Broadwind Energy, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Amounts are in millions of dollars unless noted. Broadwind supplies towers, gearing, and wind turbine services, while expanding into oil and gas, mining, and infrastructure markets.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $47.9 | $34.0 | $130.8 | $89.3 |
| Gross profit (loss) | $0.7 | ($0.2) | $6.2 | ($3.5) |
| Gross margin | 1.5% | (0.6%) | 4.7% | (3.9%) |
| Operating loss | ($6.2) | ($7.8) | ($14.5) | ($32.1) |
| Net loss | ($6.6) | ($8.3) | ($16.2) | ($36.6) |
| Basic and diluted loss per share | ($0.06) | ($0.08) | ($0.15) | ($0.35) |
| Adjusted EBITDA (non-GAAP) | ($1.5) | ($2.8) | ($1.2) | ($13.1) |
Q3 revenue rose 40.8%, principally on higher tower volumes and stronger Services sales. The nine-month improvement reflected an 80% increase in Towers revenue, lower operating expenses, and the absence of prior-year impairment charges. Despite improving results, the company remained loss-making; Q3 gross margin was pressured by competitive pricing, a lower mix of fabrication-only tower orders, and startup inefficiencies on a new tower design.
By segment, nine-month Towers revenue was $82.4 million with $5.2 million operating income, compared with a $2.2 million operating loss a year earlier. Gearing revenue increased to $38.7 million, but the segment lost $8.5 million. Services revenue rose to $10.8 million, with a $3.9 million operating loss. Q3 Gearing revenue declined as wind gearing sales weakened and a major customer sourced gearing offshore; industrial gearing and Services activity provided offsets.
Cash flow and liquidity: Continuing-operations operating cash use was $11.6 million for the nine months, versus $20.0 million a year earlier. Inventory growth used $13.5 million of cash, partly offset by $6.8 million in higher customer deposits. Investing cash use was $2.8 million; financing provided $12.5 million. Cash and cash equivalents were $13.0 million at September 30, plus $1.4 million restricted cash; cash declined $2.4 million from year-end 2010.
Reported debt and notes payable totaled $7.4 million, including $2.2 million current maturities; the $5.1 million debt related to the Brandon facility was separately classified as held-for-sale liability. Capital lease obligations totaled approximately $2.1 million. The company reported $6.3 million of long-term debt and capital leases in its liquidity discussion. It had $123,000 drawn under its Wells Fargo receivables facility, with up to $9.9 million available subject to facility conditions. Management expected available cash and operating cash generation to cover liquidity needs for at least 12 months, but cautioned that this depended on customer collections, orders, restructuring assumptions, and access to financing.
Material changes and notable items
- On September 21, Broadwind sold 32.5 million shares at $0.40 per share. Proceeds were approximately $12.2 million before other offering costs and $11.7 million net of reported offering costs. Shares outstanding at September 30 were 139.7 million.
- The company sold its logistics subsidiary in March 2011. Its results are reported as discontinued operations; the sale included cash, a secured note, buyer-held Broadwind shares, and assumption of certain debt and lease obligations.
- Inventory increased 76% from December 2010 to $31.3 million, driven by expected future orders, more steel-inclusive tower contracts, and production delays.
- The company entered a New Markets Tax Credit financing structure in July, receiving approximately $2.0 million in net proceeds. The facility-related structure requires compliance for seven years and carries potential tax-credit recapture exposure.
- No additional impairment was recorded in Q3 after testing certain intangible assets and property and equipment. The company had recorded substantial impairment charges in 2010.
Outlook, restructuring, risks, and contingencies
Management said wind-industry conditions might improve in the short term but emphasized uncertainty around government support and future demand. It provided no clear quantified revenue or earnings forecast. The company plans to reduce its facility footprint by about 30%—438,000 square feet—through sales or closures over approximately 15 months. Estimated restructuring costs are $13.2 million, including $5.2 million in capital expenditures and $8.0 million in expenses; $3.7 million of expenses are expected to be non-cash. Management estimates annual savings of $5.5 million and expects approximately $7.7 million of net asset-sale proceeds to substantially fund cash costs.
- Liquidity and execution: The company has a history of losses and negative operating cash flow. Management’s liquidity outlook depends on restructuring execution, asset sales, customer orders and collections; further financing may be unavailable or dilutive. Debt principal due over the next 12 months was $2.2 million, and purchase commitments were approximately $1.0 million.
- Legal and regulatory matters: Shareholder class and derivative lawsuits remain pending; the company could not estimate a loss range. An SEC subpoena concerns accounting practices at Brad Foote. A federal environmental investigation concerns alleged wastewater disposal; the previously recorded $675,000 remediation liability had been spent, with no additional amount accrued, but potential sanctions and effects remain uncertain.
- Market and customer risks: Demand depends partly on wind tax incentives and policy. A limited number of customers account for a substantial share of sales, and customer order changes, delayed payments, or offshore sourcing could affect revenue and cash flow. Diversification into industrial markets may not offset weaker wind demand.
- NASDAQ listing: The company received notice that its share price had been below the $1 minimum for 30 consecutive trading days. It had until March 19, 2012 to regain compliance, subject to NASDAQ requirements.
- Other exposure: Potential future impairment, steel and supplier costs, warranty claims, and possible limitations on tax-loss carryforwards under IRC Section 382 remain risks. The company said its disclosure controls were effective and reported no material change in internal control over financial reporting during the period.
Most important facts for investors to verify
- Whether restructuring milestones, asset sales, and the projected $5.5 million in annual savings are achieved on schedule and within the stated cost estimate.
- Whether inventory converts to sales and collections, and whether customer deposits and working-capital movements support operating cash flow.
- Liquidity and financing availability, including the Wells Fargo facility terms and the treatment of debt and obligations tied to assets held for sale.
- Developments in the shareholder litigation, SEC inquiry, and environmental investigation, including any new loss estimates or sanctions.
- Wind-market demand and policy support, customer concentration and order trends, and compliance with NASDAQ’s minimum bid-price requirement.