Broadwind Energy, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in thousands of dollars, except per-share data. Broadwind supplies wind towers, heavy fabrications, precision gearing and industrial systems; wind energy represented 65% of revenue in the first half of 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $41,169 | $36,781 | $82,829 | $66,748 |
| Gross profit / margin | $3,892 / 9.5% | $2,223 / 6.0% | $7,429 / 9.0% | $2,091 / 3.1% |
| Operating loss | $(206) | $(5,736) | $(700) | $(10,273) |
| Net loss | $(1,018) | $(6,116) | $(2,060) | $(10,954) |
| Basic and diluted loss per share | $(0.06) | $(0.40) | $(0.13) | $(0.71) |
- Q2 revenue increased 11.9%; first-half revenue increased 24.1%. Higher tower sales prices and steel costs, increased first-half tower volume, and improved Gearing sales contributed to growth.
- Gross margin improved as manufacturing utilization and efficiency increased, particularly in Towers and Heavy Fabrications and Gearing. Q2 selling, general and administrative expense was $3,895, up from $2,495.
- Q2 net loss improved primarily because the prior-year quarter included a $4,993 goodwill impairment charge, alongside higher sales and better Gearing efficiency. The comparison was partly offset by the absence of a $1,140 Red Wolf earn-out reserve reversal recorded in 2018 and weaker Towers and Heavy Fabrications margins.
- Net interest expense increased to $773 in Q2 and $1,309 in the first half, compared with $352 and $650, respectively, in the comparable 2018 periods.
Cash flow, debt and liquidity
- Cash was $74 at June 30, 2019, versus $1,177 at December 31, 2018. First-half operating cash use was $14,612, compared with $2,793 in the prior-year period; investing cash use was $1,182, and financing provided $14,690.
- Operating cash use reflected a $13,088 inventory increase and a $4,946 decline in customer deposits, partly offset by higher accounts payable. Management said cash balances remain minimal because receipts and disbursements flow through the drawn revolving credit facility.
- Debt and finance lease obligations totaled $29,931, including $26,637 drawn on the revolving line. The $35,000 asset-based facility had $8,033 of additional borrowing availability at quarter-end and matures February 25, 2022. The company reported covenant compliance at June 30.
- Operating lease liabilities were $18,611 at June 30 following adoption of the new lease standard; the company also reported $1,378 of finance lease obligations. These lease liabilities are separate from the debt-and-finance-lease total above.
- Management expects available cash, facility availability, operating cash generation and potential securities proceeds to meet liquidity needs for at least 12 months, but cautioned that customer orders, production, collections and deposits could differ from expectations.
Segments, changes and outlook
- Towers and Heavy Fabrications: Q2 revenue was $28,970, up 13%; operating income was $318 versus $541, and margin fell to 1.1% from 2.1%. First-half revenue rose 31% to $57,264, while operating income was $96. Management cited foreign competition and pricing pressure, partly offset by higher volumes and improved utilization.
- Gearing: Q2 revenue rose to $9,266 and operating income improved to $913 from a $662 loss. First-half operating income was $2,300 versus a $1,288 loss. Better product mix, throughput and manufacturing efficiency helped; lower oil and gas demand was a headwind.
- Process Systems: Q2 revenue was $2,933 and operating income was $28. The first-half operating loss was $256, compared with a $5,890 loss in 2018, primarily reflecting the absence of the prior-year goodwill impairment.
- Q2 orders were $104,612, versus $18,602 a year earlier, driven primarily by tower customers securing production slots for anticipated strong 2020 turbine demand. Management did not provide formal revenue or earnings guidance.
- In Q1 2019, the company moved the Abilene compressed natural gas and heavy fabrication business from Process Systems to Towers and Heavy Fabrications and restated prior-period segment comparisons. The 2018 restructuring was substantially completed; the company projected approximately $575 in annual facility-cost savings and said further costs should be immaterial.
- Broadwind entered into a $6,000 interest-rate swap in June, synthetically fixing the LIBOR component at 2.13% before the credit risk premium. Fair-value changes flow through earnings and may create non-cash volatility. Red Wolf operating losses triggered an impairment review; the company recorded no additional impairment at June 30, 2019.
Risks, contingencies and other notable items
- Liquidity depends on production, sales, collections, customer deposits and access to borrowing or capital markets. A significant operating deterioration could threaten covenant compliance and access to the credit facility; additional equity financing could dilute shareholders.
- Management cited dependence on a few significant customers, wind-market and competitive conditions, commodity and steel prices, and the ability to realize revenue and cash from orders and backlog as important uncertainties.
- The company has ordinary-course legal proceedings; management does not expect a material adverse outcome but noted litigation is uncertain. Product warranty liability was $214. No liquidated-damages reserve was recorded at June 30, 2019.
- The company reported a full valuation allowance against deferred tax assets and $248,717 of net operating loss carryforwards as of December 31, 2018; annual usage is generally limited to $14,284 under Section 382. A shareholder rights plan was extended for three years in 2019 to help protect these tax attributes.
- Management concluded disclosure controls were effective at June 30, 2019 and reported no material change in internal control during the quarter. The filing disclosed no material changes to previously reported risk factors.
Key facts for investors to verify
- Whether the large increase in tower orders converts into shipments and collected cash, and how concentrated those orders are among major customers.
- Whether inventory growth and lower customer deposits reverse as production and deliveries progress; monitor operating cash flow and borrowing-base availability.
- Whether Towers and Heavy Fabrications can sustain volumes and improve margins amid foreign competition and pricing pressure.
- Whether the $8,033 reported borrowing availability, facility covenants and management’s 12-month liquidity assessment remain adequate under actual operating results.
- Whether Red Wolf’s operating performance or future cash-flow assumptions require another impairment, and whether the interest-rate swap causes material earnings volatility.