Broadwind Energy, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed April 26, 2019. Dollar amounts are in thousands, except per-share data. Broadwind manufactures wind towers, precision gears and gearing systems, heavy fabrications, and industrial systems. Wind energy accounted for 64% of revenue.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $41,660 | $29,967 | +39.0% |
| Gross profit (loss) | $3,537 | $(132) | Improved $3,669 |
| Gross margin | 8.5% | (0.4%) | +8.9 percentage points |
| Operating loss | $(494) | $(4,537) | Improved $4,043 |
| Net loss | $(1,042) | $(4,838) | Improved $3,796 |
| Basic and diluted loss per share | $(0.07) | $(0.32) | Improved $0.25 |
| Operating cash flow | $(11,350) | $(3,293) | Cash use increased $8,057 |
| Capital expenditures | $577 | $229 | Increased $348 |
Improved results reflected higher sales, greater plant utilization, and better manufacturing efficiency, especially in Towers and Heavy Fabrications and Gearing. Operating expenses fell to $4,031 from $4,405; as a share of revenue, they declined to 9.7% from 14.7%. Net interest expense rose to $536 from $298.
Segments and material changes
- Towers and Heavy Fabrications: Revenue increased 55% to $28,294; operating loss narrowed to $222 from $2,096. Tower sections sold rose 31%, with higher average selling prices partly reflecting steel costs and increased heavy-fabrication sales. Orders rose 28% to $12,510, driven by an order from the largest customer.
- Gearing: Revenue increased 14% to $10,027 and operating income was $1,387, compared with a $626 loss. Improvement reflected aftermarket wind shipments, stronger mining and industrial demand, favorable mix, and manufacturing efficiencies. Orders fell to $7,135 from $15,366, mainly due to lower oil and gas order intake and timing of wind replacement orders.
- Process Systems: Revenue was $3,339 versus $2,966; operating loss narrowed slightly to $285 from $301. Orders rose to $4,361 from $2,971, supported by gas-turbine demand.
- Total new orders were $24,006, down 15% year over year. Broadwind revised segment reporting by moving the Abilene compressed-natural-gas and heavy-fabrication business into Towers and Heavy Fabrications; prior periods were restated.
- The company incurred $12 of restructuring costs in the quarter versus $151 a year earlier. It expects remaining restructuring costs to be immaterial and estimates annual facility-expense savings of approximately $575.
Liquidity, debt, and cash flows
- Cash was $37 at March 31, 2019, down from $1,177 at year-end. Management said cash balances are typically minimal because operating receipts and payments flow through the drawn credit facility.
- Debt and finance lease obligations totaled $25,686, including $22,249 drawn on the revolving credit line. Additional borrowing availability under the facility was $7,528. The facility was expanded to $35,000 and extended to February 25, 2022; it is secured by specified assets and facilities.
- Current assets were $57,196 and current liabilities $67,818. Accounts receivable rose to $22,509 from $17,455, and inventories to $32,944 from $22,670. The company attributed increased operating cash use primarily to working-capital investment amid higher production and a $5,752 decline in customer deposits.
- Management expects existing cash, available credit, operating cash generation, and potential securities financing to cover liquidity needs for at least 12 months. It cautioned that weaker production, sales, collections, customer deposits, or new orders could create liquidity pressure.
- The credit agreement requires minimum quarterly EBITDA through September 30, 2019, followed by a minimum fixed-charge coverage ratio, along with other covenants. Broadwind reported compliance at March 31, 2019. The filing warns that operational deterioration could threaten covenant compliance and credit access.
Outlook, risks, and notable items
- No specific revenue, earnings, or order guidance was provided. Management cited dependence on production, collections from large customers, customer deposits, and new orders as key liquidity variables; building products or buying steel before receiving deposits could also reduce liquidity.
- Broadwind adopted lease accounting guidance on January 1, 2019, recognizing operating lease liabilities of $19,508 and a corresponding right-of-use asset of $17,613 at adoption. At quarter-end, operating lease obligations were $19,067, including $1,726 current and $17,341 long-term.
- Red Wolf’s recent operating losses triggered an impairment review; management concluded no further impairment was indicated at March 31, 2019. Prior impairment charges included $4,993 of goodwill in 2018 and $7,592 for customer relationships.
- The company had a full valuation allowance against deferred tax assets and $248,717 of net operating loss carryforwards at December 31, 2018. Section 382 ownership-change rules limit annual NOL use to $14,284; a shareholder rights plan was extended for three years to help preserve tax attributes.
- Routine legal proceedings were not expected by management to have a material adverse effect, though outcomes are uncertain. No reserve was recorded for potential liquidated damages. The filing states that risk factors changed materially from the 2018 Form 10-K but does not identify the changes in the supplied text.
- Disclosure controls were assessed as effective at quarter-end; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track cash conversion, receivables, inventory, customer deposits, and the availability actually accessible under the borrowing base.
- Monitor covenant performance, especially minimum EBITDA through September 2019 and fixed-charge coverage requirements thereafter.
- Assess whether tower orders and customer concentration support production, and whether weaker Gearing orders reflect timing or sustained oil-and-gas demand softness.
- Review the unspecified material risk-factor changes and any developments in Red Wolf performance or impairment assumptions.
- Verify the progress and cost realization of restructuring savings, and the potential dilution from available ATM and shelf-registration financing.