Broadwind Energy, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Dollar amounts are in millions unless noted. Broadwind manufactures wind towers and other industrial products, precision gearing, and wind-farm services; 81% of Q1 2014 revenue was associated with new wind-turbine installations.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $58.8 | $45.5; up 29% |
| Gross profit / margin | $5.1 / 8.6% | $2.2 / 4.8% |
| Operating loss | $(1.0) | $(4.5) |
| Net loss | $(1.0), or $(0.07) per share | $(4.8), or $(0.33) per share |
| Adjusted EBITDA (non-GAAP) | $2.8 | $1.3 |
| Cash used in operating activities | $(12.1) | $(2.8) |
Revenue and profitability improved mainly on stronger Towers and Weldments performance, partly offset by weaker Gearing and Services. Towers and Weldments operating income was $5.6 million, with an 11.6% margin, versus $2.2 million and 7.2%. Gearing recorded a $3.0 million operating loss and a (33.8%) margin; Services recorded a $1.3 million operating loss and a (54.9%) margin. SG&A rose 10% to $5.9 million, while lower amortization and restructuring expense reduced total operating expenses.
Cash and short-term investments were $11.4 million at quarter-end, down from $26.1 million at December 31, 2013. Cash used in investing activities was $2.8 million, including $2.2 million of capital expenditures; financing used $0.4 million. Total debt and capital lease obligations were $4.7 million. The $20 million asset-based credit facility was undrawn; borrowing availability was $15.2 million, and the company reported covenant compliance. Current maturities of debt were $0.2 million.
Material changes and outlook
- Towers and Weldments revenue rose 62%, supported by demand and improved throughput. Weldments revenue fell 60% amid weak mining-industry demand.
- Gearing revenue declined 18%, attributed to consolidation-related production delays and a shift toward more complex gearbox production. Services revenue declined 67%, largely because a large industrial project had been completed in the prior-year quarter.
- Net new orders were $15.8 million, versus $91.9 million in Q1 2013, when orders surged after renewal of the federal Production Tax Credit. Management noted quarterly variability in tower orders; Gearing orders increased 61% sequentially from Q4 2013.
- Management expected cash on hand, available credit, and operating cash generation to cover liquidity needs for at least 12 months, while cautioning that customer production, sales, collections, advances, and new orders could affect liquidity.
- The restructuring program aims to reduce facility footprint by about 40% by the end of 2014. Approximately $12.3 million of an estimated $13.3 million in net costs had been incurred by quarter-end; about $4.8 million of incurred costs were non-cash.
Risks, contingencies, and unusual items
- Operating cash outflow increased significantly, principally due to lower customer deposits and accounts payable. Management warned that weaker-than-expected operating cash generation or covenant issues could constrain liquidity and investment.
- Disclosure controls were ineffective at March 31, 2014 because of continuing material weaknesses in journal-entry controls, inventory accrual reconciliations and valuation, integrity-related controls, and revenue-recognition expertise. Remediation was incomplete.
- Brad Foote’s Clean Water Act plea agreement was approved in February 2014 and requires a $1.5 million fine payable in three annual installments. The company also reported a $0.5 million environmental remediation accrual for the Cicero facility.
- A shareholder derivative settlement received final court approval on April 3, 2014; it provides for $0.6 million in plaintiffs’ counsel fees and expenses, payable by the insurer and/or company.
- An SEC inquiry into accounting practices at Brad Foote remained unresolved; the company said it could not predict the outcome or estimate any loss. It did not believe resolution would materially affect its consolidated financial position or results.
- Further tax benefits may be limited under IRC Section 382 following ownership changes. The company reported $167.2 million of NOL carryforwards at December 31, 2013, subject to limitations, and a full valuation allowance against net deferred tax assets.
- Management found no impairment of the evaluated intangible assets in Q1 despite operating losses. It also disclosed potential recapture of $3.9 million in NMTC tax credits if compliance conditions are breached; the company did not anticipate recapture.
Important facts for investors to verify
- Whether the Towers and Weldments demand and margins are sustainable, given the sharp year-over-year order decline.
- Whether Gearing and Services can improve production execution, revenue, and segment losses.
- Whether operating cash flow recovers and customer deposits and collections support liquidity as projected.
- Progress on control remediation, the SEC inquiry, environmental obligations, and the approved derivative settlement.
- Remaining restructuring costs and the timing and proceeds of planned facility dispositions.