Business context and reporting period
Broadwind Energy, Inc. filed this unaudited Form 10-Q for the quarter ended September 30, 2013. The company supplies products and services to energy, mining and infrastructure customers, with significant exposure to U.S. wind. Wind-related sales represented 67% of revenue for the first nine months of 2013, versus 64% a year earlier.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $62.4 million | $55.0 million | $159.5 million | $165.8 million |
| Gross profit / margin | $4.6 million / 7.3% | $2.7 million / 5.0% | $9.3 million / 5.9% | $6.6 million / 4.0% |
| Operating loss | $2.4 million | $3.5 million | $10.2 million | $11.6 million |
| Net loss | $2.5 million | $3.9 million | $7.7 million | $12.0 million |
| Adjusted EBITDA (non-GAAP) | $2.6 million | $2.4 million | $6.6 million | $4.9 million |
- Q3 revenue rose 13.4%; nine-month revenue declined 3.8%. Gross margin improved in both periods, primarily on stronger tower volumes, mix and operational throughput.
- For the nine months, operating cash flow was $21.5 million, versus cash used of $20.3 million in 2012. Customer deposits contributed $17.4 million to the year-over-year cash-flow improvement. Investing cash flow was $5.9 million provided; financing cash flow was $5.1 million used.
- At September 30, cash and short-term investments totaled $23.7 million; working capital was $24.1 million. Debt and capital leases totaled $5.8 million. The AloStar revolver was undrawn, with up to $15.5 million available; the company reported covenant compliance. Current debt principal due within 12 months was $0.3 million.
- Total assets were $164.2 million and stockholders’ equity was $97.5 million. Customer deposits were $21.5 million, compared with $4.1 million at year-end 2012.
Material changes versus prior periods
- Towers and Weldments led improvement: Q3 segment revenue increased 30% and operating income rose to $6.7 million from $1.7 million. Nine-month segment revenue increased 6%, and operating income was $12.8 million versus $3.3 million.
- Gearing weakened: nine-month revenue fell 24% to $31.6 million and operating loss widened to $12.4 million from $5.4 million. Management cited production delays from consolidation and complex gearbox production, lower mining and natural-gas demand, and unfavorable mix.
- Services nine-month revenue declined 5% to $15.3 million; its operating loss was $3.2 million. Q3 revenue declined 46%, reflecting reduced wind construction and field-service activity.
- Nine-month net loss improved partly due to a $3.6 million gain on the Brandon facility sale. The sale generated about $8 million net proceeds after costs and mortgage repayment. Cash also benefited from customer advances.
Outlook, risks and unusual items
- Management said cash, available borrowing capacity and expected operating cash flows should meet liquidity needs for at least 12 months, but cautioned that weaker production, sales, collections, customer advances or new orders could create liquidity pressure.
- Tower backlog was $141 million at September 30, of which $43 million was scheduled for shipment in 2013. Management linked demand to the extension of the federal wind production tax credit for projects starting construction in 2013 and completed by the end of 2015; actual wind farm construction and installation activity remained weak through the first three quarters.
- The restructuring program targets a roughly 40% reduction in facility footprint. About $8.5 million of approximately $13.3 million projected net costs had been incurred. Management estimated annual savings of about $6 million; the planned Cicero facility disposition remained a significant step. Estimates include approximately $5.4 million of non-cash costs.
- A $1.5 million regulatory settlement charge was recorded in Q3. Brad Foote agreed to plead guilty to one Clean Water Act count and pay a $1.5 million fine in installments, subject to court approval. The company also had a $0.5 million accrued settlement liability at quarter-end.
- The SEC inquiry into Brad Foote accounting practices remained unresolved; management said it could not predict the outcome. A shareholder class-action settlement of $3.9 million received court approval and was payable by the insurer. Other legal and environmental matters could still affect results, cash flows or liquidity.
- A material weakness in internal control over financial reporting was identified in Towers and Weldments revenue recognition. Management reported no impact on results for any period, but concluded disclosure controls were ineffective at quarter-end and began remediation through contract reviews and training.
- Impairment reviews found no impairment for the tested intangible assets and operating-segment long-lived assets based on management projections. The filing notes that results could differ if those projections are not achieved. The company recorded charges and classified a Wisconsin facility and Gearing equipment as held for sale.
- Use of tax-loss carryforwards may be limited by ownership changes under Section 382. A stockholder rights plan is intended to protect those tax assets. The New Markets Tax Credit structure also carries potential tax-credit recapture exposure if compliance conditions are not met.
Important facts for investors to verify
- Whether the $141 million tower backlog converts to shipments and collections on schedule, and whether customer deposits remain sufficient to support production.
- Whether Gearing production delays and losses improve, and whether demand weakness in mining, natural gas and Services persists.
- Whether the AloStar borrowing base, covenants and available capacity remain adequate as working-capital needs change.
- Final approval and payment timing for the environmental plea agreement, and developments in the SEC inquiry and other legal matters.
- Progress on the revenue-recognition control remediation, facility restructuring, projected savings and any further asset impairments.