BROADWIND, INC. annual report, FY2013

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Broadwind Energy, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. Dollar amounts are in thousands unless noted. This annual filing includes fourth-quarter results; it is not a standalone quarterly report.

Business context and reporting period

Broadwind manufactures wind towers, industrial weldments and precision gearing, and provides wind turbine maintenance and repair services. In 2013, 80% of sales were linked to wind energy. The U.S. wind market experienced a sharp slowdown: installations fell from 13,131 MW in 2012 to 1,084 MW in 2013 after the Production Tax Credit expired and was later reinstated. Management reported renewed project activity and expected installations to rise significantly beginning in 2014.

Financial results and liquidity

  • Revenue: $215.710 million, up 2.4% from $210.707 million in 2012. Towers and Weldments revenue rose 18% to $159.478 million; Gearing revenue fell 22% to $43.150 million, and Services revenue fell 22% to $17.243 million.
  • Profitability: Gross profit was $12.345 million, a 5.7% margin versus 3.2% in 2012. Operating loss improved to $13.210 million from $17.297 million. Net loss was $10.499 million, or $0.73 per share, compared with $17.907 million, or $1.27 per share. Adjusted EBITDA, a non-GAAP measure, was $10.346 million (4.8% margin), versus $5.511 million (2.6%) in 2012.
  • Cash flow: Operating activities provided $26.254 million, compared with $2.882 million used in 2012. Investing activities provided $5.654 million, mainly reflecting the Brandon facility sale; financing activities used $7.488 million.
  • Cash and working capital: Year-end cash and cash equivalents were $24.936 million and short-term investments were $1.143 million; restricted cash was $83 thousand. Operating working capital was $5.348 million, down $16.239 million year over year, primarily due to customer advances and lower past-due receivables.
  • Debt and liquidity: Term loans and notes totaled $2.956 million; capital lease obligations had $2.126 million of principal outstanding. The $20 million asset-based revolver was undrawn at year-end, with reported borrowing availability of $15.807 million. Broadwind reported covenant compliance and said current resources and expected 2014 operating cash flows should meet liquidity needs for at least 12 months, while cautioning that this depends on customer orders, collections and other assumptions.
  • Balance sheet: Total assets were $163.694 million, versus $142.910 million in 2012; stockholders’ equity was $95.330 million, versus $103.308 million.
  • Fourth quarter: Revenue was $56.397 million, gross profit $2.156 million, operating loss $3.950 million and net loss $3.746 million. The quarter’s gross profit included the effects of restructuring and facility impairment charges.

Material changes versus 2012

  • Revenue increased modestly as tower demand outweighed declines in gearing and services. Tower operating income increased to $19.550 million from $2.766 million, while Gearing’s operating loss widened to $17.916 million from $7.626 million and Services’ operating loss widened to $4.721 million from $4.185 million.
  • Five largest customers accounted for 83% of sales, up from 67% in 2012. Siemens and General Electric each represented more than 10% of 2013 consolidated revenue.
  • Customer deposits rose to $22.993 million from $4.063 million, supporting the improvement in operating cash flow. Inventory increased to $37.143 million from $21.988 million.
  • Broadwind sold its Brandon facility in April 2013, recording a $3.585 million gain and receiving approximately $8 million in net proceeds after closing costs and mortgage repayment. It recorded $2.365 million of impairment charges related to the restructuring and facility consolidation plan.

Outlook, risks, contingencies and unusual items

  • Outlook: Firm backlog was approximately $311 million at year-end, up 153% from 2012; $215 million was expected to be delivered in 2014. Management cautioned that backlog was unusually high and should not be expected to continue at that level. It expected to complete its multi-year restructuring plan by mid-2014. The filing provides no quantified revenue or earnings guidance.
  • Restructuring: The company expected total net restructuring costs of approximately $13.2 million and had incurred approximately $11.5 million by year-end. The plan targets a roughly 40% reduction in facility footprint. The Cicero Avenue facility was significantly curtailed, with a $1.732 million impairment recorded in the fourth quarter.
  • Reporting controls and restatement: Broadwind concluded its disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses in journal-entry controls, inventory accounting, revenue recognition, and related oversight and ethical communications. Previously issued 2013 quarterly statements were restated; the investigation identified $938 thousand of understated gross profit and overstated net loss for the first nine months of 2013, along with other corrected errors. Management described remediation steps but gave no assurance they would resolve all weaknesses.
  • Legal and environmental matters: Brad Foote pleaded guilty to a Clean Water Act violation; the court approved a $1.5 million fine in February 2014, payable in installments. A separate SEC accounting inquiry remained unresolved, with no loss estimate possible. A shareholder derivative settlement was awaiting final approval and contemplated $600 thousand of legal fees and governance reforms. A $500 thousand environmental remediation accrual related to the Cicero site remained at year-end.
  • Key business risks: Dependence on wind incentives and market conditions; high customer concentration; potential customer insourcing or order changes; steel supply and pricing; execution of diversification and restructuring; continuing losses; union negotiations at Cicero; environmental liabilities; and possible limitations on net operating loss usage under Section 382. The company reported that prior ownership changes had already triggered an annual limitation on tax attributes.

Most important facts for investors to verify

  • Whether 2014 backlog converted to shipments and cash collections as expected, and whether customer advances remain available.
  • Progress in remediating the disclosed material weaknesses and whether subsequent filings show reliable inventory, revenue and journal-entry controls.
  • Whether tower margins and utilization remain strong while Gearing and Services losses improve.
  • Final costs, timing and asset-sale proceeds from the restructuring, including the Cicero and Clintonville properties and environmental remediation.
  • Developments in the SEC inquiry, the environmental fine payments, and final approval and cost allocation for the derivative settlement.
  • Availability under the asset-based revolver, covenant compliance, and the effect of customer concentration on liquidity and operating performance.