Broadwind Energy, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 26, 2015. The filing reports annual results, with quarterly data including the fourth quarter. Unless noted, amounts below are U.S. dollars in millions.
Business context and reporting period
Broadwind manufactures wind-turbine towers, industrial weldments and precision gearing, and provides wind turbine maintenance and repair services. Its three reporting segments are Towers and Weldments, Gearing, and Services. Wind-related business remained dominant: 75% of 2014 sales were tied to new wind installations and a further 8% to support of the installed wind fleet. Management’s medium-term objective is to generate 50% of revenue outside the more volatile wind market.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $241.3 | $215.7 |
| Gross profit / margin | $17.5 / 7.2% | $12.3 / 5.7% |
| Operating loss | $(5.9) | $(13.2) |
| Net loss | $(6.2) | $(10.5) |
| Net loss per share, diluted | $(0.42) | $(0.73) |
| Adjusted EBITDA and margin | $8.9 / 3.7% | $10.3 / 4.8% |
| Cash provided by operating activities | $2.5 | $26.3 |
Revenue grew 11.8%, principally from Towers and Weldments, whose revenue rose 16% to $184.9 million. Segment operating income was $18.1 million, down from $19.6 million; margin fell to 9.8% from 12.3%, reflecting Abilene production inefficiencies, customer accommodation charges and warranty costs. Gearing revenue declined 2% to $42.3 million, but its operating loss narrowed to $9.4 million from $17.9 million. Services revenue fell 10% to $15.6 million and the segment recorded a $4.5 million operating loss, slightly improved from the prior year.
Consolidated operating loss improved, but the company remained unprofitable. The improvement in net loss also reflected lower restructuring costs and lower intangible amortization; it was partly offset by the absence of the prior-year Brandon facility sale gain. Adjusted EBITDA, a non-GAAP measure, declined despite higher revenue.
Fourth quarter: Revenue was $53.8 million, versus $56.4 million in Q4 2013. Gross loss was $0.1 million and operating loss was $5.2 million, compared with gross profit of $2.2 million and operating loss of $4.0 million in Q4 2013. Net loss was $5.2 million, or $0.35 per share.
At year-end, cash and cash equivalents were $12.1 million and short-term investments were $8.0 million, totaling $20.2 million, down from $26.1 million a year earlier. Operating cash flow fell to $2.5 million, mainly due to timing of customer deposits and lower accounts payable. Investing activities used $12.3 million, including purchases of short-term securities and $6.5 million of capital expenditures. Financing activities used $3.0 million, including $1.8 million for share repurchases.
Total debt and capital lease obligations were $4.1 million; the $20 million asset-based credit facility was undrawn, with $14.5 million of borrowing availability. The facility was scheduled to expire August 23, 2015, and management intended to negotiate a replacement. The company reported covenant compliance and expected cash and operating cash generation to cover needs for at least 12 months. Contractual obligations included $30.5 million of operating lease payments and $1.2 million of capital lease payments.
Material changes versus the prior comparable period
- Orders declined sharply: net new orders were $135.1 million in 2014 versus $404.4 million in 2013. Tower and Weldments orders fell to $77.6 million from $361.5 million. Year-end backlog was $202.4 million, down 35% year over year.
- Tower sales volumes increased 11%, and average selling prices rose as the company produced larger towers. Production inefficiencies in Abilene and customer accommodation charges weighed on segment profitability; the company cited $1.2 million of liquidated damages paid in Q4 2014.
- Gearing orders increased to $42.9 million from $36.4 million, including a $10.4 million increase in oil and gas sales, but production delays limited revenue. Management was monitoring the sharp late-2014 decline in crude oil prices for potential effects on customer orders.
- Operating cash flow decreased substantially from 2013. The company attributed much of the change to working-capital timing, including customer deposits and steel-related payables.
- The multi-year restructuring plan was completed, with approximately $13.7 million of total costs incurred. Year-end accounts receivable and inventory, net of accounts payable and customer deposits, represented $13.9 million of operating working capital, up $8.5 million year over year.
Outlook, risks, contingencies and unusual items
- Management expected strong wind installations related to the Production Tax Credit in 2015 and 2016, and said tower orders would consume substantially all available tower capacity in 2015. The tax credit extension ran only through the end of 2014, making longer-term demand dependent on policy and project execution.
- Wind-sector concentration, government incentives, customer concentration and order timing are significant risks. The five largest customers represented 87% of 2014 revenue; Siemens and General Electric each exceeded 10%. Backlog is not a guarantee of future shipments or revenue.
- Quality deficiencies at the Abilene tower facility were being addressed. Higher warranty costs and customer accommodation charges affected 2014 results; the warranty liability rose to $1.2 million from $0.5 million, including a $0.4 million obligation to one customer.
- The company had operating losses in each year of its history. Gearing and Services continued to report segment losses, creating risk of future impairment if management’s cash-flow projections are not achieved. Steel supply, raw-material availability, mining weakness, oil and gas conditions, and customer credit or contract changes could also affect results and liquidity.
- After year-end, the SEC settlement was finalized. The company agreed to a $1.0 million civil penalty and reimbursed $0.6 million of disgorgement and interest owed by the CFO and former CEO; the company neither admitted nor denied the SEC allegations. The filing recorded a $1.6 million 2014 regulatory settlement charge.
- Brad Foote had pleaded guilty to a Clean Water Act violation and agreed to a $1.5 million fine. The EPA terminated the facility’s statutory debarment in November 2014 following corrective actions. A separate environmental remediation accrual for the Cicero facility was $0.5 million.
- The Abilene New Markets Tax Credit transaction carries potential recapture exposure of $3.9 million if compliance conditions are breached through September 2018; management did not anticipate recapture. The company also disclosed a $0.1 million put option expected to be exercisable in 2018.
- Management said previously identified material weaknesses in financial reporting controls were remediated as of year-end. Management and KPMG reported effective internal control over financial reporting; KPMG issued an unqualified opinion on the financial statements and controls.
Important facts for investors to verify
- Whether the 2015 tower backlog converted to shipments and revenue as expected, and how the 35% backlog decline affects utilization after 2015.
- Progress on Abilene quality remediation, and whether warranty, accommodation and liquidated-damages costs moderate.
- Replacement credit-facility terms and availability before the August 2015 expiration, alongside operating cash flow and working-capital trends.
- Whether oil-price weakness reduced Gearing orders, and whether diversification outside new wind installations advanced from the 25% revenue share reported for 2014.
- Cash payments and remaining accruals related to the SEC settlement, environmental remediation, and any other legal or regulatory matters.
- Whether segment losses, especially in Gearing and Services, improve sufficiently to support carrying values and the company’s liquidity outlook.