(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our 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."
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,
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
Our Mexico segment manufactures wind blades from three facilities in Ju�rez, 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 Ju�rez, 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
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
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.
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 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 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.
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
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
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
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 . . .
Aug 06, 2020
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