Broadwind Energy, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Dollar amounts below are in millions unless stated otherwise. Broadwind manufactures wind towers and specialty weldments and precision gearing; wind energy represented 93% of revenue for the first nine months. The Services segment is reported as discontinued operations following the company’s decision to exit it.
Financial performance and position
- Third-quarter revenue was $42.6 million, down 14.5% year over year. Gross profit was $5.3 million; gross margin improved to 12.5% from 5.7%. Operating income was $1.4 million, versus an operating loss of $2.1 million.
- Third-quarter earnings were $1.245 million from continuing operations and $0.872 million net income, or $0.06 per diluted share. The prior-year quarter had a $7.613 million net loss, including a $5.230 million discontinued-operations loss.
- Nine-month revenue was $132.7 million, down 17.9%. Gross profit was $13.4 million, down from $14.1 million, while gross margin rose to 10.1% from 8.7%. Operating income was $1.3 million versus an operating loss of $0.9 million. Net income was $0.021 million, compared with a net loss of $11.013 million.
- Segment trends: Q3 Towers and Weldments operating income increased to $4.1 million from $2.2 million, with margin rising to 10.7%. Gearing remained loss-making, with a $0.7 million operating loss, though improved from $2.6 million; its revenue and orders were pressured by weak oil, gas, and mining demand. For the first nine months, Towers and Weldments generated $10.0 million operating income, while Gearing recorded a $3.1 million operating loss.
- Cash flow: Continuing-operations operating cash flow was $17.1 million for the nine months, versus cash use of $14.7 million a year earlier. The company attributed the improvement mainly to $11.5 million more in customer deposits and higher accounts payable; accounts receivable increased $5.2 million. Investing used $13.5 million and financing used $3.3 million.
- Liquidity and debt: Cash and cash equivalents plus short-term investments totaled $24.3 million at September 30, up from $12.6 million at December 31, 2015. Total debt and capital lease obligations were $3.172 million, including $2.6 million of long-term debt and $0.572 million of capital leases. The AloStar facility was undrawn, with $3.281 million available; the term loan was repaid in June.
- Balance sheet: Total assets were $125.6 million and stockholders’ equity was $68.1 million. Customer deposits were $21.5 million, versus $9.9 million at year-end 2015.
Material changes versus the prior period
- Despite lower revenue, Q3 gross margin improved substantially, reflecting better Abilene tower-plant efficiency, cost management, and a change in the estimated salvage value of selected Gearing machinery.
- The depreciation estimate change reduced expense by $0.576 million in Q3 and $1.838 million in the first nine months. Management estimated a $2.450 million favorable impact on full-year 2016 continuing-operations and net income, or $0.17 per share; the benefit is expected to continue through October 2017.
- The nine-month revenue decline reflected lower steel and other material costs passed through to tower customers, fewer towers sold, and weaker Gearing demand. Gearing revenue fell sharply, while operating losses narrowed through lower depreciation, overhead, and SG&A.
- Improved year-over-year net income also reflects the substantially completed 2015 Services divestiture and a lower discontinued-operations loss. Q3 2016 discontinued operations still recorded a $0.373 million loss, including warranty and inventory-related charges.
Outlook, risks, contingencies, and unusual items
- Management reported $27.5 million of Q3 orders, compared with $12.2 million a year earlier, largely due to timing of tower orders. It cited the extension of the federal Production Tax Credit as supportive of wind demand through 2023. No specific revenue or earnings guidance was provided.
- Management expected cash, operating cash generation, and credit availability to meet liquidity needs for at least twelve months, but warned that weaker production, sales, collections, or customer deposits could create liquidity pressure and that covenant noncompliance could restrict access to credit.
- On October 26, 2016, after quarter-end, Broadwind replaced the AloStar facility with a three-year, $20 million secured revolver from PrivateBank. Availability is borrowing-base dependent; a further $5 million increase may be elected if 2016 EBITDA reaches at least $7 million.
- The company reported a $1.252 million environmental remediation accrual relating to its Cicero Avenue facility. Its New Markets Tax Credit arrangement carries potential recapture exposure of up to $3.9 million if specified requirements are breached before the compliance period ends in September 2018; management said it did not anticipate recapture.
- Gearing asset impairment testing indicated that projected undiscounted cash flows did not cover certain asset-group carrying values, but the subsequent fair-value analysis indicated no impairment at September 30. The valuation relies in part on management projections and other significant unobservable inputs.
- Disclosure controls were deemed ineffective because a previously identified material weakness in controls over inventory completeness, accuracy, and existence remained unremediated at September 30. Management was continuing remediation.
- The company disclosed ongoing ordinary-course legal proceedings, but management did not expect their resolution to have a material adverse effect; outcomes remain uncertain. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether tower orders convert into shipments, revenue, and cash collections, and whether the elevated customer deposits are sustainable.
- Whether Towers and Weldments can maintain improved margins and whether Gearing demand and losses recover.
- The underlying earnings excluding the favorable depreciation-estimate change, and the effect when that benefit diminishes after October 2017.
- Availability and covenant terms under the post-quarter PrivateBank facility, including whether 2016 EBITDA qualifies the company for the additional $5 million.
- Progress in remediating the inventory-control material weakness and any effect on inventory valuation or cost of sales.
- Changes in the Cicero environmental remediation estimate, potential warranty costs from discontinued Services operations, and continued compliance with New Markets Tax Credit requirements.