Broadwind Energy, Inc. — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016. Dollar amounts are in thousands unless otherwise noted. Broadwind manufactures wind towers, specialty weldments, and precision gearing, primarily for U.S. customers. Its continuing reportable segments are Towers and Weldments and Gearing; the former Services segment is reported as discontinued operations.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $180,840 | $199,156 |
| Gross profit / margin | $18,139 / 10.0% | $7,867 / 4.0% |
| Operating income (loss) | $1,909 | $(11,908) |
| Continuing-operations income (loss) | $1,335 | $(12,246) |
| Net income (loss) | $319; $0.02 per share | $(21,807); $(1.48) per share |
| Operating cash flow from continuing operations | $17,300 | $(5,512) |
- Revenue fell 9.2%. Lower steel costs passed through to customers reduced Towers and Weldments revenue, while Gearing revenue declined 30% amid weak oil-and-gas and mining demand.
- Profitability improved substantially with better manufacturing productivity and cost control, lower SG&A, and fewer restructuring costs. The 2016 net result also benefited from the Services segment’s smaller discontinued-operations loss: $(1,016), versus $(9,561) in 2015.
- At December 31, cash and cash equivalents were $18,699 and short-term investments were $3,171, totaling $21,870. Total debt and capital lease obligations were $4,103. No amounts were drawn on the new revolver; borrowing availability was $17,226 under its $20,000 commitment.
- Current assets were $58,190 and current liabilities were $43,251. Operating working capital was $(839), compared with $10,241 at year-end 2015, mainly due to higher customer deposits and lower inventory.
- Capital expenditures were $6,624. Investing cash flow was $(3,164) and financing cash flow was $(3,319). Customer deposits were a significant contributor to operating cash generation and year-end liquidity.
Segments, orders, and material changes
- Towers and Weldments: Revenue was $160,210, down from $170,919; operating income rose to $12,788 from $4,702, and operating margin improved to 8.0% from 2.8%. Results benefited from higher labor productivity, improved cost management, and the absence of customer penalties tied to prior Abilene production issues.
- Gearing: Revenue declined to $20,648 from $29,588. The operating loss narrowed to $(3,244) from $(8,235), reflecting cost reductions, $2,481 less depreciation following a change in the estimated salvage value of selected equipment, and no repeat of a $874 environmental charge recorded in 2015. The segment remained loss-making.
- Net new orders increased to $275,010 from $94,027. Year-end backlog was $188,717, up 101% year over year, primarily reflecting strong tower orders following the 2015 extension of federal wind tax incentives. Backlog is not a guarantee of future shipments or revenue.
- Wind-related installations accounted for 92% of 2016 sales. The five largest customers represented 91% of sales and 86% of year-end receivables; Siemens, Gamesa, and General Electric each exceeded 10% of revenue.
- In February 2017, Broadwind acquired Red Wolf Company for approximately $16,500 at closing, with up to $9,900 of contingent consideration. Red Wolf is expected to form a new Process Systems segment; purchase accounting was not complete when the 10-K was filed.
Outlook, risks, and unusual items
- Management said cash, operating cash generation, and available credit were expected to cover liquidity needs for at least 12 months. This outlook depends on customer orders, production, collections, and deposits; weaker-than-expected performance could threaten liquidity or covenant compliance.
- The company’s growth strategy emphasizes customer and market diversification, operational efficiency, capacity utilization, and strategic bolt-on acquisitions. No specific revenue or earnings guidance was provided.
- Federal production and investment tax credits support wind demand but phase down for projects starting construction in 2017–2019. Policy changes, competition, customer concentration, and the wind market’s dependence on incentives are material risks.
- Other risks include persistently weak oil-and-gas and mining markets; steel and supply-chain disruptions; delivery, warranty, and customer cancellation claims; environmental compliance and remediation; labor negotiations; and possible impairment of Gearing assets. Management recorded a $1,241 environmental remediation reserve and reported no Gearing impairment at year-end, though its cash-flow projections did not recover the assets’ carrying value before fair-value testing.
- The New Markets Tax Credit structure could expose the company to recapture of up to $3,900 in tax credits if compliance conditions are not met. Management said it did not anticipate recapture.
- Broadwind reported a prior-year waiver of an Adjusted EBITDA covenant under its former credit facility. It replaced that facility in October 2016 and reported compliance with covenants under the new facility at year-end. The new facility is secured by working-capital assets and a mortgage on the Abilene tower facility.
- Federal and state net operating losses are substantial, but use is subject to Section 382 limits; the company disclosed a $14,284 annual limitation tied to a prior ownership change. Deferred tax assets remain largely offset by a valuation allowance.
- Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2016. A material weakness in inventory controls disclosed for 2015 was reported as remediated.
Investor facts to verify
- Whether the $188,717 backlog converts to shipments and revenue on schedule, and how much is cancellable or subject to customer changes.
- Whether improved gross margins and positive operating cash flow can be sustained, particularly given Gearing’s continuing losses and the $2,481 depreciation-estimate benefit.
- Customer concentration, receivables collectability, and reliance on customer deposits to support cash and working-capital needs.
- Red Wolf’s purchase accounting, contingent consideration, integration costs, and contribution to results and liquidity.
- Environmental remediation costs, NMTC compliance through September 2018, and the ability to preserve and use NOL tax benefits.