BROADWIND, INC. annual report, FY2012

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Broadwind Energy, Inc. — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012; the filing also reports unaudited fourth-quarter results. Unless noted otherwise, amounts are in thousands of dollars. Broadwind manufactures wind towers, precision gearing and specialty weldments, and provides wind turbine maintenance services, while expanding into oil and gas, mining and other industrial markets.

Financial performance and liquidity

  • Revenue: $210.7 million, up 13.4% from $185.9 million in 2011. Growth came from weldments and higher steel content in tower sales, industrial gearing and Services.
  • Profitability: Gross profit was $6.8 million, with a 3.2% gross margin versus 3.9% in 2011. Operating loss narrowed to $17.3 million from $20.4 million; net loss narrowed to $17.9 million from $21.9 million. Basic and diluted loss per share was $1.27 versus $1.89. Adjusted EBITDA, a non-GAAP measure, was positive $5.5 million versus negative $2.1 million.
  • Fourth quarter: Revenue was $44.9 million, gross profit $0.2 million, operating loss $5.7 million and net loss $5.9 million. Revenue and gross profit were lower than in the third quarter, when they were $55.0 million and $2.7 million, respectively.
  • Segments: Towers and Weldments revenue rose to $135.2 million, but operating income fell to $2.8 million from $5.2 million. Gearing revenue was $55.7 million and its operating loss improved to $7.6 million from $10.7 million. Services revenue grew 36% to $22.1 million and its operating loss improved to $4.2 million from $5.2 million.
  • Cash flow: Operating activities used $2.9 million, compared with $10.3 million in 2011. Investing activities used $4.7 million and financing activities used $5.2 million. Cash and cash equivalents fell to $0.5 million from $13.3 million; restricted cash was $0.3 million at year-end.
  • Debt and liquidity: Reported debt and credit-agreement balances totaled $4.3 million, excluding $3.9 million of debt classified with liabilities held for sale and capital lease obligations. The $20 million asset-based AloStar revolver had $0.955 million outstanding and $11.44 million of additional borrowing availability at year-end. Operating working capital was $21.6 million, up $7.6 million year over year. Management expected available cash, credit and operating cash generation to cover needs for at least 12 months, but cautioned that this depended on customer collections, new orders and restructuring assumptions.
  • Backlog: Approximately $123 million at year-end, with $89 million expected to be delivered in 2013. Industrial customers represented 23% of backlog, versus 16% in 2011.

Material changes and outlook

  • The revenue mix shifted: new wind installations fell to 62% of revenue from 73%; installed-base wind support rose to 13% from 7%; industrial gearing and weldments rose to 25% from 20%. The five largest customers still represented 67% of sales, although this was down from 76% in 2011; Gamesa, Siemens and GE each exceeded 10% of 2012 revenue.
  • Management attributed weaker tower profitability to lower-margin sales mix, reduced tower-section volumes and production start-up inefficiencies. Tower sections sold fell to 1,207 from 1,369. Gearing saw industrial revenue grow while wind gearing declined; Services grew with increased customer work and activity at the Abilene drivetrain facility.
  • The restructuring plan targets an approximately 40% reduction in facility footprint by the end of 2014. Estimated total costs are about $14.9 million, of which $6.0 million had been incurred by year-end; projected annual savings are approximately $6.0 million. Asset-sale proceeds of about $7.2 million are expected to help fund cash costs.
  • In February 2013, Broadwind agreed to sell the non-operational Brandon, South Dakota facility for $12.3 million, above the carrying value of related assets. Closing was anticipated in the first half of 2013, subject to customary conditions. Management also reported $78 million of follow-on tower orders announced in late 2012 and early 2013.
  • The federal production tax credit was extended in early 2013 for qualifying wind projects that began construction in 2013. Management noted uncertainty about how quickly developers would resume investment and place component orders. The filing gives no specific consolidated revenue or earnings guidance.

Risks, contingencies and unusual items

  • Covenant: Broadwind was not compliant with AloStar’s fixed-charge coverage covenant at December 31, 2012. AloStar waived the breach and waived the March 2013 test unless the Brandon facility disposition was completed before then. Further waiver or compliance was required for later quarters, beginning June 30, 2013.
  • Legal and regulatory: The U.S. Attorney’s investigation into alleged wastewater disposal at the Cicero facility identified Brad Foote as a target; the limitations period was tolled through April 18, 2013. The company reported no estimate of potential loss. An SEC inquiry into accounting practices at Brad Foote also remained unresolved. A shareholder class action had an agreement in principle for a $3.915 million settlement payable by the insurer; settlement documents were still being negotiated. Derivative suits were dismissed, though an indemnification request remained.
  • Other exposures: Wind demand remains sensitive to policy incentives, competing energy costs and project financing. Customer concentration, the ability to diversify profitably, underused manufacturing capacity, steel supply and pricing, warranty claims, and access to financing are material risks. Environmental liabilities could exceed recorded amounts; the filing reports a $0.352 million environmental reserve related to a planned Cicero facility sale.
  • Tax attributes: Broadwind reported approximately $153.6 million of federal net operating loss carryforwards, subject to expiration and Section 382 ownership-change limits. A new Section 382 rights plan was adopted in February 2013, subject to stockholder approval.
  • Unusual items: Restructuring charges and accelerated amortization of a customer-relationship intangible affected results. The company effected a 1-for-10 reverse stock split in August 2012. Its financial statements received an unqualified audit opinion; management concluded disclosure controls and internal control over financial reporting were effective.

Most important facts for investors to verify

  • Whether the Brandon facility sale closed, the net cash proceeds after debt repayment and transaction costs, and any effect on AloStar covenant compliance.
  • Actual borrowing availability under the asset-based revolver, subsequent covenant results, and whether operating cash flow and customer collections support the stated liquidity outlook.
  • Conversion of the $123 million backlog into shipments and cash, including the timing and profitability of the $78 million tower orders and the expected $89 million 2013 deliveries.
  • Whether diversification and restructuring deliver the projected approximately $6 million annual savings while improving margins, particularly in Gearing and Services.
  • Developments and potential financial exposure in the environmental investigation, SEC inquiry and shareholder settlement, including any uninsured costs or additional reserves.