Broadwind Energy, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed July 30, 2015. Unless noted, amounts are in millions of dollars. Broadwind supplies products and services to energy, mining and infrastructure markets, with wind energy its largest market; 80% of first-half revenue came from new wind installations.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $65.225 | $68.381 | $116.276 | $127.181 |
| Gross profit / margin | $7.234 / 11.1% | $8.631 / 12.6% | $7.973 / 6.9% | $13.724 / 10.8% |
| Operating income (loss) | $1.861 | $2.101 | $(3.117) | $1.106 |
| Net income (loss) | $1.615 | $1.860 | $(3.400) | $0.817 |
| Diluted earnings (loss) per share | $0.11 | $0.12 | $(0.23) | $0.05 |
At June 30, cash and cash equivalents were $0.509 million, versus $12.149 million at year-end 2014; short-term investments were zero, versus $8.024 million. Net cash used in operating activities in the first half was $23.131 million, compared with $10.546 million in 2014. Cash use reflected an $8.231 million inventory increase and a $14.021 million reduction in customer deposits.
Total debt and capital lease obligations were $8.944 million. Debt included $0.527 million drawn on the revolving facility and a $5.0 million term loan. The company reported $11.973 million of remaining borrowing availability and compliance with loan covenants. Current assets were $67.696 million and current liabilities $36.444 million; total assets were $132.061 million and stockholders’ equity $85.587 million.
Changes versus the prior comparable period
- Q2 revenue declined 4.6%; first-half revenue declined 8.6%. First-half net results shifted from $0.817 million income to a $3.400 million loss.
- Q2 gross margin fell to 11.1% from 12.6%; first-half gross margin fell to 6.9% from 10.8%. The first-half deterioration reflected tower-production disruption and weaker weldments results.
- Q2 segment trends diverged: Towers and Weldments revenue rose $2.140 million, while Gearing revenue fell $4.458 million and Services revenue fell $0.796 million. Gearing and Services reported Q2 operating losses of $1.524 million and $1.764 million, respectively.
- Q2 net income was lower despite reduced operating expenses, partly because gross profit declined. The prior-year quarter included a $0.750 million regulatory settlement charge that did not recur.
- First-half operating cash use more than doubled year over year, while cash and investments fell by $19.664 million from year-end.
Outlook, commentary and risks
- Management said the U.S. wind market remained strong but competition for wind towers was increasing. It reported $60.0 million of net new Q2 orders, more than double the prior-year quarter, largely due to order timing; first-half orders were also affected by timing of 2016 tower production orders.
- Oil and gas and mining demand weakened, particularly affecting Gearing and industrial weldments. Management cited low oil prices as a factor. Services faced weaker gearbox refurbishment and turbine blade repair demand.
- Abilene tower production had returned near its targeted rate since March. Higher steel and tower inventories reflected earlier production problems and West Coast port delays; management expected inventory balancing to continue through the rest of 2015.
- The company idled facilities, reduced headcount and eliminated positions totaling approximately 8% of its workforce, consolidated service and weldment activities, and cut discretionary and capital spending. On July 23, 2015, the Board authorized management to evaluate strategic alternatives for the Services segment.
- No specific earnings or revenue guidance was provided. Management expected available cash, operating cash generation and credit availability to cover needs for at least 12 months, but cautioned that weaker production, sales, collections or customer deposits could create liquidity pressure or threaten covenant compliance.
- The revolving facility and term loan mature August 31, 2016. The term loan amortizes at about $60,000 monthly and has an approximately $4.220 million balloon payment due in August 2016.
- Other exposures include $0.510 million accrued for environmental remediation, ordinary-course legal claims, and potential recapture of up to $3.9 million of New Markets Tax Credits if compliance requirements are breached through September 2018. Management did not anticipate a tax-credit recapture.
- Brad Foote and Services had operating losses; management’s impairment assessments identified no impairment at June 30, 2015. The company also reported substantial tax loss carryforwards, but their use may be limited by ownership changes under Section 382.
Most important facts for investors to verify
- Whether cash generation, inventory conversion and customer collections improve, given $0.509 million of cash and substantial first-half operating cash use.
- Whether the company maintains borrowing availability and complies with monthly financial covenants under its secured credit arrangements.
- Whether tower production and inventory normalize, and whether tower orders translate into shipments and collected cash.
- Whether weak Gearing and Services demand persists, and what strategic alternatives are pursued for Services.
- Whether the August 2016 debt maturities, including the term-loan balloon, are refinanced or repaid, and whether environmental or tax-credit contingencies change.