Broadwind Energy, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Amounts are in thousands of dollars, except per-share data. Broadwind manufactures wind towers and specialty weldments and precision gearing; wind energy represented 89% of first-half revenue. The Services segment is reported as discontinued operations following the company’s decision to exit it.
Financial results and liquidity
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Revenue | $43,380 | $62,563 | $90,137 | $111,792 |
| Gross profit / margin | $4,142 / 9.5% | $8,499 / 13.6% | $8,104 / 9.0% | $11,244 / 10.1% |
| Operating income (loss) | $181 | $3,616 | ($43) | $1,252 |
| Continuing-operations income (loss) | $42 | $3,386 | ($316) | $863 |
| Net income (loss), including discontinued operations | ($474) | $1,615 | ($851) | ($3,400) |
| Basic and diluted EPS | ($0.03) | $0.11 | ($0.06) | ($0.23) |
- Cash flow: First-half operating cash flow from continuing operations was positive $1,788, versus negative $20,717 a year earlier. Investing activities provided $1,206; financing activities used $3,127. Cash and cash equivalents rose to $7,501 from $6,436 at year-end; cash plus short-term investments totaled $11,106, down $1,509 from year-end.
- Balance sheet and debt: Current assets were $52,028 and current liabilities $36,034 at June 30. Total assets were $108,468 and stockholders’ equity $67,073. Long-term debt was $2,600; total debt and capital lease obligations were $3,348. The $2,441 Term Loan balance was paid off in June. The $10,000 revolving facility was undrawn, with borrowing availability of up to $8,650; its stated rate was 4.25%.
- Working capital: Accounts receivable increased to $16,866 from $9,784 at year-end, while inventory declined to $21,047 from $24,219. Customer deposits increased to $11,383 from $9,940.
Material changes and operating trends
- Q2 revenue fell 30.7% year over year and first-half revenue fell 19.4%. Lower material costs passed through to customers, lower tower volumes and production mix, and reduced Gearing demand contributed to the declines.
- Q2 gross margin contracted to 9.5% from 13.6%; operating income declined to $181 from $3,616. Lower tower sales and less favorable mix weighed on results, partly offset by improved Abilene tower-facility efficiencies and lower operating expenses.
- Towers and Weldments Q2 revenue was $37,963, with operating income of $2,725 and a 7.2% margin, compared with $55,032, $7,156 and 13.0%, respectively, in Q2 2015. Gearing Q2 revenue was $5,417; its operating loss narrowed to $1,189 from $1,524, although its operating margin weakened to negative 21.9% from negative 19.1%.
- First-half Gearing revenue declined 39%, reflecting weak oil and gas and mining demand. Its operating loss narrowed to $2,392 from $2,736, but operating margin worsened to negative 23.5% from negative 16.5%. Management attributed much of the loss improvement to lower depreciation and overhead.
- Services discontinued-operations losses improved to $516 in Q2 from $1,771 and to $535 for the first half from $4,263. The company recorded $427 of additional warranty expense in Q2 related to two claims.
Outlook, risks, contingencies and unusual items
- Orders and demand: Q2 orders were $176.2 million, including a $137 million multi-year tower agreement; Towers and Weldments orders were $170.6 million. Management cited the timing of large orders and stated the extended federal Production Tax Credit is expected to support wind-tower demand through 2023. No numerical revenue or earnings guidance was provided. Gearing demand from oil and gas and mining remained weak.
- Liquidity and credit: Management expected cash, operating cash generation and the credit facility to cover obligations for at least 12 months, but cautioned that collections, production, customer deposits, new orders, covenant compliance or credit availability could fall short of expectations. The facility matures February 28, 2017; renewal and alternative financing were under consideration. A prior Adjusted EBITDA covenant breach at December 31, 2015 was waived; the company reported compliance with applicable covenants and the $3,500 liquidity requirement at June 30, 2016.
- Accounting estimate: A change in estimated salvage values for selected Gearing machinery reduced depreciation expense by $603 in Q2 and $1,262 in the first half. Management estimated a favorable full-year 2016 impact of $2,500, or $0.17 per share; a similar effect was expected through October 2017. Gearing continued to incur operating losses, and impairment testing identified no impairment at June 30 despite undiscounted cash flows below carrying value.
- Environmental and other exposures: The Cicero Avenue facility remediation reserve was $1,255. The company disclosed a $500 accrued regulatory settlement, $1,203 in self-insured workers’ compensation reserves, and ordinary-course litigation; management said litigation outcomes could nevertheless be material. No liquidated-damages reserve was recorded.
- New Markets Tax Credit: The transaction carries potential recapture of up to $3,900 in tax credits if compliance conditions are not met through September 2018. The company said it did not anticipate recapture. Capital One may put its interest to the company for $130 in 2018.
- Tax attributes: The company had $202.1 million of NOL carryforwards at December 31, 2015, subject to an annual limitation under IRC Section 382. A stockholder rights plan was extended in February 2016 to help preserve those tax attributes.
- Internal controls: Disclosure controls were deemed ineffective at June 30, 2016 because a material weakness remained in controls over completeness, accuracy and existence of certain Towers and Weldments inventory. Remediation was ongoing and incomplete.
Key facts for investors to verify
- Whether the $137 million multi-year tower order converts into scheduled deliveries, revenue and cash collections as expected.
- Whether tower volumes and margins recover and Gearing losses improve amid weak oil and gas and mining demand.
- Whether operating cash flow remains adequate as receivables rise, and whether the company renews or replaces its facility before February 2017 while maintaining covenant compliance.
- Progress and independent validation of inventory-control remediation, including whether the material weakness is resolved.
- Assumptions behind the salvage-value estimate and the projected $2.5 million annual depreciation benefit, as well as future impairment assessments for Gearing assets.
- Changes to the Cicero remediation estimate, warranty claims, and compliance with the New Markets Tax Credit conditions and potential 2018 put obligation.