Broadwind Energy, Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; unaudited. Broadwind supplies products and services to wind, energy, mining and infrastructure customers, and is diversifying beyond new U.S. wind installations. Wind-related new-installation sales were 63% of first-half revenue, versus 75% a year earlier. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Revenue | $56.311 | $39.332 | $110.754 | $82.862 |
| Gross profit / margin | $1.659 / 3.0% | $2.932 / 7.5% | $3.891 / 3.5% | $5.511 / 6.7% |
| Operating loss | $(4.159) | $(4.311) | $(8.100) | $(8.284) |
| Net loss | $(4.231) | $(4.458) | $(8.091) | $(9.638) |
| Net loss per share | $(0.03) | $(0.04) | $(0.06) | $(0.09) |
- Revenue rose 43.2% in Q2 and 33.7% in the first half year over year. Net losses narrowed, but gross profit and gross margin fell as lower-margin tower sales, production inefficiencies and restructuring costs offset higher volumes and improved segment results.
- First-half Adjusted EBITDA, a non-GAAP measure, was $2.448 million versus $0.359 million. It was $1.056 million in Q2 versus $0.134 million. The filing cautions that this measure is not a substitute for GAAP performance or liquidity measures.
- First-half operating cash use was $2.366 million, compared with $1.866 million a year earlier. Investing cash use was $1.257 million and financing cash use was $1.581 million. Cash and cash equivalents declined $5.204 million to $8.136 million; restricted cash was another $0.230 million.
- At June 30, cash and cash equivalents plus restricted cash totaled $8.366 million. Current assets were $81.656 million and current liabilities $56.527 million. The filing reported $5.791 million of term loans and notes payable, including $1.455 million due within 12 months; capital lease obligations totaled $3.875 million. A further $4.333 million of Brandon Facility debt was classified in liabilities held for sale.
- Inventory increased to $38.717 million from $23.355 million at year-end, including raw materials of $23.055 million, up $11.112 million. Accounts payable rose to $34.175 million, while customer deposits fell to $8.712 million from $17.328 million.
Material changes and operating results
- Towers and Weldments revenue increased, but segment operating income fell to $0.561 million in Q2 from $2.773 million; first-half operating income was $1.566 million versus $5.194 million. Management cited a lower-margin tower mix, fewer tower sections produced and start-up inefficiencies for multiple designs. Higher steel-inclusive sales also raised reported revenue; fabrication-only towers made up a smaller share than in the prior-year comparison.
- Gearing revenue and Services revenue increased, and both segments reduced operating losses. Gearing benefited from industrial sales growth; Services cited stronger field service, blade maintenance and drivetrain-center activity. Both segments remained loss-making.
- SG&A declined 20.6% in Q2 and 14.2% in the first half, attributed to cost controls and lower compensation, selling costs and professional fees. The average share count was about 139.9 million in first-half 2012 versus 107.1 million a year earlier; the filing notes that common-stock equivalents were excluded from diluted EPS because they were anti-dilutive.
- Management shortened the estimated useful life of $2.216 million of customer-relationship intangibles to one year from five years, increasing the pace of amortization. Impairment testing identified no impairment of the tested intangible or long-lived assets at June 30.
Outlook, liquidity, risks and contingencies
- Management expected wind-industry conditions to remain strong in Q3 but weaken significantly in late 2012 and into 2013 because the Production Tax Credit was scheduled to expire. The company was pursuing diversification into industrial gearing and weldments, including export opportunities, but warned that insufficient tower orders could require further operating reductions. No quantified revenue or earnings guidance was provided.
- Management expected the production delays and elevated inventory to ease and inventory to return toward historical levels in the second half of 2012. It said current cash, operating cash generation and financing arrangements were expected to meet liquidity needs for at least 12 months, but warned that weaker sales, customer collections, orders or restructuring outcomes could create cash-flow shortfalls and additional financing might not be available on acceptable terms.
- Wells Fargo receivables financing had a $10 million facility limit: $7.284 million was outstanding at June 30, leaving up to $2.716 million available, subject to facility terms. The company said the inventory build was funded partly by assigning receivables and extending payables. It reported compliance with debt covenants at quarter-end.
- The restructuring plan targets a roughly 40% reduction in facility footprint, with approximately $11.6 million of total expected costs, including $4.2 million of capital expenditures and $7.4 million of expenses; management estimated $5.5 million in annual savings and expected approximately $7.2 million of net asset-sale proceeds to fund cash costs. Costs incurred through June 30 were $2.756 million. The Brandon Facility was held for sale, with sale expected within 12 months.
- Significant unresolved matters include a shareholder class action with some claims remaining, an SEC inquiry into Brad Foote accounting practices, and a federal environmental investigation concerning wastewater disposal at a Brad Foote facility. The company could not estimate potential losses; it said no environmental fines or penalties had been suggested and no additional remediation expense was accrued at June 30. Indemnification requests from Tontine and/or an associated former executive could also arise.
- The New Markets Tax Credit structure carries potential recapture exposure of up to $3.9 million if compliance requirements are breached during the seven-year period; management did not anticipate recapture. Other risks include customer warranty claims, liquidated damages for qualifying delivery delays, and restrictions on use of net operating loss carryforwards following ownership changes.
Investor verification priorities
- Confirm inventory reduction, production execution and cash conversion in subsequent filings, especially given reliance on extended payables and receivables financing.
- Track tower order volumes, product mix, margins and the effect of the Production Tax Credit’s scheduled expiration; assess whether industrial diversification can offset weaker wind demand.
- Compare restructuring costs, asset-sale proceeds, facility closures and realized savings with management’s estimates.
- Review liquidity, availability under the Wells Fargo facility, debt and lease payments, covenant compliance, and the status and price of the Brandon Facility sale.
- Monitor the shareholder litigation, SEC inquiry, environmental investigation and any resulting liabilities or indemnification obligations.
- Verify whether accelerated amortization, future impairment testing or share-based compensation affects reported earnings and dilution.