Broadwind Energy, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; balance-sheet comparisons are to December 31, 2011. Financial amounts are in thousands of dollars unless noted. The filing identifies the registrant as Broadwind Energy, Inc.
Business context and financial performance
Broadwind supplies products and services to energy, mining and infrastructure customers, with significant exposure to U.S. wind markets. Its reportable segments are Towers and Weldments, Gearing, and Services. The company is pursuing diversification into oil and gas, mining and other industrial markets.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Revenue | $54,443 | $43,530 |
| Gross profit / margin | $2,232 / 4.1% | $2,579 / 5.9% |
| Operating loss | $(3,941) | $(3,973) |
| Loss from continuing operations | $(3,860) | $(4,053) |
| Net loss | $(3,860) | $(5,180) |
| Basic and diluted loss per share | $(0.03) | $(0.05) |
| Adjusted EBITDA (non-GAAP) | $1,392 | $225 |
| Cash from continuing operations | $(1,399) | $9,171 |
Revenue rose 25.1%, with increases in all segments. Gross profit fell 13.5% and gross margin declined 1.8 percentage points, mainly because the quarter lacked higher-margin fabrication-only tower work and included restructuring costs. Lower SG&A and improved other income helped reduce the operating and net losses. Q1 2011 net loss included a $1,127 discontinued-operations loss from the logistics business, sold in March 2011.
Segments and material changes
- Towers and Weldments: Revenue increased 25% to $35,169, while operating income fell to $1,005 from $2,420 and margin fell to 2.9% from 8.6%. Tower-section volume declined 19%; megawatt capacity sold declined 28%. The prior-year quarter included fabrication-only sections representing 43% of volume; none were sold in Q1 2012.
- Gearing: Revenue increased 18% to $16,032; operating loss improved to $1,121 from $2,397. Industrial sales rose 73%, while wind gearing sales fell 39%; industrial customers accounted for 75% of segment revenue.
- Services: Revenue increased 88% to $3,442, but operating loss widened to $1,623 from $1,354. Increased contribution margins were outweighed by compensation and depreciation costs.
- Operating cash flow swung to an outflow, primarily due to a $9,007 inventory build and the absence of the prior-year increase in customer deposits. Investing cash outflow decreased to $112 from $1,611, mainly because of lower capital spending.
Financial position and liquidity
- Cash and cash equivalents were $10,857 at March 31, down from $13,340 at year-end; restricted cash was $404, for total cash assets of $11,261. Cash declined $2,483 during the quarter.
- Total assets were $172,806; current assets were $78,228 and current liabilities $51,861. Inventory rose to $32,368 from $23,355, while accounts payable rose to $24,945 from $17,358.
- Debt listed as term loans and notes payable was $6,788, including $2,190 current maturities. Capital lease obligations totaled $1,751. A further $4,583 related to the Brandon facility is classified in liabilities held for sale. At quarter-end, $2,917 of receivables financing was outstanding under the Wells Fargo facility, with up to $7,083 additionally available subject to its cash-balance condition.
- Management stated that cash on hand and expected operating cash flows should meet liquidity needs for at least 12 months, and reported compliance with debt covenants. The company must make $2,190 of principal payments during the next 12 months and had $390 of Brandon-facility purchase commitments.
Outlook, restructuring and risks
No specific revenue or earnings guidance was provided. Management expected wind-industry conditions to remain strong in Q2 and Q3 2012, then weaken significantly in late 2012 and 2013 as the Production Tax Credit was scheduled to expire. It cited uncertainty around wind demand, natural-gas oversupply and low prices, customer orders and collections, and the availability and terms of additional financing.
The restructuring plan targets reducing the facility footprint by at least 30%—about 400,000 square feet—by June 2013. The company projected total plan costs of $12,800, including approximately $4,900 in capital expenditures and $7,900 in expenses, and expected annual savings of about $5,500. It anticipated funding cash costs substantially with approximately $7,500 in net asset-sale proceeds. The Brandon facility was held for sale; management expected a sale within 12 months.
In Q1, the company recorded $464 of restructuring expense in the income statement. It tested certain intangible and property assets after identifying impairment indicators and reported no additional impairment. Management cautioned that if restructuring assumptions, major-customer collections or new orders do not meet expectations, liquidity could be affected; additional financing may not be available on acceptable terms.
Contingencies and other notable matters
- A shareholder class action remained partly outstanding after an April 19, 2012 court ruling dismissed claims against most named defendants and dismissed certain claims, but denied dismissal of some claims against the company and former CEO J. Cameron Drecoll. The company said it intended to defend the remaining claims; it could not estimate a loss.
- The SEC was investigating accounting practices at Brad Foote, including revenue recognition, cost accounting and asset valuations. The company could not predict the outcome.
- A federal environmental investigation concerned alleged wastewater disposal at Brad Foote’s Cicero facility. The company reported completing its subpoena response and instituting corrective measures; no fines or penalties had been suggested, but the outcome and possible liability were uncertain.
- The New Markets Tax Credit arrangement could expose the company to recapture of $3,900 in tax credits if specified compliance conditions are not met during the seven-year period. Management did not anticipate recapture.
- The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether wind demand and the expected expiration or renewal of the Production Tax Credit materially affect orders, utilization and margins.
- Execution of the facility-reduction plan, timing and proceeds from asset sales, and realization of projected annual savings.
- Cash conversion, inventory levels, collections from large customers, use of receivables financing and access to liquidity.
- Debt and covenant compliance, scheduled principal payments, and the timing and outcome of the Brandon facility sale.
- Developments in the shareholder litigation, SEC inquiry and environmental investigation, including any financial exposure.
- Whether Gearing’s industrial growth can offset weaker wind activity and whether Services can reduce its operating losses.