Broadwind, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with the three months ended March 31, 2022. Dollar amounts below are in millions unless otherwise stated. Broadwind manufactures precision structures, equipment and components for energy, mining and infrastructure markets; wind energy represented 50% of Q1 2023 revenue, versus 53% a year earlier.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $48.873 | $41.844 |
| Gross profit / margin | $6.976 / 14.3% | $2.012 / 4.8% |
| Operating income (loss) / margin | $1.282 / 2.6% | $(2.073) / (5.0)% |
| Net income (loss) | $0.769; $0.04 per diluted share | $(2.404); $(0.12) per diluted share |
| Adjusted EBITDA | $4.098 | $(0.008) |
| Cash used in operating activities | $(25.984) | $(6.005) |
| Capital expenditures | $1.065 | $0.492 |
| Free cash flow, company-defined | $(23.335) | $(4.487) |
| Orders / ending backlog | $39.602 / $287.808 | $52.693 / $117.133 |
| Book-to-bill | 0.8 | 1.3 |
Revenue rose 16.8%. Gross profit improved substantially, reflecting higher sales volumes and $3.162 of Advanced Manufacturing Production (AMP) credits recognized as a reduction of cost of sales. Net income also benefited from the credits and stronger sales, partly offset by higher medical costs and $0.720 of proxy-contest-related expense. Adjusted EBITDA and free cash flow are non-GAAP measures defined by the company.
Segments and operating trends
- Heavy Fabrications: Revenue was $31.593, up 16%; operating income was $2.790 versus a $0.461 loss. The segment’s 8.8% operating margin included the $3.162 AMP credit. Wind tower orders fell 63%, largely because a major customer secured longer-term capacity in Q4 2022; industrial fabrication orders rose 113%.
- Gearing: Revenue was $11.965, up 13%; operating income was $0.581 versus a $0.112 loss. Orders declined 12%, primarily due to weaker oil and gas demand.
- Industrial Solutions: Revenue was $5.423, up 33%; operating income was $0.622 versus a $0.209 loss. Orders rose 56%, primarily on demand for new gas-turbine content.
Financial position and liquidity
- Cash was $1.729 at March 31, down $11.003 from year-end 2022. Current assets were $81.186 and current liabilities $74.281.
- Total debt was $24.952; debt and finance lease obligations together were $30.591. The company had $16.945 outstanding on its revolving line and $6.947 on its term loan. It reported $10.567 of additional borrowing capacity under the credit facility.
- Operating cash outflow increased year over year, driven mainly by higher accounts receivable and inventory and lower customer deposits. The company attributed these working-capital movements to increased production and updated terms with a major customer.
- Financing activities provided $16.046, mainly from increased credit-facility borrowings. The company sold $9.614 of receivables through supply-chain financing arrangements during the quarter, paying $0.131 in discount fees.
- Management expects available cash, facility capacity, operating cash generation, equipment financing and potential securities sales to cover liquidity needs for at least the next 12 months. This is an expectation, not a guarantee.
Material developments, outlook and risks
- The February 2023 credit agreement amendment waived the Q4 2022 minimum EBITDA requirement and revised certain future minimum EBITDA and fixed-charge-coverage requirements. Broadwind said it was in compliance with financial covenants at March 31, 2023. The facility’s stated maturity is August 2027.
- The company recognized $3.162 of IRA AMP credits for eligible U.S.-produced wind towers. The receivable is recorded as a long-term asset. IRS and Treasury guidance remained pending, and changes in interpretation or eligibility could affect the expected benefit.
- Management cautioned that production, sales, collections from significant customers, customer deposits and new orders may not meet expectations. Weaker performance could create liquidity pressure or covenant-compliance risk and potentially require delayed investments or additional financing, which could be dilutive or restrictive.
- Other identified risks include wind-industry dependence on government incentives, inflation and higher interest rates, customer and supplier concentration, market volatility, and access to bank deposits or lending. The filing provides no numerical revenue or earnings guidance.
- WM Argyle Fund nominated three director candidates after reducing its original slate. A contested election could replace as many as three incumbent directors; related professional fees contributed to higher corporate expenses.
- Broadwind reported that disclosure controls and procedures were effective as of March 31, 2023, with no material change in internal control over financial reporting during the quarter. It described routine legal proceedings but did not expect them to have a material adverse effect; outcomes remain uncertain.
Most important facts for investors to verify
- Whether the $3.162 AMP credit is eligible under final IRS and Treasury rules, and when it can be converted into cash.
- Whether the sharp operating cash outflow reverses as receivables are collected, inventory is used, and customer deposits and working-capital needs normalize.
- Credit-facility availability, borrowing-base capacity, covenant headroom and compliance under the amended requirements.
- Whether the large backlog converts to revenue and cash on schedule, given Q1 orders below revenue and a 0.8 book-to-bill ratio.
- Exposure to significant customers and wind-policy incentives, and the financial and governance outcome of the proxy contest.