Broadwind Energy, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unless otherwise indicated, amounts below are in millions of dollars. The filing covers Broadwind Energy, Inc. and subsidiaries; quarterly results are unaudited.
Business context and performance
Broadwind supplies wind-energy, industrial, mining and infrastructure customers. Wind-turbine installation-related sales accounted for 77% of first-half 2014 revenue, leaving the company exposed to wind-market conditions and policy support.
Second-quarter revenue rose 29% to $68.4 million, led by Towers and Weldments growth and improved Gearing throughput. Net new orders were $23.6 million versus $24.9 million a year earlier; backlog was $222.4 million at June 30. Towers and Weldments orders were unusually low at $0.9 million, while Gearing orders were $18.3 million. Management cautions that orders fluctuate by quarter and backlog may not convert to revenue as expected.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $68.4 | $52.9 | $127.2 | $98.5 |
| Gross profit / margin | $8.6 / 12.6% | $3.4 / 6.4% | $13.7 / 10.8% | $5.6 / 5.6% |
| Operating income (loss) | $2.1 | $(2.5) | $1.1 | $(7.0) |
| Net income (loss) | $1.9 | $0.4 | $0.8 | $(4.4) |
| Diluted EPS | $0.12 | $0.03 | $0.05 | $(0.30) |
| Adjusted EBITDA (non-GAAP) | $5.9 | $3.5 | $8.7 | $4.9 |
For the quarter, improved tower volumes and mix, plus Gearing productivity, lifted gross margin and operating results. Prior-year comparisons included a $3.0 million gain on asset sale and restructuring in other income; despite its absence, Q2 2014 net income increased. First-half revenue growth was 29%, but Services revenue fell 49% year over year, largely because a prior-year industrial project was completed. Towers and Weldments remained the principal earnings contributor; Gearing and Services continued to report operating losses.
Cash flow and liquidity: Operating activities used $10.5 million in the first half, compared with $13.8 million provided in the prior-year period. Management attributed the outflow principally to lower customer deposits as tower orders were completed and lower accounts payable, partly offset by not repeating the prior-year inventory build. Investing activities used $3.1 million; capital expenditures were $4.5 million. Cash and cash equivalents declined to $10.8 million from $24.9 million at year-end; short-term investments were $0.7 million, for combined cash and investments of $11.5 million.
At June 30, total assets were $150.9 million and stockholders’ equity was $96.6 million. Current assets were $76.7 million versus current liabilities of $47.3 million. Debt was $2.8 million and capital lease obligations were $1.7 million, for total debt and lease obligations of $4.4 million. The $20 million asset-based credit facility was undrawn at quarter-end, with up to $18.0 million available; the company reported covenant compliance. The facility terminates in August 2015.
Material changes and management commentary
- Towers and Weldments Q2 revenue increased 35% and operating margin improved to 16.2% from 13.0%, reflecting higher tower shipments, throughput and favorable tower mix. Management attributed first-half tower growth partly to recovery from the industry slowdown following expiration of the federal Production Tax Credit.
- Gearing Q2 revenue increased 19%; its operating loss narrowed to $1.8 million from $4.0 million. Services Q2 revenue declined 14% and its operating loss widened slightly to $1.3 million.
- The company reported $1.1 million of first-half operating income after a $7.0 million operating loss in the comparable period. First-half net income was $0.8 million versus a $4.4 million loss.
- Restructuring begun in 2011 is nearing completion: approximately $13.0 million of an expected $13.4 million in net costs had been incurred. The plan targets a roughly 40% reduction in facility footprint; the Cicero Avenue facility remains a significant planned disposition.
Outlook, risks and unusual items
- Management expects cash resources, available credit and operating cash generation to meet liquidity needs for at least the next 12 months, but says this depends on production, sales, collections from large customers, customer advances and new orders. Failure to meet expectations could create liquidity or covenant pressure and delay investment.
- The SEC investigation resulted in Wells notices to the company, its CFO and a former CEO concerning historical accounting matters. A Wells notice is preliminary, not a finding of wrongdoing. The company submitted a response and was negotiating a resolution; it recorded a $0.75 million estimated settlement charge, but the ultimate outcome and amount were uncertain.
- Brad Foote’s approved Clean Water Act plea agreement includes a $1.5 million fine payable in three annual installments. The EPA also advised that the Cicero Avenue facility is statutorily debarred from certain federal contracts or benefits involving work at that location; management expected minimal impact as the site was being closed and prepared for sale. The company had a $0.5 million environmental remediation accrual, with the remediation plan still subject to agency review.
- Disclosure controls and procedures were deemed ineffective at June 30 because material weaknesses remained in journal-entry controls, inventory accrual reconciliations and valuation, ethical-control communications, and revenue-recognition expertise. Remediation was incomplete, and management gave no assurance it would be successful.
- The company reported $167.2 million of net operating loss carryforwards at year-end 2013, but ownership changes have triggered Section 382 limitations; further ownership changes could constrain their use. The company’s tax valuation allowance was full.
- Management identified operating losses in Gearing and Services and continued evaluating certain assets for impairment; no impairment was indicated at June 30. The company also noted that the new revenue-recognition standard was expected to be adopted in 2017 and was still under evaluation.
Important facts for investors to verify
- Whether the $222.4 million backlog converts to orders, shipments, collections and cash flow, particularly given low Towers and Weldments bookings in Q2.
- Whether the company can reverse first-half operating cash use and sustain liquidity as customer deposits and payables fluctuate; confirm borrowing availability and covenant compliance.
- The final SEC investigation outcome, settlement amount and any related consequences for the company or individuals.
- Progress and cost to complete the restructuring, including Cicero Avenue sale and environmental remediation obligations.
- Remediation of the disclosed material weaknesses and any subsequent changes in financial reporting controls.
- Recovery prospects for Gearing and Services, continued dependence on wind installations, and any effect of wind-sector policy changes.