Broadwind Energy, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2015. Broadwind manufactures wind-turbine towers and other weldments, and precision gearing. The Services segment is reported as discontinued operations following the 2015 decision to exit it. Amounts below are in millions unless noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $46.757 | $49.229 | Down 5.0% |
| Gross profit / margin | $3.962 / 8.5% | $2.745 / 5.6% | Margin up 2.9 percentage points |
| Operating loss | $(0.224) | $(2.364) | Improved $2.140 |
| Continuing-operations loss | $(0.358) | $(2.523) | Improved $2.165 |
| Discontinued-operations loss | $(0.019) | $(2.492) | Improved $2.473 |
| Net loss / diluted loss per share | $(0.377) / $(0.03) | $(5.015) / $(0.34) | Improved $4.638 / $0.31 per share |
| Cash from continuing operating activities | $3.061 | $(19.872) | Improved $22.933 |
Segments: Towers and Weldments revenue was $42.015 million and operating income $3.241 million, versus $41.028 million and $1.135 million. Its operating margin rose to 7.7% from 2.8%. Gearing revenue was approximately $4.7 million (MD&A reports $4.760 million; segment table reports $4.742 million of external revenue) and operating loss was $1.202 million, nearly unchanged from $1.211 million; its margin worsened to (25.3%) from (14.1%).
Financial position and liquidity
- At March 31, cash and cash equivalents were $9.711 million and short-term investments $5.696 million, totaling $15.407 million, up $2.792 million from year-end. Current assets were $51.002 million and current liabilities $35.192 million.
- Total debt and capital lease obligations were $5.520 million. This included $5.220 million of debt and $0.300 million of current capital lease obligations; $2.920 million of principal payments were due within 12 months.
- No borrowings were outstanding under the revolving credit facility; up to $7.0 million was available. The facility was reduced to $10.0 million and extended to February 28, 2017. The $2.620 million term loan had a balloon payment of approximately $2.323 million due in August 2016.
- Working-capital movements supported operating cash generation: inventory fell $5.348 million and customer deposits fell $2.163 million during the quarter. Capital expenditures were $0.950 million.
Material changes, outlook, and risks
- Revenue declined mainly because Gearing sales to oil and gas and mining customers fell 45%; Towers and Weldments revenue increased modestly. Management cited stronger wind-market conditions following the late-2015 extension of the federal Production Tax Credit, but continued weakness in oil and gas and mining demand. New orders were approximately $39.0 million, versus $21.7 million a year earlier, primarily reflecting timing of tower orders. No specific full-year revenue or earnings guidance was provided.
- Management attributed improved tower profitability to higher unit sales, better production flow and plant efficiency. Lower steel prices reduced average tower prices because material costs are generally passed through to customers. Wind-related sales represented 88% of Q1 revenue.
- A change in the estimated salvage values of selected Gearing machinery reduced Q1 depreciation by $0.659 million. Management estimated a favorable effect on 2016 continuing-operations income and net income of $2.636 million, or $0.18 per share; a similar depreciation effect was expected through October 2017. This is an estimate change, not an improvement in cash generation.
- Management said cash, operating cash flow and available credit should meet liquidity needs for at least 12 months, but cautioned that weaker production, sales or customer collections, reduced deposits, covenant noncompliance or unavailable refinancing could create liquidity pressure. The company was considering renewal and other financing alternatives.
- The lender waived a December 31, 2015 Adjusted EBITDA covenant breach and amended covenant terms. Broadwind reported compliance with the Adjusted EBITDA covenant and $3.5 million liquidity requirement at March 31, 2016; the fixed-charge coverage covenant was to be recalculated for periods beginning with Q2 2016.
- Disclosure controls were deemed ineffective because of an unremediated material weakness in controls over inventory completeness, accuracy and existence. Management was implementing remediation, but it was not complete at quarter-end.
- Other exposures include a $1.300 million environmental remediation accrual for the Cicero facility, $0.379 million reserved for liquidated damages, and potential recapture of $3.9 million in New Markets Tax Credits if program requirements are not met. The filing states management does not anticipate tax-credit recapture. The company also disclosed ongoing legal proceedings, with outcomes uncertain.
- Brad Foote’s operating losses triggered long-lived-asset impairment testing; management recorded no impairment from the Q1 assessment. The Services exit was substantially completed in December 2015; remaining assets and liabilities were classified as held for sale.
Most important facts for investors to verify
- Whether tower orders convert to shipments and collections, and whether Gearing demand recovers from oil and gas and mining markets.
- Refinancing or renewal terms for the term loan and revolving facility, including the August 2016 balloon payment and future covenant compliance.
- Progress in remediating inventory-control weaknesses and whether subsequent testing identifies further errors.
- Actual earnings impact of the machinery salvage-value estimate and whether Gearing asset values remain supportable.
- Resolution and cash costs of the Cicero environmental remediation, remaining Services asset sales, and compliance with New Markets Tax Credit conditions.