Broadwind Energy, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial amounts are in thousands of dollars, except per-share data. Broadwind makes wind-energy components and provides gearing, fabrication and wind-farm services, while diversifying into industrial markets.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $55,045 | $47,899 | $165,799 | $130,761 |
| Gross profit / margin | $2,715 / 5.0% | $712 / 1.5% | $6,606 / 4.0% | $6,223 / 4.7% |
| Operating loss | $(3,527) | $(6,244) | $(11,627) | $(14,528) |
| Net loss | $(3,938) | $(6,586) | $(12,029) | $(16,224) |
| Net loss per diluted share | $(0.28) | $(0.60) | $(0.86) | $(1.50) |
- Q3 revenue rose 14.9%; nine-month revenue rose 26.8%. Q3 gross margin improved, but nine-month gross margin fell year over year.
- For the nine months, operating cash outflow was $20,289, versus $11,492 in 2011; investing cash outflow was $2,273 and financing cash inflow was $11,943. Cash decreased $10,619 to $2,721; restricted cash was $330.
- At September 30, total assets were $161,884 and stockholders’ equity was $108,254. Total reported debt was $20,715, including $17,585 drawn on the AloStar line. The company reported $2,415 of additional availability under the facility and compliance with its covenants.
- Q3 Adjusted EBITDA, a non-GAAP measure, was $2,412, compared with $(1,516) a year earlier; nine-month Adjusted EBITDA was $4,859, compared with $(1,157).
Material changes and business trends
- Q3 Towers and Weldments revenue increased 26%, and the segment moved from a small operating loss to $1,740 operating income. Higher-margin tower mix, weldments growth and better utilization helped; nine-month segment operating income nevertheless declined to $3,306 from $5,159.
- Gearing revenue declined 11% in Q3 as large customers reduced orders amid softer natural-gas and mining markets. Nine-month Gearing revenue increased 7%, but the segment remained loss-making, with a $5,390 operating loss.
- Services revenue increased 48% for the nine months, while its operating loss narrowed to $3,331. Q3 Services loss widened, partly due to a one-time $233 legal settlement expense and higher non-cash charges.
- Management attributed lower SG&A to cost controls, reduced professional fees, compensation and bad-debt expense. Higher interest expense and accelerated amortization of a customer-relationship intangible partly offset improvements.
- Wind-related new-installation sales represented 64% of revenue for the first nine months, down from 73% in the comparable 2011 period. The filing also reports a 1-for-10 reverse stock split effective August 22, 2012.
Outlook, risks and unusual items
- Management expects the U.S. wind market to weaken considerably in 2013 as the Production Tax Credit approaches scheduled expiration; timing, structure and duration of any replacement legislation are uncertain. Towers were scheduled for lower production in Q4 2012. After quarter-end, the company announced approximately $37 million of tower orders for production beginning in late 2012 and extending into 2013.
- The company expects liquidity from cash, AloStar availability and operating cash generation to meet needs for at least 12 months, but cautions that weaker production, sales, collections or new orders could cause liquidity pressure. The borrowing base depends on eligible receivables and inventory; cash receipts are automatically applied to the line, so management expects low cash balances while it is drawn.
- Restructuring is intended to reduce the facility footprint by about 40% by the end of 2014. Costs incurred were $3,708; total projected costs are about $13,468, including $5,416 in capital expenditures. Management anticipates approximately $5,500 in annual savings and expects asset-sale proceeds of about $7,200 to fund cash costs. The Brandon, South Dakota facility remains held for sale, with a sale expected within 12 months despite prior delays.
- Operating losses triggered impairment reviews; no impairment was recorded in Q3. Management’s valuations depend on future cash-flow projections, and failure to meet projections could affect asset values. A portion of customer-relationship intangibles is being amortized over one year rather than five.
- Contingencies include a shareholder class action with remaining claims against the company and a former CEO, an SEC inquiry into accounting practices at Brad Foote, and a federal environmental investigation involving alleged wastewater disposal. Outcomes and potential losses are not estimable in the filing. The company also accrued $213 for potential customer liquidated damages and identified $352 of environmental remediation liability for a Cicero facility sale.
- A New Markets Tax Credit arrangement could expose the company to recapture of $3,900 in tax credits if compliance conditions are breached during the seven-year period; management does not anticipate recapture.
Important facts for investors to verify
- Availability under AloStar’s borrowing base, covenant compliance, and cash generation relative to the $20,289 nine-month operating cash outflow.
- Whether the announced $37 million tower orders convert to timely production, shipment, collection and adequate margins amid the expected 2013 wind-market slowdown.
- Progress, cash funding and realized savings from restructuring, including the timing and proceeds of the Brandon facility sale.
- Developments and potential financial effects of the shareholder litigation, SEC inquiry, environmental investigation and other contingencies.
- Whether segment performance and forecasts support carrying values for gearing, services and other long-lived assets without future impairment.