Business context and reporting period
Broadwind Energy, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. It supplies products and services to energy, mining and infrastructure markets through Towers and Heavy Fabrications, Gearing, and Process Systems. Wind energy represented 55% of revenue for the first nine months of 2018. Dollar amounts below are in thousands unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $31,445 | $29,595 | $98,193 | $129,017 |
| Gross profit (margin) | $1,486 (4.7%) | $1,014 (3.4%) | $3,577 (3.6%) | $11,260 (8.7%) |
| Operating loss | $(2,612) | $(1,831) | $(12,885) | $(744) |
| Net income (loss) | $(783) | $(2,207) | $(11,737) | $3,340 |
| Basic net income (loss) per share | $(0.05) | $(0.15) | $(0.76) | $0.22 |
- Q3 revenue rose 6.3% year over year; nine-month revenue fell 23.9%. The nine-month decline chiefly reflected lower tower sales and prices.
- Q3 operating loss widened despite improved gross margin, as operating expenses rose to $4,098 from $2,845. Nine-month results included a $4,993 goodwill impairment and $424 of restructuring costs.
- Q3 net loss improved in part because of a $2,249 gain from extinguishing the New Markets Tax Credit (NMTC) obligation. This nonrecurring gain also benefited nine-month results.
- Cash from continuing operations was negative $7,233 for the nine months, versus negative $6,627 in 2017. Investing cash outflow was $1,435, while financing provided $8,804. Cash at September 30 was only $142.
- At September 30, total debt and capital lease obligations were $23,216. The revolving credit facility had $18,765 outstanding and $5,811 of additional borrowing availability. Total assets were $108,034 and stockholders’ equity was $55,505.
Material changes and segment results
- Towers and Heavy Fabrications: Q3 revenue increased to $17,331 from $15,971 and operating loss narrowed to $755 from $1,473. For the nine months, revenue declined to $58,139 from $99,194, and the segment moved from $7,177 operating profit to a $1,535 loss, reflecting lower tower volumes, weaker mix and ramp-up costs.
- Gearing: Q3 revenue increased 33% to $10,056 and operating income was $346 versus a $396 loss. Nine-month revenue increased to $27,494 from $17,511; operating loss narrowed to $941 from $2,562. Management cited O&G market recovery, higher utilization and productivity.
- Process Systems: Q3 revenue declined to $4,155 from $6,054 and the segment recorded a $917 operating loss. Nine-month revenue was $12,680, but operating loss reached $7,581, including the goodwill impairment and restructuring charges. Lower natural-gas-turbine customer demand was a factor.
- Q3 orders were $19,717, up 12% from the prior-year quarter. Segment order movements were mixed; Process Systems orders fell to $4,420 from $5,345.
Outlook, risks and unusual items
- Management expected available cash, operating cash generation, the credit facility and potential securities sales to cover liquidity needs for at least 12 months, but cautioned that weaker production, customer collections, deposits or new orders could create liquidity pressure. Cash is minimal and the credit line is substantially drawn.
- The company began a restructuring plan to exit its Abilene natural-gas-compression and fabrication facility after the NMTC compliance period and consolidate activities elsewhere. It expected total costs of $721, with $424 incurred by September 30, and annual facility-cost savings of about $575.
- The company was compliant with debt covenants at September 30. A subsequent October 26, 2018 credit amendment changed covenant terms, including minimum EBITDA covenants through June 30, 2019 and the removal of specified fixed-charge-coverage and capital-expenditure covenants beginning December 31, 2018.
- The company entered an at-the-market stock sales agreement allowing up to $10,000 of common-stock sales. It issued 15,112 shares during Q3 for approximately $33 net proceeds; approximately $9,967 remained available at quarter-end. Further equity financing could dilute shareholders.
- Red Wolf goodwill was fully impaired after adverse operating results and customer and initiative developments. No further impairment was recorded in Q3, but the company continued to identify impairment-triggering conditions in Gearing and Red Wolf asset groups.
- Other risks include reliance on large customers, market and commodity volatility, potential loss or limitation of tax-loss carryforwards under Section 382, and the possibility of covenant noncompliance if operating performance weakens. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
Most important facts for investors to verify
- Whether tower production, order intake and customer demand recover enough to improve nine-month revenue and margins.
- Whether cash conversion improves: operating cash use was $7,233 and quarter-end cash was $142, despite $5,811 of reported facility availability.
- Compliance with the amended credit-facility covenants and continued availability of borrowing capacity.
- Whether Process Systems restructuring is completed on schedule, achieves the projected $575 annual savings and avoids further impairment.
- The sustainability of Gearing’s recovery and the degree of ongoing dependence on wind and large customers.
- Potential dilution from the remaining ATM authorization and the usability of the company’s tax-loss carryforwards.