Broadwind Energy, Inc. — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2013. Broadwind manufactures wind towers and industrial weldments, precision gearing, and wind-farm services. Figures below are in $thousands except per-share data. Wind-related installations accounted for 62% of first-half revenue, versus 63% a year earlier.
Financial performance and position
- Revenue: Q2 revenue was $51,363, down 8.8% year over year. First-half revenue was $97,027, down 12.4%.
- Profit and margins: Q2 gross profit was $2,584 (5.1% margin) versus $1,659 (3.0%); operating loss was $3,333 versus $4,159; net loss was $153, or $0.01 per share, versus $4,231, or $0.30 per share. First-half gross profit was $4,750 (4.9% margin), operating loss $7,829, and net loss $5,212 ($0.36 per share), compared with a $8,091 net loss ($0.58 per share). First-half adjusted EBITDA, a non-GAAP measure, was $4,028 versus $2,448.
- Segment trends: Q2 Towers and Weldments revenue rose 1% and operating income improved to $4,103 from $561. Gearing revenue fell 26%, with operating loss widening to $3,882 from $1,632. Services revenue fell 29%, and operating loss was $1,262 versus $1,139. For the first half, Gearing revenue fell 30%; Towers and Weldments fell 6%; Services rose 26%, largely due to a one-time industrial project.
- Cash flow: First-half operating cash flow was positive $13,776, compared with negative $2,366 in 2012, mainly reflecting increased customer deposits. Investing cash flow was positive $9,118, including proceeds from asset disposals; financing cash flow was negative $6,149. Cash increased to $17,261 from $516 at year-end.
- Liquidity and debt: Current assets were $83,277 and current liabilities $58,153 (current ratio approximately 1.43). The company had $606 in short-term investments and $331 in restricted cash. Term loans and notes payable totaled $3,123, plus capital lease obligations of $1,710; the AloStar revolving facility was undrawn, with $13,318 available under its borrowing base. The company reported compliance with facility covenants.
Material changes, outlook and risks
- Q2 and first-half net losses improved partly because the April sale of the idle Brandon tower facility produced a reported $3,586 gain; the sale generated approximately $8,000 net proceeds after costs and mortgage repayment. The gain is a significant non-recurring contributor to the comparison.
- Management cited weak first-half wind-farm construction and installation activity, softer mining and natural-gas demand, and Gearing production delays associated with plant consolidation and a shift to more complex gearbox production. Federal production tax-credit extension for projects beginning construction in 2013 supported new tower orders. At June 30, tower backlog was $119 million, of which $88 million was scheduled for shipment during 2013.
- The restructuring plan has incurred approximately $6,800 of net costs to date, with approximately $12,700 projected in total. Management expects about $6,000 in annual savings and continued facility-footprint reductions; disposition of the Cicero Avenue facility remains a significant planned step. These are estimates, not assurances.
- Management said cash, borrowing availability, operating cash flows and asset sales were expected to meet liquidity needs for at least 12 months, but warned that production, sales, collections, covenant compliance or credit availability could be weaker than expected.
- Impairment reviews were prompted by continuing losses. The company recorded a $288 charge related to Clintonville facility assets and a $345 charge related to Gearing equipment, which were classified as held for sale. No impairment was indicated for the tested intangible assets; their recoverability depends on forecasts.
- Controls: Management identified a material weakness in revenue-recognition controls in Towers and Weldments and concluded disclosure controls were ineffective at quarter-end. It said corrective process and contract changes were underway; it reported no effect on results for any period.
- Contingencies: The SEC investigation into Brad Foote accounting practices continued, including employee testimony; the company could not predict its outcome. Brad Foote was a target of a federal environmental investigation concerning wastewater practices, with the tolling period extended to September 27, 2013; potential fines or sanctions were not estimable. A shareholder class-action settlement received final court approval, with the $3,915 settlement payable by the insurer. The company also settled Tontine-related indemnification claims for $495.
- The company reported $153,629 of tax-loss carryforwards at December 31, 2012, but Section 382 ownership-change limits may restrict their use. A shareholder rights plan was adopted to help preserve these tax assets. The New Markets Tax Credit arrangement carries potential $3,900 credit recapture exposure if compliance requirements are breached; management did not expect recapture.
Important facts for investors to verify
- Whether the $119 million tower backlog converts to revenue and whether the $88 million scheduled for 2013 ships and is collected as expected.
- Whether Gearing production delays and weak industrial demand improve, and whether Services can sustain revenue without one-time project work.
- Underlying earnings and cash generation excluding the Brandon facility gain, and the timing and cash cost of remaining restructuring actions.
- Progress in remediating the revenue-recognition material weakness and any subsequent control or reporting developments.
- Updates on the SEC and environmental investigations, potential exposure, and the company’s ability to meet liquidity needs and debt covenants.