Broadwind Energy, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Financial amounts below are in millions of dollars unless stated otherwise. Broadwind manufactures wind towers and weldments, precision gearing, and industrial process systems. Wind energy accounted for 86% of revenue in the first half of 2017.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $43.362 | $43.380 | $99.422 | $90.137 |
| Gross profit / margin | $3.872 / 8.9% | $4.142 / 9.5% | $10.246 / 10.3% | $8.104 / 9.0% |
| Operating income (loss) | $(0.516) | $0.181 | $1.087 | $(0.043) |
| Net income (loss) | $(0.780) | $(0.474) | $5.547 | $(0.851) |
| Diluted earnings (loss) per share | $(0.05) | $(0.03) | $0.36 | $(0.06) |
Q2 revenue was essentially flat. Lower Towers and Weldments sales were offset by Red Wolf and improved Gearing sales. Gross margin contracted in the quarter, while first-half margin improved. The six-month net profit included a $5.034 tax benefit, primarily from a partial release of the deferred-tax valuation allowance following the Red Wolf acquisition; it was not solely operating-driven.
At June 30, cash and cash equivalents were $0.182, compared with $18.699 at year-end 2016; short-term investments were zero, versus $3.171. Total current assets were $45.096 and current liabilities $42.330. Debt and capital lease obligations totaled $19.081, including $13.713 drawn on the revolving facility. The $25.000 facility had $10.137 of additional borrowing availability. The filing states principal payments of $14.692 are due in the next 12 months, including the revolver balance.
For the first half, operating cash flow was a use of $14.503, compared with cash provided of $1.788 in 2016. Investing cash use was $17.515, including $16.449 cash paid for Red Wolf and $4.304 in capital expenditures. Financing provided $13.396, principally from credit-facility borrowings. Cash, cash equivalents and restricted cash declined by $18.556 to $0.182.
Material changes and business segments
- Towers and Weldments: Q2 revenue fell 10% to $34.327 as tower units sold declined 19%; operating income rose to $2.801 and margin to 8.2% on mix, productivity and cost actions. First-half revenue increased to $83.222 and operating margin improved to 10.4%.
- Gearing: Q2 revenue rose 12% to $6.071 and operating loss narrowed to $0.634. First-half revenue was $9.942, with a $2.165 operating loss. Management cited recovering oil and gas demand, improved throughput and productivity.
- Process Systems: Formed following the February 1 acquisition of Red Wolf and combination with the Abilene CNG and fabrication business. First-half revenue was $6.258 and operating loss $1.921; the loss included no CNG unit shipments, $0.257 of purchase-accounting inventory revaluation impact and $0.600 of intangible amortization.
- Orders: Q2 orders were $17.566 versus $176.225 a year earlier, which included a $137.000 multi-year tower order. Towers and Weldments orders were $1.478 versus $170.637; management also cited customers working through inventory built for Production Tax Credit qualification. Gearing orders rose to $11.644 from $5.588; Process Systems received $4.444.
Outlook, risks and unusual items
Management expects cash resources, operating cash generation and available Credit Facility capacity to meet liquidity needs for at least the next 12 months, but provides no specific revenue or earnings guidance. It cautions that weaker production, sales, customer collections or deposits could create liquidity pressure; deterioration could also threaten compliance with financial covenants and access to the facility.
Red Wolf’s purchase price was $18.983, comprising $16.449 cash and $2.534 estimated contingent consideration. Future earn-outs could range from zero to $9.900, subject to annual caps. The purchase-price allocation remains provisional; acquired goodwill was $5.218 and is not tax deductible. Red Wolf contributed $5.981 revenue and a $0.934 net loss from acquisition through June 30.
Other matters to monitor include Gearing’s continuing operating losses and management’s assessment that no long-lived-asset impairment was required at June 30; the $1.125 environmental remediation accrual for the Cicero facility; and potential recapture of $3.900 of New Markets Tax Credits if compliance requirements are not met through the third quarter of 2018. Management said it did not anticipate recapture. The company also disclosed that use of its substantial tax-loss carryforwards may be limited under IRC Section 382. Routine legal proceedings were not expected by management to have a material adverse effect, though outcomes are uncertain.
Important facts for investors to verify
- Whether tower orders, customer inventories and Production Tax Credit-related demand support future production and cash conversion; the filing does not provide a clear backlog value.
- Whether working-capital outflows, low cash balances, revolver availability and covenant compliance remain manageable.
- Whether Gearing and Process Systems can improve operating performance and whether Red Wolf integration and earn-out assumptions prove reasonable.
- How much of first-half earnings reflects the one-time tax benefit, and the practical availability of tax-loss carryforwards subject to Section 382.
- Whether the provisional acquisition accounting, Gearing asset valuations, environmental remediation costs and New Markets Tax Credit compliance assumptions change.