Broadwind Energy, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Unless noted otherwise, amounts are in thousands of dollars.
Business context and results
Broadwind supplies products and services to energy, mining and infrastructure customers. Wind energy accounted for 89% of first-quarter revenue. Following its February 1 acquisition of Red Wolf, the company reported three segments: Towers and Weldments, Gearing, and Process Systems.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Revenue | $56,060 | $46,757 |
| Gross profit / margin | $6,374 / 11.4% | $3,962 / 8.5% |
| Operating income (loss) | $1,603 | ($224) |
| Income (loss) from continuing operations | $6,482 | ($358) |
| Net income (loss) | $6,327 | ($377) |
| Diluted earnings (loss) per share | $0.42 | ($0.03) |
| Operating cash flow | ($8,145) | $3,061 |
Financial position and liquidity
- At March 31, cash and cash equivalents were $216, versus $18,699 at year-end; short-term investments were zero, down from $3,171. Restricted cash was $39.
- Current assets were $52,373 and current liabilities $48,940. Accounts receivable rose to $23,690 from $11,865; net inventory rose to $25,775 from $21,159.
- Total debt and capital lease obligations were $10,482, including $6,494 drawn on the revolving facility, $2,600 of long-term debt, and $1,388 of capital leases. The company reported $17,356 of additional borrowing availability under its facility, increased to $25,000 in March. It cited $6,964 of principal payments due over the next 12 months.
- Investing cash use was $16,747, including the Red Wolf acquisition and $3,261 of capital expenditures, primarily supporting the Abilene expansion. Financing provided $6,380, mainly from credit-facility proceeds.
Material changes and segment performance
- Revenue increased 19.9% year over year; gross profit rose 60.9%. Management attributed margin improvement mainly to better Abilene tower-plant efficiency and productivity, and to Red Wolf.
- Towers and Weldments revenue was $48,895, up from $42,015; operating income increased to $5,849 from $3,241, and margin improved to 12.0% from 7.7%. Tower units sold increased 12%.
- Gearing revenue declined 19% to $3,871; its operating loss widened to $1,531 from $1,202. Orders increased to $7,319 from $3,540, which management attributed to recovering oil-and-gas demand and expanded commercial efforts.
- Process Systems, including Red Wolf and Broadwind’s Abilene CNG and fabrication business, recorded $3,294 of revenue and an $822 operating loss. The quarter included no CNG unit shipments and purchase-accounting costs, including $230 of inventory revaluation and $240 of intangible amortization.
- Company-wide first-quarter orders were $40,022, compared with $38,976 a year earlier. Towers and Weldments orders declined, partly offset by increased Gearing orders and Red Wolf orders.
Acquisition, outlook and risks
- Red Wolf’s purchase price was $19,603: $16,500 paid in cash and $2,944 estimated contingent consideration. Potential future earn-out payments range from zero to $9,900, subject to profitability targets. Purchase accounting remained provisional. Red Wolf contributed $3,022 of revenue and a $233 net loss from its acquisition date through quarter-end.
- Net income included a $5,018 income-tax benefit, primarily from a partial release of the deferred-tax valuation allowance upon combining Broadwind’s deferred tax assets with Red Wolf’s deferred tax liabilities. This benefit materially boosted reported earnings; the company continued to report a full valuation allowance on deferred tax assets.
- Management said cash, expected operating cash generation and credit availability should cover liquidity needs for at least 12 months. This outlook is conditional on production, sales, collections from large customers, customer deposits and new orders meeting expectations. Weaker performance could impair covenant compliance or access to the credit facility.
- The company’s late-2016 three-year strategy calls for growth and diversification through organic growth and bolt-on acquisitions. No specific full-year financial guidance is provided in the supplied filing text.
- Gearing’s operating losses and loss history triggered a long-lived-asset recoverability review. The filing reports no impairment charge, based on estimated fair values exceeding carrying amounts; those estimates rely in part on significant assumptions.
- Contingencies include a $1,224 environmental remediation accrual for the Cicero facility and possible recapture of up to $3,900 of New Markets Tax Credits if facility compliance requirements are breached through September 2018. Management did not anticipate recapture. The company also disclosed ordinary-course litigation and warranty, workers’ compensation and other exposures.
- After quarter-end, the company approved a separation agreement for its general counsel, providing $110,796.66 in severance subject to a release, and a consulting arrangement at $200 per hour up to $2,000.
Important facts for investors to verify
- Whether the substantial year-over-year decline in cash and first-quarter operating cash outflow reverse as receivables are collected and working capital normalizes.
- Whether the facility’s reported borrowing availability, borrowing-base limits and financial covenants remain adequate as cash needs and debt service evolve.
- Whether Towers and Weldments efficiency and demand persist, and whether improving Gearing orders translate into revenue and reduced losses.
- Red Wolf’s integration, profitability against earn-out targets, and final purchase-price allocation and contingent-consideration valuation.
- The sustainability of earnings excluding the one-time tax benefit, and the future realizability and Section 382 limitations of tax-loss carryforwards.
- Updates to the Cicero environmental reserve, New Markets Tax Credit compliance and recapture exposure, and other disclosed contingencies.