Broadwind, Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 9, 2023. The company manufactures precision structures, equipment and components for wind energy and other energy, mining and industrial markets. Unless noted, financial amounts below are in U.S. dollars.
Business context and performance
Broadwind operates through Heavy Fabrications, Gearing and Industrial Solutions. Wind energy remained a major exposure: it represented 48% of 2022 sales, while the five largest customers represented 69%. Siemens Gamesa Renewable Energy and GE Renewable Energy each exceeded 10% of revenue.
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $176.8 million | $145.6 million |
| Gross profit / margin | $10.7 million / 6.1% | $5.5 million / 3.8% |
| Operating loss | $6.6 million | $12.6 million |
| Net income (loss) | $(9.7) million; $(0.48) per share | $2.8 million; $0.15 per share |
| Adjusted EBITDA | $2.4 million | $13.2 million |
| Operating cash flow | $16.6 million provided | $12.8 million used |
| Capital expenditures | $3.1 million | $1.7 million |
| Free cash flow (company-defined) | $17.5 million | $(2.0) million |
| Orders / year-end backlog | $368.0 million / $297.2 million | $159.0 million / $106.4 million |
Revenue, segments and material changes
- Revenue rose 21.4%. Heavy Fabrications revenue increased 15% to $117.2 million, Gearing increased 49% to $42.6 million, and Industrial Solutions increased 16% to $17.8 million.
- Heavy Fabrications operating loss narrowed to $1.0 million from $3.2 million; Gearing moved to $43,000 operating income from a $2.6 million loss; Industrial Solutions moved to $120,000 operating income from a $386,000 loss. All three segments remained low-margin.
- Consolidated gross margin improved with higher volume, partly offset by higher material costs and ramp-up costs. Operating expenses fell to 9.8% of revenue from 12.4%.
- Despite improved operating performance, the company swung to a net loss. The principal comparison was the absence of $9.2 million of PPP loan forgiveness income and $7.0 million of Employee Retention Credit benefits recorded in 2021. Net interest expense also increased to $3.2 million from $1.1 million.
- Backlog increased 179%, principally on Heavy Fabrications orders as tower customers reserved capacity through 2024. Book-to-bill was 2.1 versus 1.1 in 2021. Backlog is not equivalent to guaranteed future revenue and is net of revenue recognized over time.
- Fourth-quarter 2022 revenue was $40.1 million, gross profit $2.6 million, operating loss $2.1 million and net loss $2.9 million, or $(0.14) per share. Fourth-quarter 2021 revenue was $26.0 million and net loss was $4.1 million.
Cash, liquidity and debt
- Year-end cash was $12.7 million, up from $0.9 million. Operating cash flow improved substantially, driven mainly by increased customer deposits and accounts payable; customer deposits reached $34.6 million, versus $12.1 million a year earlier.
- Operating working capital was $0.5 million versus $18.6 million, with the decline primarily reflecting the timing and level of customer deposits. Accordingly, reported free cash flow benefited materially from working-capital movements and should be considered alongside the company’s adjusted EBITDA definition.
- Year-end debt was $8.3 million, including a $7.2 million term loan; no revolving-credit borrowings were outstanding. Debt and finance lease obligations together totaled $14.5 million. The company reported $27.4 million of additional borrowing availability under its credit facility.
- The August 2022 Wells Fargo facility provides a $35 million revolving line and an original $7.6 million term loan, with facility maturity in August 2027. Effective rates at year-end were 6.55% on the revolver and 6.80% on the term loan.
- In February 2023, the lender waived the fourth-quarter 2022 minimum EBITDA requirement and amended certain future covenant requirements. The company said available cash, operating cash flows, financing and potential equity issuance should meet requirements for at least the next 12 months.
- Broadwind may issue up to $12 million of common stock under a sales agreement; approximately $11.7 million remained available at year-end. It issued 100,379 shares under the agreement in 2022.
Outlook, commentary and risks
- Management highlighted stronger orders, substantial tower backlog, diversification beyond wind, improved capacity utilization and operational efficiency. The filing provides no quantified revenue, earnings or cash-flow guidance.
- The Inflation Reduction Act extends renewable-energy incentives and provides eligible component manufacturers with potential advanced manufacturing tax credits beginning in 2023. Management was awaiting implementation guidance; the filing does not quantify expected company benefits.
- Management reported continuing supply-chain disruption, labor constraints and manufacturing inefficiencies, as well as higher material, labor and freight costs. The company believed raw materials would be adequate to meet 2023 manufacturing needs, while noting prior shortages and delays.
- Key risks include dependence on a small number of customers, exposure to wind demand and policy incentives, volatile order timing, steel and supply availability, skilled-labor constraints, inflation and variable-rate borrowing costs, and the ability to meet credit covenants. Customer cancellations, late delivery damages and warranty claims may also affect results.
- Heavy Fabrications reported recurring operating losses and was the subject of a November 2022 impairment assessment. No impairment was recorded because forecast undiscounted cash flows exceeded carrying value; the auditor identified this assessment as a critical audit matter.
- Broadwind reported approximately $288.5 million of federal and state NOL carryforwards, with $227.8 million beginning to expire in 2026. Use is subject to an existing Section 382 annual limitation and could be further restricted by ownership changes. The company’s rights plan is intended to deter certain ownership changes.
- WM Argyle Fund, which allegedly held about 1% of the shares, nominated six director candidates for the 2023 annual meeting; a contested election was possible. Ordinary-course legal proceedings were not considered material by management, and no significant environmental remediation costs or penalties were reported for 2022.
Most important facts for investors to verify
- Whether the $297.2 million backlog converts to scheduled shipments and profitable revenue, especially given customer concentration and project timing.
- Whether segment margins and adjusted EBITDA improve enough to sustain operations and comply with revised lender covenants.
- How much of 2022 operating cash flow and free cash flow reflects customer deposits and other working-capital timing, and whether those cash sources persist.
- The terms and remaining capacity of the credit facility, borrowing availability, interest costs and any subsequent covenant amendments or waivers.
- The practical value of IRA manufacturing credits, and the company’s ability to use its NOLs given Section 382 limitations and the rights plan.
- Whether Heavy Fabrications’ impairment assumptions remain supportable and whether supply, labor, cost inflation or customer concentration materially affects execution.
- The outcome of the 2023 director nomination contest and any resulting impact on strategy or governance.
The financial statements received an unqualified audit opinion. Management stated that disclosure controls and internal control over financial reporting were effective at December 31, 2022; the auditor did not provide an internal-control audit opinion.