BROADWIND, INC. quarterly report, Q2 FY2023

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Broadwind, Inc. — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Broadwind manufactures precision structures, equipment and components for wind energy and other energy, mining and infrastructure markets. Amounts below are in millions of dollars unless stated otherwise.

Financial performance

  • Q2 revenue: $50.8, up 1.7% from $50.0 a year earlier. Six-month revenue: $99.7, up 8.6% from $91.9.
  • Profitability: Q2 gross profit was $8.3 (16.4% margin), versus $2.4 (4.8%) in Q2 2022. Operating income was $2.2, compared with a $1.9 operating loss; net income was $1.4, or $0.07 per diluted share, versus a $2.7 net loss, or $0.13 loss per share. For the first half, net income was $2.2 versus a $5.1 loss; gross margin was 15.4% versus 4.8%.
  • Cash flow: First-half operating cash outflow was $17.4, compared with $8.3 a year earlier. Investing outflow was $4.0, including $4.0 of capital expenditures. Financing provided $10.8, principally from increased credit-facility borrowings. Cash declined $10.6 to $2.1 from year-end 2022.
  • Liquidity and debt: Current assets were $91.5 and current liabilities $80.9 at June 30. Debt excluding finance leases was $20.3; debt plus finance lease obligations totaled $25.4. The company had $18.7 outstanding under its credit facility and reported $13.1 of additional borrowing availability. Facility rates were 7.31% on the revolving facility and 7.56% on the term loan. The company was in compliance with financial covenants at quarter-end.
  • Working capital: Accounts receivable rose to $28.8 from $17.0 and inventory to $48.6 from $44.3 since year-end. Customer deposits declined to $30.4 from $34.6. These movements, along with the $6.7 AMP credit receivable, contributed to cash use.
  • Orders and backlog: Q2 orders were $25.4 versus $26.0; first-half orders were $65.0 versus $78.7. Backlog was $262.2, compared with $93.2 at June 30, 2022. Book-to-bill was 0.5 for Q2 and 0.7 for the first half, versus 0.5 and 0.9, respectively, in 2022.

Changes and operating drivers

  • Q2 improvement in gross profit and earnings reflected better operating execution and $3.6 of Advanced Manufacturing Production (AMP) tax credits recorded as a reduction of cost of sales. First-half results included $6.7 of these credits.
  • Heavy Fabrications Q2 revenue declined 5%; tower sections sold fell 14%, while industrial fabrication revenue rose 3%. Segment operating margin increased to 11.4% from 0.2%, substantially reflecting the AMP credits. First-half segment revenue rose 4% and operating margin was 10.2%, versus a 0.6% loss margin.
  • Gearing Q2 revenue rose 9%, but orders fell 35%, primarily due to lower oil and gas demand. Segment operating margin improved to 3.2% from a 5.8% loss margin.
  • Industrial Solutions Q2 revenue rose 24% and orders rose 75%, mainly on stronger new and aftermarket gas-turbine demand. Segment operating margin increased to 13.4% from 0.6%.
  • SG&A increased 44% in Q2 and 43% in the first half, primarily due to proxy-contest-related professional fees; management also cited higher medical costs in the first half. Proxy-related expenses added back in adjusted EBITDA were $1.0 in Q2 and $1.8 for the first half.

Outlook, risks and unusual items

  • No specific revenue or earnings guidance is provided. Management expects current cash, facility availability, operating cash generation, equipment financing and potential securities-sale proceeds to meet liquidity needs for at least twelve months; it cautions this depends on production, sales, collections, customer deposits and new orders meeting expectations.
  • Management warns that weaker operating performance could threaten covenant compliance and access to the credit facility, potentially delaying investment or requiring additional financing. Equity financing could dilute shareholders; debt financing could add covenants or restrictions.
  • The AMP credits are subject to pending IRS and Treasury technical guidance. Changes in interpretation or rules could reduce expected benefits and materially affect results. Wind energy accounted for 50% of first-half 2023 revenue, versus 53% a year earlier, leaving the business exposed to industry and policy developments.
  • Other disclosed risks include customer and supplier concentration, market volatility, competition, supply-chain disruption, and potential limits on use of tax-loss carryforwards under Section 382. The company’s shelf registration statement was due to expire October 12, 2023; approximately $11.7 of common-stock capacity remained under its sales agreement at quarter-end.
  • The company reports ordinary-course legal proceedings; management does not expect them to have a material adverse effect, while noting litigation outcomes are uncertain. No liquidated-damages reserve was recorded at June 30, 2023.

Important facts for investors to verify

  1. How much of the margin and earnings improvement persists without AMP credits, and how subsequent IRS/Treasury guidance affects credit eligibility and collection.
  2. Whether operating cash flow improves as receivables and inventory convert to cash, and whether customer deposits and collections meet management’s assumptions.
  3. Credit-facility availability, borrowing costs and covenant compliance, including the effects of the February 2023 amendment and waiver.
  4. Whether backlog converts into revenue and orders recover, particularly given the low book-to-bill ratio, weaker wind-tower order timing and reduced oil-and-gas demand.
  5. The scale and duration of proxy-related and other elevated corporate expenses, and any potential dilution from future securities issuance.