Business context and reporting period
Broadwind Energy, Inc. (Broadwind) filed this unaudited Form 10-Q for the three months ended March 31, 2018. The company supplies products and manufacturing services to energy, mining, infrastructure and other industrial customers. Its reportable segments are Towers and Heavy Fabrications, Gearing, and Process Systems. Wind energy represented 52% of first-quarter 2018 revenue.
Unless otherwise noted, amounts below are in thousands of dollars. Results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue | $29,967 | $56,060; down 46.5% |
| Gross profit (loss) / margin | $(132) / (0.4%) | $6,374 / 11.4% |
| Operating income (loss) | $(4,537) | $1,603 |
| Net income (loss) | $(4,838); $(0.32) per diluted share | $6,327; $0.42 per diluted share |
| Cash used in operating activities | $3,293 | $8,145 |
| Cash used in investing activities | $229 | $16,747 |
| Cash provided by financing activities | $3,497 | $6,380 |
Lower tower volumes, less favorable product mix, and production ramp-up inefficiencies drove the deterioration in gross and operating results. The prior-year net income also included a $5,018 income-tax benefit from a partial release of the valuation allowance following the Red Wolf acquisition; the Q1 2018 tax benefit was $27. Selling, general and administrative expense declined to $3,898 from $4,420, while interest expense increased to $298 from $139.
Segment revenue and operating result: Towers and Heavy Fabrications revenue was $16,785, with a $1,504 operating loss (prior-year revenue $48,895 and operating income $5,849). Gearing revenue rose to $8,805 from $3,871, while its operating loss narrowed to $626 from $1,531. Process Systems revenue increased to $4,377 from $3,294; its operating loss was $893 versus $822. Total new orders fell to $28,141 from $40,022, principally due to fewer tower orders; Gearing orders more than doubled to $15,366.
At March 31, 2018, cash and cash equivalents were $26, compared with $78 at December 31, 2017. Current assets were $40,643 and current liabilities were $48,881. Total debt and capital lease obligations were $21,181, including $14,239 drawn on the revolving credit facility and $2,600 related to the New Markets Tax Credit (NMTC) transaction. The company reported $9,861 of additional borrowing availability under its $25,000 credit facility. Total assets were $115,145 and stockholders’ equity was $61,663.
Material changes, outlook and risks
- Towers and Heavy Fabrications revenue fell substantially as tower sections sold decreased 64%. Management cited strong early-2017 demand related to Production Tax Credit safe-h harbor provisions, a subsequent inventory correction by its largest customer, and low plant utilization and ramp-up costs. (The filing refers to safe-harbor provisions.)
- Gearing revenue increased 127%, reflecting stronger demand from oil and gas and other industrial customers. Process Systems benefited from a full quarter of Red Wolf results and recovery in mining and other industrial markets.
- Broadwind began a restructuring to reduce facility capacity and management structure, consolidate Abilene operations, and exit the CNG compression-unit market. It expects to vacate the Abilene leased facility by the end of 2018 after the NMTC compliance period. Estimated restructuring costs are $927, of which $151 had been incurred; management anticipates approximately $575 in annual facility-cost savings.
- Management stated that available cash, facility borrowing capacity, expected operating cash flows, equipment financing and potential securities offerings should meet liquidity needs for at least 12 months. It cautioned that weaker-than-expected production, sales, collections or customer deposits could create liquidity pressure. Cash was minimal, and the credit facility was drawn.
- The company amended its credit agreement in January 2018 after a waiver of the fixed-charge coverage covenant violation at December 31, 2017, adding minimum EBITDA and capital-expenditure covenants through June 30, 2018. A May 3, 2018 amendment, after quarter-end, waived noncompliance with the minimum EBITDA covenant through March 31, 2018 and revised thresholds and the EBITDA definition. Further covenant noncompliance could restrict borrowing access and operating flexibility.
- The NMTC compliance period runs through the third quarter of 2018. Noncompliance could expose the company to recapture of up to $3,900 of tax credits; management did not anticipate a recapture. The filing says the company expects Capital One to exercise a put option for $130 at the end of the compliance period; any resulting accounting and cash effects merit attention.
- Other matters include the Cicero union agreement, which expired in February 2018 and was under negotiation; ordinary-course legal proceedings, whose outcomes are uncertain; and potential limitations on the use of tax-loss carryforwards under IRC Section 382. The company reported a full valuation allowance against deferred tax assets and $227,871 of NOL carryforwards at December 31, 2017.
- No formal revenue or earnings guidance is provided. The company adopted the new revenue standard using the modified retrospective method and reported no material effect on its financial statements.
Most important facts for investors to verify
- Whether tower orders, customer inventory levels and production utilization recovered, and whether the revenue decline and negative gross margin persisted.
- Whether the restructuring stays within the $927 estimated cost, delivers the stated $575 annual savings, and achieves the planned Abilene exit.
- Current credit-facility availability, covenant compliance after the May 3 amendment, and whether operating cash flow can support liquidity needs with only $26 of reported cash.
- Completion of the NMTC compliance period, any tax-credit recapture exposure, and the outcome and funding implications of Capital One’s put option.
- Customer concentration and collections, including whether the largest customer’s inventory correction affected new orders, receivables or cash generation.