Broadwind Energy, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2017. Broadwind manufactures wind towers and specialty weldments, precision gearing, and industrial process systems. Wind energy accounted for 79% of revenue in the first nine months of 2017. The company acquired Red Wolf on February 1, 2017, adding the Process Systems segment. Dollar amounts below are in millions unless otherwise noted.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $29.6 | $42.6 | $129.0 | $132.7 |
| Gross profit / margin | $1.0 / 3.4% | $5.3 / 12.5% | $11.3 / 8.7% | $13.4 / 10.1% |
| Operating income (loss) | ($1.8) | $1.4 | ($0.7) | $1.3 |
| Net income (loss) | ($2.2) | $0.9 | $3.3 | $0.02 |
| Diluted earnings (loss) per share | ($0.15) | $0.06 | $0.22 | $0.00 |
- Nine-month continuing-operations income was $3.7 million, despite a $1.3 million pretax loss, primarily because of a $5.1 million income-tax benefit related to the Red Wolf acquisition and release of part of the deferred-tax valuation allowance.
- Operating cash flow was negative $6.6 million for the first nine months, versus positive $17.1 million a year earlier. Investing cash flow was negative $19.2 million, including $16.4 million paid for Red Wolf and $6.0 million of capital expenditures; financing cash flow was positive $7.2 million.
- Cash and cash equivalents were $41,000 at September 30, down from $18.7 million at year-end 2016. Current assets were $27.2 million and current liabilities $27.4 million.
- Total debt and capital lease obligations were $12.9 million, including $7.8 million drawn on the revolving credit facility and a $2.6 million NMTC note. The company reported $11.8 million of additional revolver availability.
Material changes versus the prior comparable period
- Q3 revenue declined 30%, mainly as Towers and Weldments revenue fell $22.0 million, reflecting 63% fewer towers sold. Segment operating results swung from $4.1 million of income to a $1.5 million loss as lower volume left fixed overhead underutilized, despite cost reductions.
- Gearing improved: Q3 revenue rose 65% to $7.6 million, and its operating loss narrowed to $0.4 million. Nine-month Gearing orders nearly tripled, but the segment remained loss-making.
- For the first nine months, revenue fell 2.8%; the $18.8 million Towers and Weldments decline was partly offset by Red Wolf and higher Gearing sales. Towers and Weldments orders were $32.3 million versus $231.4 million in 2016; the prior-year comparison included a $137 million multiyear order.
- Red Wolf contributed $11.1 million of revenue and a $0.5 million net loss from acquisition through September. Broadwind released $1.4 million of contingent earn-out accrual into Q3 operating income after judging the first-year payment threshold unlikely to be met; $1.1 million remained accrued for a potential second-year earn-out.
Outlook, risks, contingencies, and unusual items
- Management said available resources, operating cash flow, revolver availability, and potential proceeds from its shelf registration should meet liquidity needs for at least 12 months. This is not assured: weaker production, customer collections or deposits, covenant noncompliance, or reduced credit availability could create liquidity pressure. No quantified earnings or revenue guidance was provided.
- Management attributed weaker tower demand to customers drawing down inventories built to qualify for Production Tax Credit provisions and other market conditions. The company noted that wind-market demand and its dependence on significant customers create uncertainty.
- The effective Form S-3 registration statement permits offerings of up to $50 million of securities. Future issuance could dilute shareholders or pressure the share price.
- The NMTC arrangement may expose the company to recapture of up to $3.9 million of tax credits if compliance requirements are not met through the third quarter of 2018; management said it did not expect recapture. The company expects Capital One to exercise a put option in 2018, but the filing describes no legal obligation for Capital One to do so.
- An environmental remediation reserve of $0.9 million related to the Cicero Avenue facility remained at quarter-end; the estimate may be reassessed after agency review of remediation results. Management reported no reserve for potential customer liquidated damages. It also said routine litigation was not expected to have a material adverse effect, while noting outcomes remain uncertain.
- Broadwind evaluated possible impairment of certain Gearing long-lived assets but recorded no impairment as of September 30. Estimates depend in part on projections and fair-value assumptions. The Red Wolf purchase-price allocation was provisional.
Most important facts for investors to verify
- Whether wind-tower orders, production volumes, and customer inventory levels recover, and how much existing backlog supports future revenue; the filing text does not provide a clear consolidated backlog value.
- Whether operating cash flow improves and the company maintains access to its revolver while meeting financial covenants, given the very low quarter-end cash balance.
- Whether Gearing and Process Systems can improve utilization and profitability, and whether Red Wolf meets its earn-out and integration assumptions.
- Whether the $5.1 million tax benefit is sustainable: it was largely acquisition-related, and Broadwind still carried a full valuation allowance against deferred tax assets. NOL use may also be limited under Section 382.
- Progress on Cicero remediation and compliance with NMTC requirements through 2018, including the potential tax-credit recapture and Capital One put option.
- Potential dilution from the $50 million shelf registration and the effect of any future securities issuance.