Broadwind Energy, Inc. — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015; comparison with the same 2014 periods. Unless stated otherwise, dollar amounts are in millions. The filing presents the Services segment as discontinued operations following the September 2015 decision to sell or exit it; prior periods were recast accordingly.
Business context and performance
Broadwind makes wind towers, specialty weldments, and precision gears. Wind-related sales remained important: 80% of revenue for the first nine months of 2015 came from new wind turbine installations. Continuing reportable segments are Towers and Weldments and Gearing.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $49.8 | $55.3 | $161.6 | $176.6 |
| Gross profit / margin | $2.8 / 5.7% | $4.0 / 7.3% | $14.1 / 8.7% | $19.2 / 10.9% |
| Operating income (loss) | $(2.1) | $(1.1) | $(0.9) | $2.7 |
| Continuing-operations income (loss) | $(2.4) | $(1.1) | $(1.5) | $2.3 |
| Discontinued-operations loss | $(5.2) | $(0.7) | $(9.5) | $(3.3) |
| Net income (loss) | $(7.6) | $(1.8) | $(11.0) | $(1.0) |
| Basic and diluted loss per share | $(0.52) | $(0.12) | $(0.75) | $(0.07) |
Q3 adjusted EBITDA, a non-GAAP measure, was $1.4 million versus $2.4 million; nine-month adjusted EBITDA was $7.7 million versus $13.0 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $4.7 million at September 30, down from $12.1 million at December 31, 2014. Short-term investments were nil, versus $8.0 million at year-end.
- For the first nine months, continuing-operations operating cash flow was $(14.7) million, investing cash flow was $6.9 million, and financing cash flow was $4.3 million. Discontinued operations used a further $3.9 million of net cash.
- Total debt was $7.5 million and capital lease obligations were $0.6 million, for combined debt and lease obligations of $8.1 million. The company reported $4.9 million of debt principal due within 12 months. The $5.0 million term loan was funded in June; its August 2016 maturity includes an approximately $4.2 million balloon payment.
- No revolving-credit borrowings were outstanding; availability was up to $12.5 million as of September 30. The revolving facility and term loan mature August 31, 2016.
- Current assets were $64.4 million and current liabilities $39.6 million. Customer deposits fell $15.8 million from year-end as the company fulfilled orders previously supported by deposits. Net inventory was $34.1 million, up $2.9 million from year-end but down $5.3 million from June 30.
Material changes and management commentary
- Q3 revenue declined 10% year over year. Gearing revenue fell about 30%, mainly as oil and gas and mining sales dropped 66%; wind-related Gearing sales partly offset the decline. Towers and Weldments revenue was lower largely because the prior-year quarter had a richer mix of larger, more complex towers.
- Q3 gross margin fell to 5.7%. Management cited lower-margin tower mix, production and supplier-quality problems at the Manitowoc tower plant, and lower Gearing volumes. For nine months, Towers and Weldments operating margin declined to 7.6% from 12.0%; Gearing continued to report operating losses.
- Q3 orders were $12.2 million versus $60.8 million a year earlier, attributed largely to tower-order timing. Nine-month orders were $88.8 million versus $92.1 million. The Towers and Weldments segment’s nine-month orders increased, while Gearing orders declined.
- The company recorded a $4.45 million impairment on Services assets held for sale, included in the discontinued-operations loss. It also recorded an $874,000 environmental remediation charge in restructuring expense; the remediation accrual was $1.31 million at quarter-end.
- Management said it had idled two facilities, reduced headcount and eliminated positions totaling approximately 9% of the workforce, consolidated industrial weldment production in Abilene, Texas, and reduced capital and discretionary spending.
Outlook, risks and contingencies
- The Board authorized a sale of substantially all Services assets and a wind-down of any remaining business. Negotiations with potential buyers were ongoing; management expected disposition and wind-down by year-end 2015 and estimated additional one-time termination costs of $0.2–$0.5 million. Completion and proceeds are uncertain.
- Management expected cash, operating cash generation and available credit to meet obligations for at least 12 months, while cautioning that this depends on production, sales, collections, customer deposits and new orders. The company has a history of annual operating losses.
- Broadwind was not in compliance with the Adjusted EBITDA covenant at September 30. An October 16, 2015 amendment waived covenant compliance as of that date, revised the Adjusted EBITDA covenant prospectively, and deferred recalculation of the fixed-charge coverage covenant until periods beginning with the quarter ending March 31, 2016. Renewal or alternative financing was under consideration ahead of the August 2016 maturities.
- Management cited weak oil and gas and mining markets, competition in domestic wind towers, and uncertainty about extension of the federal Production Tax Credit beyond 2016. The filing also identifies risks around Services divestiture, liquidity and covenant compliance, environmental remediation, and possible limits on use of tax-loss carryforwards under IRC Section 382.
- The company had a $1.31 million environmental reserve for remediation at its Cicero Avenue facility. It also disclosed potential recapture of $3.9 million in New Markets Tax Credits if specified compliance requirements are not met; management did not expect recapture. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, but outcomes remain uncertain.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported during the period.
Most important facts for investors to verify
- Progress, timing, proceeds and final costs of the Services segment sale or exit, including whether the expected year-end 2015 wind-down occurred.
- Subsequent covenant compliance, the effect of the October waiver and amendment, and refinancing or renewal plans for the facilities maturing in August 2016.
- Cash generation, customer collections and deposits, borrowing-base availability, and the large term-loan balloon payment.
- Whether tower production issues and weaker Gearing demand improve, and whether order trends translate into revenue and acceptable margins.
- Updated estimates for Cicero environmental remediation and any potential tax-credit recapture or tax-loss carryforward limitations.