (EMEAI) as follows:

    •   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 to manufacture wind blades at our Warren, Rhode
        Island facility, (3) the manufacturing of composite solutions for the
        transportation industry, which we also conduct at our Rhode Island
        facility , (4) wind blade inspection and repair services in North America,
        (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 which we purchased in July 2019
        and (7) our corporate headquarters, the costs of which are included in
        general and administrative expenses.


    •   Our Asia segment includes (1) the manufacturing of wind blades at our
        facilities in Dafeng, China and Yangzhou, China, the latter of which
        commenced operations in March 2019, (2) the manufacturing of precision
        molding and assembly systems at our Taicang Port, China facility and
        (3) wind blade inspection and repair services.


    •   Our Mexico segment manufactures wind blades from three facilities in
        Juárez, Mexico and a facility in Matamoros, Mexico. In addition, we have a
        facility which manufactures precision molding and assembly systems and
        composite solutions for the transportation industry in Juárez, Mexico and
        we commenced operations at this facility in March 2019. This segment also
        performs wind blade inspection and repair services.


    •   Our EMEAI segment manufactures wind blades from two facilities in Izmir,
        Turkey and also performs wind blade inspection and repair services. In
        February 2019, we entered into a new lease agreement with a third party
        for a new manufacturing facility that was built in Chennai, India and we
        commenced operations at this facility in the first quarter of 2020.

KEY TRENDS AND RECENT DEVELOPMENTS AFFECTING OUR BUSINESS

The COVID-19 pandemic adversely impacted our operations and results of operations for the three and six months ended June 30, 2020 due primarily to reduced production levels at all of our manufacturing facilities. During the first quarter of 2020, our China


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manufacturing facilities were adversely impacted by the COVID-19 pandemic in the form of reduced production levels. 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. However, several of our manufacturing facilities, in particular our Mexico and India manufacturing facilities, are operating in regions with high levels of reported COVID-19 positive cases. As such, we may be required to reinstate temporary production suspensions or volume reductions at these manufacturing facilities or 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. 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, however, are unable to currently estimate and quantify the actual impact of COVID-19 on our business, results of operations and financial condition for the balance of 2020.

As a result of such uncertainty, we are managing our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the six months ended June 30, 2020, we drew down $80.0 million under our Credit Agreement. In addition, during the six months ended June 30, 2020, we entered into three unsecured credit facilities with three Turkish financial institutions resulting in aggregate gross proceeds of $27.2 million and current availability of $9.0 million.

For the three and six months ended June 30, 2020, we estimate that our net sales were adversely impacted by approximately $96 million and $134 million, based upon 230 and 329 wind blade sets which we had forecasted to produce in those 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.

For the three and six months ended June 30, 2020, we estimate that our net loss was adversely impacted by approximately $39 million, net of taxes, and $47 million, net of taxes, based upon the forecasted gross margin on the forecasted wind blade sets which we were to produce in those periods but were unable to do so as a result of the COVID-19 pandemic. In addition, for the three and six months ended June 30, 2020, we incurred approximately $16 million, net of taxes, and $17 million, net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor.

For the three and six months ended June 30, 2020, we estimate that our Adjusted EBITDA was adversely impacted by approximately $36 million and $47 million, based upon the forecasted Adjusted EBITDA margin on the forecasted wind blade sets which we were to produce in those periods but were unable to do so as a result of the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor.

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.

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.


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Manufacturing overhead at each of our facilities includes virtually all indirect costs (including share-based compensation costs) incurred at the manufacturing facilities, including engineering, finance, information technology, human resources and plant management. 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.

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 research and development expenses incurred at our Warren, Rhode Island location, our Kolding, Denmark advanced engineering center and our Berlin, Germany engineering center are also included in general and administrative expenses. For the three months ended June 30, 2020 and 2019 and for the six months ended June 30, 2020 and 2019, research and development expenses totaled $0.3 million, $0.3 million, $0.5 million and $0.5 million, respectively.

Realized Loss on Sale of Assets and Asset Impairments

Realized loss on sale of assets represents the realized losses on the sale of receivables under supply chain financing arrangements with our customers and realized gains and losses on the sale of other assets and asset impairments 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 primarily of interest expense on our debt borrowings and the amortization of deferred financing costs on such borrowings. Other income (expense) also includes realized gains and losses on foreign currency remeasurement, interest income, losses on extinguishment of debt and miscellaneous income and expense.

Income Taxes

Income taxes consist 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 composite 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 condensed consolidated financial statements in accordance with GAAP, we use certain other financial 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 invoiced, estimated megawatts of energy capacity for wind blade sets invoiced, utilization percentage, manufacturing lines dedicated to customers under long-term supply agreements and manufacturing lines installed, which help us evaluate our operational performance. We believe that these measures are useful to investors in evaluating our performance.


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KEY FINANCIAL METRICS



                         Three Months Ended           Six Months Ended
                              June 30,                    June 30,
                         2020          2019          2020          2019
                                         (in thousands)
Net sales              $ 373,817$ 330,771$ 730,453$ 630,551
Net income (loss)      $ (66,101 )$   1,828$ (66,593 )$ (10,276 )
EBITDA (1)             $  (2,628 )$  11,671$  (5,349 )$   7,574
Adjusted EBITDA (1)    $   3,295$  23,421$   4,591$  26,346
Capital expenditures                               $  42,030$  37,739
Free cash flow (1)                                 $ (69,035 )$ (39,257 )




                                          June 30,       December 31,
                                            2020             2019
                                                (in thousands)

Total debt, net of debt issuance costs $ 237,902$ 141,389 Net debt (1)

                             $ (142,524 )$      (71,779 )






    (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, any realized gains or losses from foreign currency remeasurement, any gains or losses from the sale of assets and asset impairments and 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 EBITDA and adjusted EBITDA has limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP.

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


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condensed consolidated balance sheets adding back any debt issuance costs and discounts. 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 tables reconcile our non-GAAP key financial measures to the most directly comparable GAAP measures:

EBITDA and adjusted EBITDA are reconciled as follows:



                                        Three Months Ended               Six Months Ended
                                             June 30,                        June 30,
                                       2020            2019            2020            2019
                                                          (in thousands)
Net income (loss)                  $    (66,101 )$     1,828$   (66,593 )$   (10,276 )
Adjustments:
Depreciation and amortization            11,616           7,125          22,644          17,784
Interest expense (net of
interest income)                          2,545           2,243           4,316           4,191
Income tax provision (benefit)           49,312             475          34,284          (4,125 )
EBITDA                                   (2,628 )        11,671          (5,349 )         7,574
Share-based compensation expense          2,374           1,937           5,316           2,922
Realized loss on foreign
currency
 remeasurement                            1,928             967             968           4,769
Realized loss on sale of assets
and asset
 impairments                              1,440           4,972           3,358           7,207
Restructuring charges, net                  181           3,874             298           3,874
Adjusted EBITDA                    $      3,295$    23,421$     4,591$    26,346

Free cash flow is reconciled as follows:



                                           Six Months Ended
                                               June 30,
                                          2020          2019
                                            (in thousands)

Net cash used in operating activities $ (27,005 )$ (1,518 ) Less capital expenditures

                 (42,030 )     (37,739 )
Free cash flow                          $ (69,035 )$ (39,257 )

Net debt is reconciled as follows:



                                               June 30,       December 31,
                                                 2020             2019
                                                     (in thousands)
Cash and cash equivalents                     $   96,657$       70,282
Less total debt, net of debt issuance costs     (237,902 )         (141,389 )
Less debt issuance costs                          (1,279 )             (672 )
Net debt                                      $ (142,524 )$      (71,779 )


KEY OPERATING METRICS



                                  Three Months Ended          Six Months Ended
                                       June 30,                   June 30,
                                   2020          2019         2020         2019
Sets                                   787          716         1,518       1,376
Estimated megawatts                  2,650        2,016         4,979       3,878
Utilization                             69 %         70 %          70 %        68 %
Dedicated manufacturing lines           52           54            52          54
Manufacturing lines installed           54           50            54          50


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Key operating metrics consist of sets invoiced, estimated megawatts of energy capacity for wind blade sets invoiced, utilization, dedicated manufacturing lines and manufacturing lines installed.

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 in 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 manufacturing lines installed at the end of the period.

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. We believe that dedicated manufacturing lines provide an understanding of additional capacity within an existing facility. Dedicated manufacturing lines primarily impacts our net sales.

Manufacturing lines installed represents the number of wind blade manufacturing lines installed and either in operation, startup or transition at the end of 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.

Results of Operations

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019


The following table summarizes certain information relating to our operating
results and related percentage of net sales for the three months ended June 30,
2020 and 2019 that has been derived from our unaudited condensed consolidated
financial statements.



                                                            Three Months Ended
                                                                 June 30,
                                                    2020                         2019
                                                          (dollars in thousands)
Net sales                                  $ 373,817         100.0 %    $ 330,771         100.0 %
Cost of sales                                367,644          98.4        285,319          86.3
Startup and transition costs                  10,920           2.9         22,901           6.9
Total cost of goods sold                     378,564         101.3        308,220          93.2
Gross profit (loss)                           (4,747 )        (1.3 )       22,551           6.8
General and administrative expenses            6,887           1.8          9,208           2.8
Realized loss on sale of assets and
asset impairments                              1,440           0.4          4,972           1.5
Restructuring charges, net                       181           0.1          3,874           1.2
Income (loss) from operations                (13,255 )        (3.6 )        4,497           1.3
Other expense                                 (3,534 )        (0.9 )       (2,194 )        (0.6 )
Income (loss) before income taxes            (16,789 )        (4.5 )        2,303           0.7
Income tax provision                         (49,312 )       (13.2 )         (475 )        (0.1 )
Net income (loss)                          $ (66,101 )       (17.7 )%   $   1,828           0.6 %



Net sales for the three months ended June 30, 2020 increased by $43.0 million or 13.0% to $373.8 million compared to $330.8 million in the same period in 2019. Net sales of wind blades increased by 15.3% to $348.1 million for the three months ended June 30, 2020 as compared to $301.8 million in the same period in 2019. The increase in net sales was primarily driven by a 10% increase in the number of wind blades produced during the three months ended June 30, 2020 compared to the same period in 2019 largely as a result of increased production at our China facilities and our Matamoros, Mexico facility. This increase was also due to a higher average sales price due to the mix of wind blade models produced during the three months ended June 30, 2020 compared to the same period in 2019. Net sales from the manufacturing of precision molding and assembly systems during the three months ended June 30, 2020


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were $6.9 million as compared to $12.9 million in the same period in 2019. Additionally, there was a $2.8 million increase in transporation and other sales during the three months ended June 30, 2020 as compared to the same period in 2019. The impact of the fluctuating U.S. dollar against the Euro in our Turkey operations and the Chinese Renminbi in our China operations on consolidated net sales for the three months ended June 30, 2020 was a decrease of 0.3% as compared to the same period in 2019. Although our net sales increased for the three months ended June 30, 2020 compared to the same period in 2019, we estimate that our net sales were adversely impacted by approximately $96 million, based upon 230 wind blade sets which we had forecasted to produce at our Mexico, 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.

Total cost of goods sold for the three months ended June 30, 2020 was $378.6 million and included $6.9 million related to lines in startup and $4.0 million of transition costs related to lines in transition during the quarter. This compares to total cost of goods sold for the three months ended June 30, 2019 of $308.2 million and included $14.7 million related to lines in startup and $8.2 million of transition costs related to lines in transition during the quarter. Total cost of goods sold as a percentage of net sales increased by approximately 8% during the three months ended June 30, 2020 as compared to the same period in 2019, driven primarily by the increase in direct materials and warranty costs primarily relating to a warranty 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 impact of the fluctuating U.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso decreased consolidated cost of goods sold by 3.2% for three months ended June 30, 2020 as compared to the same period in 2019.

General and administrative expenses for the three months ended June 30, 2020 totaled $6.9 million, or 1.8% of net sales, compared to $9.2 million, or 2.8% of net sales, for the same period in 2019. The decrease as a percentage of net sales was primarily driven by lower travel and training costs due to the COVID-19 pandemic.

Realized loss on sale of assets and asset impairments for the three months ended June 30, 2020 totaled $1.4 million and was comprised primarily of realized losses on the sale of receivables under supply chain financing arrangements with our customers. Realized loss on sale of assets and asset impairments for the three months ended June 30, 2019 totaled $5.0 million and was comprised of $3.1 million of realized losses on the sale of assets at our corporate and manufacturing facilities and $1.9 million of realized losses on the sale of receivables under supply chain financing arrangements with our customers.

Restructuring charges for the three months ended June 30, 2020 totaled $0.2 million compared to $3.9 million for the same period in 2019. The prior year restructuring costs primarily related to the closing of our Taicang City, China manufacturing facility.

Other expense totaled $3.5 million for the three months ended June 30, 2020 as compared to other expense totaling $2.2 million for the same period in 2019. The increase in the expense was primarily due to a $1.0 million increase in realized losses on foreign currency remeasurement and a $0.3 million increase in interest expense in the three months ended June 30, 2020 as compared to the same period in 2019.

Income taxes reflected a provision of $49.3 million for the three months ended June 30, 2020 as compared to a provision of $0.5 million for the same period in 2019. The increase in the provision was primarily due to a change in the forecasted annual effective tax rate as of June 30, 2020 in comparison to the forecast at March 31, 2020 and the earnings mix by jurisdiction in the three months ended June 30, 2020 as compared to the same period in 2019. More specifically, income taxes for the three months ended June 30, 2020 was the result of applying a revised forecasted annual effective tax rate to a quarter that was significantly impacted by losses in several jurisdictions due to the COVID-19 pandemic.

Net loss for the three months ended June 30, 2020 was $66.1 million as compared to net income of $1.8 million in the same period in 2019. The decrease in the net income was primarily due to the reasons set forth above. In addition, we estimate that our net loss was adversely impacted by approximately $39 million, net of taxes, based upon the forecasted gross margin on the wind blade sets we had forecasted to produce at our Mexico, 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, we incurred $16 million, net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The net loss per share was $1.87 for the three months ended June 30, 2020, compared to a net income per share of $0.05 for the three months ended June 30, 2019.


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Segment Discussion

The following table summarizes our net sales and income (loss) from operations by our four geographic operating segments for the three months ended June 30, 2020 and 2019 that has been derived from our unaudited condensed consolidated financial statements.




                    Three Months Ended
                         June 30,
                    2020          2019
Net Sales             (in thousands)
U.S.              $  42,079$  39,858
Asia                145,918        84,699
Mexico               83,420        95,362
EMEAI               102,400       110,852
Total net sales   $ 373,817$ 330,771




                                        Three Months Ended
                                             June 30,
                                        2020          2019
Income (Loss) from Operations             (in thousands)
U.S. (1)                              $ (12,045 )$ (22,222 )
Asia                                     18,492           131
Mexico                                  (11,324 )       4,120
EMEAI                                    (8,378 )      22,468

Total income (loss) from operations $ (13,255 )$ 4,497


    (1) Includes the costs of our corporate headquarters, our advanced engineering
        center in Kolding, Denmark and our engineering center in Berlin, Germany
        totaling $6.9 million and $9.2 million for the three months ended June 30,
        2020 and 2019, respectively.

U.S. Segment

Net sales for the three months ended June 30, 2020 increased by $2.2 million or 5.6% to $42.1 million compared to $39.9 million in the same period in 2019. Net sales of wind blades decreased slightly to $26.3 million during the three months ended June 30, 2020 as compared to $26.6 million in the same period of 2019. There were no net sales from the manufacturing of precision molding and assembly systems during the three months ended June 30, 2020 compared to $1.2 million during the same period in 2019. Additionally, there was a $3.7 million increase in transportation and other sales during the three months ended June 30, 2020 as compared to the same period in 2019. Although our total U.S. net sales increased for the three months ended June 30, 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.

The loss from operations in the U.S. segment for the three months ended June 30, 2020 was $12.0 million as compared to a loss from operations of $22.2 million in the same period in 2019. As previously discussed, the loss amounts include corporate general and administrative costs of $6.9 million and $9.2 million for the three months ended June 30, 2020 and 2019, respectively. Although our U.S. loss from operations decreased for the three months ended June 30, 2020 compared to the same period in 2019, our income from operations for the three months ended June 30, 2020 were adversely impacted due to reduced production levels at our U.S. manufacturing facilities due to the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The decrease in the loss from operations was primarily due to the decreased costs related to the shutdown of our Newton, Iowa transportation facility and the decrease in transition costs, partially offset by increased direct labor and direct material costs at our Newton, Iowa blade facility.

Asia Segment

Net sales for the three months ended June 30, 2020 increased by $61.2 million or 72.3% to $145.9 million compared to $84.7 million in the same period in 2019. Net sales of wind blades were $141.5 million in the three months ended June 30, 2020 compared to $78.4 million in the same period of 2019. This increase reflects a 87% 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 between the two periods. This increase was partially offset by a decrease in the year over year number of wind blades still in the production process at the end of the period. Net sales from the manufacturing of precision molding and assembly systems totaled $3.6 million during the three months ended June 30, 2020 compared to $5.7 million during the same period in 2019. There was no net impact of the fluctuating U.S. dollar against the Chinese Renminbi on net sales during the three months ended June 30, 2020 as compared to the same period in 2019.


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The income from operations in the Asia segment for the three months ended June 30, 2020 was $18.5 million as compared to income from operations of $0.1 million in the same period in 2019. This increase in the income from operations was primarily due to the net increase in overall wind blade volume, an increase in the average sales price of wind blades noted above, a decrease in startup and transition costs, foreign currency fluctuations and the impact of savings in raw material costs. The impact of the fluctuating U.S. dollar against the Chinese Renminbi had a favorable impact of 2.7% on cost of goods sold for the three months ended June 30, 2020 as compared to the same period in 2019.

Mexico Segment

Net sales in the three months ended June 30, 2020 decreased by $11.9 million or 12.5% to $83.4 million compared to $95.4 million in the same period in 2019. The decrease reflects a 28% net decrease in overall wind blade volume which was primarily related to reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic. The decrease was partially offset by an increase in the average sales price of wind blades due to a change in the mix of wind blades between the two periods and the Matamoros strike in 2019. Net sales from the manufacturing of precision molding and assembly systems during the three months ended June 30, 2020 were $3.3 million compared to $6.0 million during the same period in 2019.

The loss from operations in the Mexico segment for the three months ended June 30, 2020 was $11.3 million as compared to income from operations of $4.1 million in the same period in 2019. The decrease in the income from operations was primarily due to reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The decrease was partially offset by a decrease in 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 4.4% on cost of goods sold for the three months ended June 30, 2020 as compared to 2019.

EMEAI Segment

Net sales during the three months ended June 30, 2020 decreased by $8.5 million or 7.6% to $102.4 million compared to $110.9 million in the same period in 2019. The decrease was driven by a 23% decrease in wind blade volume primarily at our two Turkey manufacturing facilities due to transitions and reduced production levels at our two Turkey manufacturing facilities due to the COVID-19 pandemic as well as a decrease in the average sales price of wind blades delivered in the comparative periods. The decrease was partially offset by 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 an unfavorable impact of 1.1% on net sales during the three months ended June 30, 2020 as compared to 2019.

The loss from operations in the EMEAI segment for the three months ended June 30, 2020 was $8.4 million as compared to income from operations of $22.5 million in the same period in 2019. The decrease in the income from operations was primarily driven by increased warranty costs at our second Turkey manufacturing facility, the decreased wind blade production at our two Turkey manufacturing facilities due to the COVID-19 pandemic, COVID-19 related costs associated with the health and safety of our associates and non-productive labor, and the increased startup costs at our India manufacturing facility and transition costs at our second Turkey manufacturing facility, partially offset by favorable foreign currency fluctuations. The fluctuating U.S. dollar relative to the Turkish Lira and Euro had a favorable impact of 4.0% on cost of goods sold for the three months ended June 30, 2020 as compared to 2019.


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Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019


The following table summarizes certain information relating to our operating
results and related percentage of net sales for the six months ended June 30,
2020 and 2019 that has been derived from our unaudited condensed consolidated
financial statements.



                                                             Six Months Ended
                                                                 June 30,
                                                    2020                         2019
                                                          (dollars in thousands)
Net sales                                  $ 730,453         100.0 %    $ 630,551         100.0 %
Cost of sales                                716,119          98.0        568,357          90.2
Startup and transition costs                  22,954           3.2         41,079           6.5
Total cost of goods sold                     739,073         101.2        609,436          96.7
Gross profit (loss)                           (8,620 )        (1.2 )       21,115           3.3
General and administrative expenses           16,383           2.2         17,193           2.7
Realized loss on sale of assets and
asset impairments                              3,358           0.5          7,207           1.1
Restructuring charges                            298           0.0          3,874           0.6
Loss from operations                         (28,659 )        (3.9 )       (7,159 )        (1.1 )
Other expense                                 (3,650 )        (0.5 )       (7,242 )        (1.2 )
Loss before income taxes                     (32,309 )        (4.4 )      (14,401 )        (2.3 )
Income tax benefit (provision)               (34,284 )        (4.7 )        4,125           0.7
Net loss                                   $ (66,593 )        (9.1 )%   $ (10,276 )        (1.6 )%



Net sales for the six months ended June 30, 2020 increased by $99.9 million or 15.8% to $730.5 million compared to $630.6 million in the same period in 2019. Net sales of wind blades increased by 18.3% to $684.4 million for the six months ended June 30, 2020 as compared to $578.7 million in the same period in 2019. The increase was primarily driven by a 10% increase in the number of wind blades produced during the six months ended June 30, 2020 compared to the same period in 2019 largely as a result of increased production at our China and Mexico facilities. The increase was also due to a higher average sales price due to the mix of wind blade models produced during the six months ended June 30, 2020 compared to the same period in 2019. Net sales from the manufacturing of precision molding and assembly systems during the six months ended June 30, 2020 were $13.7 million as compared to $24.1 million in the same period in 2019. Additionally, there was a $4.7 million increase in transporation and other sales during the six months ended June 30, 2020 as compared to the same period in 2019. The impact of the fluctuating U.S. dollar against the Euro in our Turkey operations and the Chinese Renminbi in our China operations on consolidated net sales for the six months ended June 30, 2020 was a net decrease of 0.4% as compared to 2019. Although our net sales increased for the six months ended June 30, 2020 compared to the same period in 2019, we estimate that our net sales were adversely impacted by approximately $134 million, based upon 329 wind blade sets which 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.

Total cost of goods sold for the six months ended June 30, 2020 was $739.1 million and included $14.8 million related to lines in startup and $8.2 million of transition costs related to the lines in transition during the period. This compares to total cost of goods sold for the six months ended June 30, 2019 of $609.4 million and included $30.8 million related to startup costs and $10.3 million of transition costs related to lines in transition during the period. Cost of goods sold as a percentage of net sales increased by approximately 4% during the six months ended June 30, 2020 as compared to the same period in 2019, driven primarily by the increase in direct materials and warranty costs primarily relating to a warranty 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 impact of the fluctuating U.S. dollar against the Euro, Turkish Lira, Chinese Renminbi and Mexican Peso decreased consolidated cost of goods sold by 2.6% for the six months ended June 30, 2020 as compared to 2019.

General and administrative expenses for the six months ended June 30, 2020 totaled $16.4 million, or 2.2% of net sales, compared to $17.2 million, or 2.7% of net sales, for the same period in 2019. The decrease as a percentage of net sales was primarily driven by lower travel and training costs due to the COVID-19 pandemic.




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Realized loss on sale of assets and asset impairments for the six months ended June 30, 2020 totaled $3.4 million and was comprised primarily of realized losses on the sale of receivables under supply chain financing arrangements with our customers. Realized loss on sale of assets and asset impairments for six months ended June 30, 2019 totaled $7.2 million and was comprised of $4.1 million of realized losses on the sale of assets at our corporate and manufacturing facilities and $3.1 million of realized losses on the sale of receivables under supply chain financing arrangements with our customers.

Restructuring charges for the six months ended June 30, 2020 totaled $0.3 million compared to $3.9 million for the same period in 2019. The prior year restructuring costs primarily related to the closing of our Taicang City, China manufacturing facility.

Other expense totaled $3.7 million for the six months ended June 30, 2020 as compared to other expense totaling $7.2 million for the same period in 2019. The decrease was primarily due to a $3.8 million decrease in realized losses on foreign currency remeasurement in the six months ended June 30, 2020 as compared to the same period in 2019.

Income taxes reflected a provision of $34.3 million for the six months ended June 30, 2020 as compared to a benefit of $4.1 million for the same period in 2019. The increase in the provision was primarily due to a change in the forecasted annual effective tax rate as of June 30, 2020 in comparison to the forecast at March 31, 2020 and the earnings mix by jurisdiction in the six months ended June 30, 2020 as compared to the same period in 2019. More specifically, income taxes for the six months ended June 30, 2020 was the result of applying a revised forecasted annual effective tax rate to a six month period that was significantly impacted by losses in several jurisdictions due to the COVID-19 pandemic.

Net loss for the six months ended June 30, 2020 was $66.6 million as compared to a net loss of $10.3 million in the same period in 2019. The increase was primarily due to the reasons set forth above. In addition, we estimate that our net loss was adversely impacted by approximately $47 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, we incurred $17 million, net of taxes, of COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The net loss per share was $1.89 for the six months ended June 30, 2020, compared to a net loss per share of $0.29 for the six months ended June 30, 2019.

Segment Discussion

The following table summarizes our net sales and income (loss) from operations by our four geographic operating segments for the six months ended June 30, 2020 and 2019 that has been derived from our unaudited condensed consolidated financial statements.




                     Six Months Ended
                         June 30,
                    2020          2019
Net Sales             (in thousands)
U.S.              $  89,510$  81,486
Asia                237,055       153,417
Mexico              201,670       180,027
EMEAI               202,218       215,621
Total net sales   $ 730,453$ 630,551




                                   Six Months Ended
                                       June 30,
                                  2020          2019
Income (loss) from Operations       (in thousands)
U.S. (1)                        $ (27,631 )$ (36,725 )
Asia                               23,564        (8,669 )
Mexico                            (13,092 )       3,696
EMEAI                             (11,500 )      34,539
Total loss from operations      $ (28,659 )$  (7,159 )


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    (1) Includes the costs of our corporate headquarters, our advanced engineering
        center in Kolding, Denmark and our engineering center in Berlin, Germany
        totaling $16.4 million and $17.2 million for the six months ended June 30,
        2020 and 2019, respectively.

U.S. Segment

Net sales in the six months ended June 30, 2020 increased by $8.0 million or 9.8% to $89.5 million compared to $81.5 million in the same period in 2019. Net sales of wind blades increased to $62.2 million during the six months ended June 30, 2020 from $58.5 million in the same period of 2019. Although our U.S. net sales increased for the six months ended June 30, 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. The increase was primarily due to a higher average sales price due to the mix of wind blade models produced in both periods as well as a 2% increase in the number of wind blades produced in the six months ended June 30, 2020 as compared to the same period in 2019. There were no net sales from the manufacturing of precision molding and assembly systems during the six months ended June 30, 2020 compared to $1.4 million during the same period in 2019. Additionally, there was a $5.6 million increase in transportation and other sales during the six months ended June 30, 2020 as compared to the same period in 2019.

The loss from operations in the U.S. segment for the six months ended June 30, 2020 was $27.6 million as compared to a loss of $36.7 million in the same period in 2019. As previously discussed, the loss amounts include corporate general and administrative costs of $16.4 million and $17.2 million for the six months ended June 30, 2020 and 2019, respectively. Although our U.S. loss from operations decreased for the six months ended June 30, 2020 compared to the same period in 2019, our income from operations for the six months ended June 30, 2020 were adversely impacted due to reduced production levels at our U.S. manufacturing facilities due to the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The decrease in the loss from operations was primarily due to the decreased costs related to the shutdown of our Newton, Iowa transportation facility and the decrease in transition costs, partially offset by increased direct labor and direct material costs at our Newton, Iowa blade facility.

Asia Segment

Net sales in the six months ended June 30, 2020 increased by $83.6 million or 54.5% to $237.1 million compared to $153.4 million in the same period in 2019. Net sales of wind blades were $227.4 million in the six months ended June 30, 2020 as compared to $140.5 million in the same period of 2019. The increase in the net sales of wind blades was primarily due to a 41% increase in in the number of wind blades produced produced in the six months ended June 30, 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 between the two periods. The increase was partially offset by a decrease in the year over year number of wind blades still in the production process at the end of the period. Although our Asia net sales increased for the six months ended June 30, 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. Net sales from the manufacturing of precision molding and assembly systems totaled $8.6 million during the 2020 period compared to $11.9 million during the six months ended June 30, 2019. There was no net impact of the fluctuating U.S. dollar against the Chinese Renminbi on net sales during the during the six months ended June 30, 2020 as compared to the same period in 2019.

The income from operations in the Asia segment for the six months ended June 30, 2020 was $23.6 million as compared to a loss from operations of $8.7 million in the same period in 2019. The decrease in the loss from operations was primarily due to the net increase in overall wind blade volume, an increase in the average sales price of wind blades noted above, a decrease in the startup and transition costs, foreign currency fluctuations and the impact of savings in raw material costs. Although our Asia income from operations increased for the six months ended June 30, 2020 compared to the same period in 2019, our income from operations were adversely impacted due to reduced production levels at our Asia manufacturing facilities due to the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The fluctuating U.S. dollar against the Chinese Renminbi had a favorable impact of 2.6% on cost of goods sold for the six months ended June 30, 2020 as compared to the 2019 period.

Mexico Segment

Net sales in the six months ended June 30, 2020 increased by $21.6 million or 12.0% to $201.7 million compared to $180.0 million in the same period in 2019. The increase reflects a 10% net increase in overall wind blade volume, an increase in the average sales price of wind blades due to a change in the mix of wind blades between the two periods and the Matomoros strike in 2019. Although our Mexico net sales increased for the six months ended June 30, 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. Net sales from the manufacturing of precision molding and assembly systems during the six months ended June 30, 2020 were $5.0 million compared to $10.8 million during the same period in 2019.


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The loss from operations in the Mexico segment for the six months ended June 30, 2020 was $13.1 million as compared to income from operations of $3.7 million in the same period in 2019. The decrease in the income from operations was due primarily to reduced production levels at our Mexico manufacturing facilities due to the COVID-19 pandemic and COVID-19 related costs associated with the health and safety of our associates and non-productive labor. The decrease was partially offset by the overall increase in wind blade volume noted above, 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 2.1% on cost of goods sold for the six months ended June 30, 2020 as compared to 2019.

EMEAI Segment

Net sales during the six months ended June 30, 2020 decreased by $13.4 million or 6.2% to $202.2 million compared to $215.6 million in the same period in 2019. The decrease was driven by a 16% decrease in wind blade production primarily at our two Turkey manufacturing facilities due to transitions and reduced production levels at our two Turkey manufacturing facilities due to the COVID-19 pandemic, as well as a decrease in the average sales price of wind blades delivered in the comparative periods. The decrease was partially offset by 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 an unfavorable impact of 1.4% on net sales during the six months ended June 30, 2020 as compared to the 2019 period.

The loss from operations in the EMEAI segment for the six months ended June 30, 2020 was $11.5 million as compared to income from operations of $34.5 million in the same period in 2019. The decrease in the income from operations was primarily driven by increased warranty costs at our second Turkey manufacturing facility, the decreased wind blade production at our two Turkey manufacturing facilities due to the COVID-19 pandemic, COVID-19 related costs associated with the health and safety of our associates and non-productive labor and the increased startup costs at our India manufacturing facility and transition costs at our second Turkey manufacturing facility, partially offset by favorable foreign currency fluctuations. The fluctuating U.S. dollar relative to the Turkish Lira and Euro had a favorable impact of 4.0% on cost of goods sold for the six months ended June 30, 2020 as compared to 2019.

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 are managing our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the six months ended June 30, 2020, we drew down $80.0 million under our Credit Agreement. In addition, during the six months ended June 30, 2020, we entered into three unsecured credit facilities with three Turkish financial institutions resulting in aggregate gross proceeds of $27.2 million and current availability of $9.0 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 $97.1 million for the six months ended June 30, 2020 as compared to net borrowings under our financing arrangements of $6.3 million in the comparable period of 2019. As of June 30, 2020 and December 31, 2019, we had $239.2 million and $142.1 million in outstanding indebtedness, excluding debt issuance costs, respectively. As of June 30, 2020, we had an aggregate of $122.8 million of remaining capacity and $41.7 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 June 30, 2020 and December 31, 2019, we had unrestricted cash, cash equivalents and short-term investments totaling $96.7 million and $70.3 million, respectively. The June 30, 2020 balance includes $54.5 million of cash located outside of the United States, including $29.7 million in China, $10.9 million in India, $10.6 million in Turkey, $2.9 million in Mexico and $0.4 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 the People's Republic of China, including retained earnings as determined under Chinese-statutory accounting requirements. Until 50% ($26.5 million as of


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December 31, 2019) of registered capital is contributed to a surplus reserve, our Chinese 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 Chinese operations can pay dividends equal to 100% of after-tax profit assuming other conditions are met. At December 31, 2019, the amount of the surplus reserve fund was $6.6 million.

Operating Cash Flows



                                                           Six Months Ended
                                                               June 30,
                                                          2020          2019
                                                            (in thousands)
Net loss                                                $ (66,593 )$ (10,276 )
Depreciation and amortization                              22,644        17,784

Realized loss on sale of assets and asset impairments 3,358 7,207 Restructuring charges

                                         298         3,874
Share-based compensation expense                            5,316         2,922
Other non-cash items                                          122           103
Changes in assets and liabilities                           7,850       (23,132 )
Net cash used in operating activities                   $ (27,005 )$  (1,518 )

Net cash used in operating activities totaled $27.0 million for the six months ended June 30, 2020 and was primarily the result of a $66.6 million net loss, partially offset by $22.6 million of depreciation and amortization, $7.9 million in net changes in working capital, $5.3 million of share-based compensation expense and a $3.4 million realized loss on sale of assets and asset impairments. The key components of the net decrease in working capital include a $44.9 million decrease in accounts receivable, a $18.8 million increase in other noncurrent liabilities, a $10.3 million decrease in other noncurrent assets, a $9.1 million increase in accrued warranty, a $5.7 million decrease in operating lease right of use assets and operating lease liabilities, and a $3.4 million decrease in other current assets. These changes were mostly offset by $53.1 million increase in contract assets and liabilities, a $19.1 million decrease in accounts payable and accrued expenses, a $6.3 million increase in prepaid expenses and a $5.9 million increase in inventories. The changes in contract assets and liabilities, accounts receivable, accounts payable and accrued expenses and accrued warranty are primarily the result of the timing of production in the period.

Net cash used in operating activities totaled $1.5 million for the six months ended June 30, 2019 and was primarily the result of a $23.1 million in net changes in working capital and a $10.3 million net loss, partially offset by $17.8 million of depreciation and amortization, $7.2 million realized loss on sale of assets, a $3.9 million restructuring charge and $2.9 million of share-based compensation expense. The key components of the net increase in working capital include a $46.7 million increase in contract assets and liabilities, a $18.4 million increase in other noncurrent assets, a $14.4 million increase in other current assets, a $6.8 million increase in prepaid expenses, and a $4.1 million increase in inventories. These changes were partially offset by a $35.3 million increase in accounts payable and accrued expenses, a $17.9 million decrease in accounts receivable, a $6.1 million decrease in operating lease right of use assets and operating lease liabilities and a $6.1 million increase in accrued warranty. The changes in contract assets and liabilities, accounts receivable, accounts payable and accrued expenses and accrued warranty are primarily the result of the timing of production in the period.


Investing Cash Flows



                                                Six Months Ended
                                                    June 30,
                                               2020          2019
                                                 (in thousands)

Purchases of property, plant and equipment $ (42,030 )$ (37,739 ) Net cash used in investing activities $ (42,030 )$ (37,739 )




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Net cash used in investing activities totaled $42.0 million and $37.7 million for the six months ended June 30, 2020 and 2019, respectively, driven primarily by capital expenditures for new facilities and expansion or improvements at existing facilities. The capital expenditures for the six months ended June 30, 2020 primarily related to our new manufacturing facilities in Chennai, India and Yangzhou, China, our second manufacturing facility in Turkey and continued investments in our other existing facilities. The capital expenditures for the six months ended June 30, 2019 primarily related to our new manufacturing facility in Yangzhou, China, our second manufacturing facility in Turkey, our new tooling facility and the expansion of one of our blade manufacturing facilities in Juárez, Mexico and continued investments in our other existing facilities.

We anticipate fiscal year 2020 capital expenditures of between $80 million to $90 million and we estimate that the cost that we will incur after June 30, 2020 to complete our current projects in process will be approximately $16.3 million. We are deferring non-critical capital expenditures in light of the COVID-19 uncertainty. We have used, and will continue to use, cash flows from operations, the proceeds received from our credit facilities for major projects currently being undertaken, which include new manufacturing facilities in Chennai, India, the continued investment in our existing Tukey, Mexico and China facilities as well as in our pilot line in Warren, Rhode Island.

Financing Cash Flows



                                                               Six Months Ended
                                                                   June 30,
                                                               2020         2019
                                                                (in thousands)
Proceeds from revolving loans                                $ 80,000$  6,000

Net proceeds (repayments) of accounts receivable financing (3,829 ) 5,062 Proceeds from working capital loans

                                 -        2,909
Principal repayments of finance leases                         (2,837 )     (5,471 )
Net proceeds (repayments) of other debt                        23,788       (2,211 )
Debt issuance costs                                              (730 )          -
Proceeds from exercise of stock options                         1,371        4,716

Repurchase of common stock including shares

  withheld in lieu of income taxes                               (508 )       (559 )
Net cash provided by financing activities                    $ 97,255$ 10,446

The net cash provided by financing activities totaled $97.3 million for the six months ended June 30, 2020 compared to $10.4 million of net cash provided by financing activities in the comparable period of 2019. Net cash provided by financing activities for the six months ended June 30, 2020 primarily reflects the net proceeds from revolving loans and other growth-related debt, partially offset by net repayments of accounts receivable financing and principal repayments of finance leases. Net cash provided by financing activities for the six months ended June 30, 2019 primarily reflects the net proceeds from revolving loans and accounts receivable financing, proceeds from the exercise of stock options and proceeds from working capital loans, partially offset by principal repayments of finance leases and other growth-related debt.



Share Repurchases


During the three months ended June 30, 2020, we repurchased 2,731 shares of our common stock for $0.05 million related to tax withholding requirements on restricted stock units which vested during the period.


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Description of Our Indebtedness

Senior Financing Agreements (U.S.):

In April 2018, we entered into a new credit agreement (the Credit Agreement) with four lenders consisting of a multi-currency, revolving credit facility in an aggregate principal amount of $150.0 million, including a $25.0 million letter of credit sub-facility. On the closing date we drew down $75.4 million on the revolving credit facility in connection with the closing of the transactions contemplated by the Credit Agreement and used the proceeds to pay all outstanding amounts due and payable under our previous credit agreement, various fees and expenses and accrued interest. All borrowings and amounts outstanding under the Credit Agreement are scheduled to mature in April 2023. In May 2019, the Credit Agreement was further amended to revise the definition of Consolidated EBITDA as utilized in certain of the financial covenants of the Credit Agreement.

In connection with the Credit Agreement, in the second quarter of 2018 we expensed $2.0 million of deferred financing costs associated with the previous credit agreement and a $1.4 million prepayment penalty within the caption "Loss on extinguishment of debt" in the condensed consolidated statement of operations. In addition, we incurred debt issuance costs related to the Credit Agreement totaling $1.0 million which will be amortized to interest expense over the five-year term of the Credit Agreement using the effective interest method.

Interest accrues at a variable rate equal to a LIBOR floor of 0.75% plus a margin of 3.0% (3.75% as of June 30, 2020), which may vary based on our total net leverage ratio as defined in the Credit Agreement. Interest is paid monthly and we are not obligated to make any principal repayments prior to the maturity date provided we are not in default under the Credit Agreement. We may prepay the borrowings under the Credit Agreement without penalty.

In April 2018, we also entered into an interest rate swap arrangement to fix a notional amount of $75.0 million of the Credit Agreement at an effective interest rate of 4.2% for a period of five years. See Note 1, Summary of Operations and Significant Accounting Policies - Financial Instruments, for more details on this interest rate swap arrangement.

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. All other material terms and conditions of the Credit Agreement remained the same. In connection with this Incremental Facility Agreement, we incurred additional debt issuance costs totaling $0.2 million which will be amortized to interest expense over the remaining term of the Credit Agreement using the effective interest method.

In June 2020, we entered into an amendment to our Credit Agreement which made certain adjustments to one of the financial covenants, added new covenants related to minimum liquidity and mandatory repayment triggers, provided for certain modifications to the affirmative and negative covenants and changed the interest rate during the Adjustment Period (as defined in the Credit Agreement) to a LIBOR floor of 0.75% plus a margin of 3.0% per annum. The interest rate following the end of the Adjustment Period would be equal to a LIBOR floor of 0.75% plus a margin ranging between 1.75% to 2.50% per annum. All other material terms and conditions of the Credit Agreement remained the same.

As of June 30, 2020 and December 31, 2019, there was $192.4 million and $112.4 million outstanding under the Credit Agreement, respectively. Additionally, as of June 30, 2020 and December 31, 2019, there was $7.9 million and $5.1 million of letters of credit outstanding under the letter of credit sub-facility of the Credit Agreement, respectively.

Due to the revolving credit facility's variable interest rate of LIBOR plus a competitive spread, we estimate that fair-value approximates the face value of these notes.

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 are managing our liquidity to ensure our long-term viability until the COVID-19 pandemic abates. During the six months ended June 30, 2020, we drew down $80.0 million under our Credit Agreement.

Accounts Receivable, Secured and Unsecured Financing:

EMEAI: During 2014, we renewed a general credit agreement, as amended, with a financial institution in Turkey to provide up to 21.0 million Euro of short-term collateralized financing on invoiced accounts receivable of one of our customers in Turkey. Interest originally accrued annually at a fixed rate of 9.1% and was paid quarterly. In December 2014, and later amended, we obtained an additional $8.0 million of unsecured financing in Turkey under the credit agreement, with interest accruing annually at a fixed rate of 2.5% and payable at the end of the term when the loan is repaid. All other credit agreement terms remained the same. The credit


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agreement does not have a maturity date, however the limits are reviewed in September of each year to establish available capacity. During the fourth quarter of 2018, we replaced the accounts receivable financing facility with the accounts receivable assignment agreement discussed below. As of June 30, 2020 and December 31, 2019, there were no amounts outstanding under the unsecured financing facility.

In 2014, we entered into a credit agreement with a Turkish financial institution to provide up to $16.0 million of short-term financing of which $10.0 million is collateralized financing on invoiced accounts receivable of one of our customers in Turkey, $5.0 million is unsecured financing and $1.0 million is related to letters of guarantee. Interest accrues at a variable rate of the three month Euro Interbank Offered Rate (EURIBOR) plus 6.5%. During the first quarter of 2018, the collateralized financing on invoiced accounts receivables and unsecured financing facilities were retired and the letters of guarantee limit was adjusted, later amended to 1.4 million Euro (approximately $1.6 million as of June 30, 2020). No amounts were outstanding under this letter of guarantee agreement as of June 30, 2020 and December 31, 2019.

In 2016, we entered into a general credit agreement, as amended, with a Turkish financial institution to provide up to 46.0 million Euro (approximately $51.7 million as of June 30, 2020) of short-term financing of which 25.0 million Euro (approximately $28.1 million as of June 30, 2020) is collateralized financing based on invoiced accounts receivables of one of our customers in Turkey, 10.0 million Euro (approximately $11.2 million as of June 30, 2020) for the collateralized financing of capital expenditures, 10.0 million Euro (approximately $11.2 million as of June 30, 2020) of unsecured financing and 1.0 million Euro (approximately $1.1 million as of June 30, 2020) related to letters of guarantee. Interest on the collateralized financing based on invoiced accounts receivables of one of our customers in Turkey accrues at a fixed rate of 4.5% as of June 30, 2020 and is paid quarterly with a maturity date equal to four months from the applicable invoice date. Interest on the collateralized capital expenditures financing accrues at the one month EURIBOR plus 6.75% (6.75% as of June 30, 2020) with monthly principal repayments beginning in October 2017 with a final maturity date of December 2021. Interest on the unsecured financing accrues at the one month EURIBOR plus 1.50% (1.50% as of June 30, 2020) and is payable monthly. The maturity date for amounts currently outstanding is April 2021. The unsecured financing agreement does not have a maturity date, however the limits are reviewed in April of each year to establish available capacity. Interest on the letters of guarantee accrues at 2.00% annually with an amended final maturity date of July 2020. As of June 30, 2020 and December 31, 2019, there was $6.0 million and $7.9 million outstanding under the collateralized financing of capital expenditures line, respectively. As of June 30, 2020 and December 31, 2019, there was none and $3.8 million, respectively, outstanding under the collateralized financing based on invoiced accounts receivables. As of June 30, 2020 and December 31, 2019, there was $10.3 million and no amount, respectively, outstanding under the unsecured financing facility.

In the first quarter of 2020, as a replacement to the original credit agreement, we entered into an unsecured financing facility with the same Turkish financial institution to provide up to 64.0 million Turkish Lira (approximately $9.4 million as of June 30, 2020). Interest accrues at a fixed rate of 1.75% and is to be paid quarterly. The credit agreement does not have a maturity date, however the limits are reviewed in October of each year to establish available capacity. All of the other terms of the original credit agreement remained the same. No amounts were outstanding under this agreement as of June 30, 2020 or December 31, 2019.

In the fourth quarter of 2019, we entered into a credit agreement with a Turkish financial institution to provide up to 10.0 million Euro (approximately $11.2 million as of June 30, 2020) of unsecured financing. Interest accrues at a fixed rate of 2.0% and is payable at the end of the term when the loan is repaid. The credit agreement does not have a maturity date, however the limits are reviewed in October of each year to establish available capacity. No amounts were outstanding under this agreement as of June 30, 2020 or December 31, 2019.

In the first quarter of 2020, we entered into a credit agreement, as amended, with a Turkish financial institution to provide up to $18.0 million of unsecured financing. Interest accrues at a fixed rate of 3.0% and is payable at the end of the term when the loan is repaid. The credit agreement does not have a maturity date, however the limits are reviewed in April of each year to establish available capacity. As of June 30, 2020, there was $15.5 million outstanding under this credit agreement.

In the first quarter of 2020, we entered into a credit agreement with a Turkish financial institution to provide up to 5.0 million Euro (approximately $5.6 million as of June 30, 2020) of unsecured financing. Interest accrues at a fixed rate of 5.0% and is payable at the end of the term when the loan is repaid. The credit agreement does not have a maturity date, however the limits are reviewed in October of each year to establish available capacity. As of June 30, 2020, there were no amounts outstanding under this credit agreement.


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Due to the short-term nature of the unsecured financings in the EMEAI segment, we estimate that fair-value approximates the face value of the notes.

Asia: In August 2019, we entered into a credit agreement with a Chinese financial institution to provide an unsecured credit line of up to 315.0 million Renminbi (approximately $44.5 million as of June 30, 2020) related to two of our China facilities which can be used for the purpose of issuing customs letters of guarantee and covering the related deposits on such letters of guarantee, project financing and certain other transactions approved by the lender. Interest on the credit line accrues at the Chinese central bank interest rate plus an applicable margin (4.8% as of June 30, 2020) and can be paid monthly, quarterly or at the time of the debt's maturity (August 2021). As of June 30, 2020, there were no letters of guarantee and related deposits used for customs clearance outstanding. As of December 31, 2019, there were 25.7 million Renminbi (approximately $3.7 million) of letters of guarantee and related deposits used for customs clearance outstanding.

In March 2018, we entered into a credit agreement, as amended, with a Chinese financial institution to provide an unsecured credit line of up to 100.0 million Renminbi (approximately $14.1 million as of June 30, 2020) which can be used as customs letters of guarantee. Interest on the credit line accrues at the Chinese central bank interest rate plus an applicable margin (4.8% at June 30, 2020) and can be paid monthly, quarterly or at the time of the debt's maturity (in March 2023). As of June 30, 2020, there were 40.5 million Renminbi (approximately $5.7 million) of letters of guarantee used for customs clearance outstanding. As of December 31, 2019, there were 71.9 million Renminbi (approximately $10.3 million) of letters of guarantee used for customs clearance outstanding.

Equipment Leases and Other Arrangements: We have entered into certain finance lease, sale-leaseback and equipment financing arrangements in the U.S., Mexico and EMEAI for equipment used in our operations as well as for office use. These leases bear interest at rates ranging from 4.6% to 9.75% annually, and principal and interest are payable monthly. As of June 30, 2020 and December 31, 2019, there was an aggregate total of $15.0 million and $17.9 million outstanding under these arrangements, respectively.

Operating Leases: We lease various facilities and equipment under non-cancelable operating lease agreements. As of June 30, 2020, we leased a total of approximately 6.8 million square feet in Dafeng, China; Yangzhou, China; Chennai, India; Izmir, Turkey; Kolding, Denmark; Berlin, Germany, Newton, Iowa; Juárez, Mexico; Matamoros, Mexico; Santa Teresa, New Mexico; Warren, Rhode Island, as well as our corporate office in Scottsdale, Arizona. The terms of these leases range from 12 months to 180 months with annual payments approximating $30 million for the full year 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 consolidated financial statements and related notes.

Our Mexico segment has an existing accounts receivable assignment agreement with a financial institution under which the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our Mexico segment's customers at a discount calculated based on an effective annual rate of LIBOR plus 2.75%.

In September 2018, our U.S. and Mexico segments entered into an accounts receivable assignment agreement, as amended, with a financial institution. Under this agreement, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our U.S. (Iowa location) and Mexico segment's customers at a discount calculated based on LIBOR plus 1.25%.

In the fourth quarter of 2018, our EMEAI segment entered into an accounts receivable assignment agreement with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse revolving basis, up to 15.0 million Euro (approximately $16.9 million as of June 30, 2020) of the accounts receivable amounts related to one of our EMEAI segment's customers at a discount calculated based on EURIBOR plus 2.65%. During the first quarter of 2020, this program was discontinued by the financial institution.

In the fourth quarter of 2018, our EMEAI segment entered into an accounts receivable assignment agreement with a financial institution. Under this agreement, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our EMEAI segment's customers at a discount calculated based on EURIBOR plus 0.75%.

In the first quarter of 2019, our Asia and Mexico segments entered into separate accounts receivable purchase agreements, as amended, with a financial institution. Under these agreements, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time up to $60.0 million of a customer's accounts receivable amounts in our Asia segment and up to $50.0 million of a customer's accounts receivable amounts in our Mexico segment at a discount calculated based on the three month LIBOR plus 1.0% and the number of days from the date of purchase to maturity.

In the second quarter of 2019, our Asia segment entered into an accounts receivable purchase agreement, as amended, with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time up to


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$45.0 million of a customer's accounts receivable amounts in our Asia segment at a discount calculated based on the three month LIBOR plus 1.0% and the number of days from the date of purchase to maturity.

In the fourth quarter of 2019, our Asia segment entered into an accounts receivable purchase agreement, as amended, with a financial institution. Under this agreement, the financial institution may buy, on a non-recourse basis, and hold outstanding at any time an unlimited amount of a customer's accounts receivable amounts in our Asia segment at a discount calculated based on a fixed rate of 4.05% and the number of days from the date of purchase to maturity.

In the first quarter of 2020, our EMEAI segment entered into an accounts receivable assignment agreement with a financial institution. Under this agreement, the financial institution buys, on a non-recourse basis, the accounts receivable amounts related to one of our EMEAI segment's customers at a discount calculated based on EURIBOR, subject to a floor of 0.0%, plus 1.95%.

As the receivables are purchased by the financial institutions under the agreements as described in the preceding paragraphs, the receivables were removed from our balance sheet. During the three and six months ended June 30, 2020, $235.7 million and $459.9 million of receivables were sold under the accounts receivable assignment agreements described above, respectively.

Critical Accounting Policies and Estimates

There have been no other significant changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1, Recently Issued Accounting Pronouncements to our condensed consolidated financial statements.

Contractual Obligations

During the six months ended June 30, 2020, there have been no material changes to the contractual obligations reported in our Annual Report on Form 10-K, other than in the ordinary course of business.

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