Broadwind Energy, Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2018; it is an annual report, not a quarterly filing. Broadwind manufactures wind towers, precision gearing, heavy fabrications and industrial systems, primarily for U.S. energy, mining and infrastructure customers. Its reportable segments are Towers and Heavy Fabrications, Gearing, and Process Systems. Amounts below are in thousands of dollars unless stated otherwise.
Financial results and key metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $125,380 | $146,785 |
| Gross profit / margin | $3,065 / 2.4% | $8,159 / 5.6% |
| Operating loss | $(25,066) | $(7,433) |
| Net loss | $(24,146) | $(3,641) |
| Net loss per share | $(1.56) | $(0.24) |
| Operating cash flow | $2,045 provided | $9,350 used |
| Cash and cash equivalents, year-end | $1,177 | $78 |
- Revenue fell 14.6%. Lower tower sales were partly offset by stronger Gearing and Process Systems revenue.
- Cash used in investing activities was $1,648, versus $19,894 in 2017; capital expenditures were $2,324. Financing activities provided $807, versus $10,660 in 2017.
- At year-end, debt and capital lease obligations totaled $14,876. The company reported $11,000 drawn on its credit facility and $10,319 of borrowing capacity available under the facility then in place. Customer deposits were $23,507, up from $9,791.
- Operating working capital was $5,000, or 5% of annualized trailing-quarter sales, down from $11,376, or 16%, at year-end 2017; management attributed the reduction primarily to higher customer deposits.
Material changes versus FY2017
- Towers and Heavy Fabrications revenue declined to $68,815 from $103,389; the segment moved from $2,667 operating income to a $4,346 operating loss. Tower sections sold fell 34%, and lower utilization and product mix weighed on results.
- Gearing revenue increased 48% to $38,376 from $26,006. The segment improved from a $2,632 operating loss to $51 operating income, reflecting improved utilization and efficiency.
- Process Systems revenue increased to $18,319 from $17,390, but its operating loss widened to $16,442 from $2,269, primarily due to impairments and restructuring costs.
- Wind-linked sales fell to 49% of revenue from 72%; industrial sales rose to 51% from 28%. The five largest customers accounted for 78% of sales, down from 85%. Siemens Gamesa Renewable Energy and Gardner Denver each represented more than 10% of FY2018 revenue.
- Backlog declined 30% to approximately $96,456 from $138,198. Management cited lower tower backlog, partly offset by higher gearing and heavy fabrication orders.
Outlook, risks and unusual items
- The company recorded $12,585 of impairment charges in 2018: $4,993 for Red Wolf goodwill in the second quarter and $7,592 for a customer-relationship intangible asset in the fourth quarter. Red Wolf performance, a major customer’s reduced performance and delayed initiatives contributed to the impairment reviews.
- A $2,249 gain was recorded on extinguishment of the New Markets Tax Credit loan. The company also incurred $668 of restructuring costs after exiting a leased Abilene facility and the natural-gas-compression-unit market. Management expects approximately $575 of annual facility-cost savings and said remaining restructuring costs should be immaterial.
- Steel tariffs and steel availability affected costs, tower competitiveness and production timing. Other material risks include wind-market dependence on policy incentives, concentrated customers, possible order changes or cancellations, competition, capacity utilization, and the ability to pass through input-cost increases.
- Management stated that available cash, operating cash flow, borrowing capacity and potential financing sources were expected to meet cash requirements for at least 12 months, while cautioning that cash generation and covenant compliance were not assured. The company had received covenant waivers and amendments during 2018.
- After year-end, on February 25, 2019, the company amended and restated its loan agreement, expanding the secured revolving facility to $35,000 and extending its term to February 25, 2022. The agreement includes minimum EBITDA covenants through September 30, 2019 and a fixed-charge-coverage covenant thereafter. Borrowings bear interest at LIBOR plus 5.50% or the base rate plus 3.50%, subject to possible pricing-grid adjustments.
- The company reported that its disclosure controls and internal control over financial reporting were effective as of December 31, 2018. Its auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the expanded credit facility’s borrowing base, interest costs and covenants provide adequate liquidity, and whether the company meets required EBITDA and subsequent fixed-charge-coverage tests.
- Whether customer deposits convert into scheduled production, shipments, collections and revenue, particularly given the lower backlog and significant customer concentration.
- Whether tower utilization and margins recover, and whether growth in gearing, mining and other industrial markets can offset weaker tower demand.
- Whether Red Wolf’s operating performance and customer relationships stabilize after the impairments, and whether anticipated restructuring savings are realized.
- Whether steel supply, tariffs, pricing and competition continue to affect costs, delivery schedules and margins.