BROADWIND, INC. - Quarter Report: 2010 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2010

 

OR

 

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to

 

Commission file number 0-31313

 

 

BROADWIND ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

47 East Chicago Avenue, Suite 332, Naperville, IL 60540

(Address of principal executive offices)

 

(630) 637-0315

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o   No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x

 

Number of shares of registrant’s common stock, par value $0.001, outstanding as of May 4, 2010: 106,759,863.

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

		Page No.
	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	[Removed and Reserved]	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

 

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PART I.      FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		March 31,			December 31,
		2010			2009
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	26,343		$	4,829
Restricted cash		—			2,010
Accounts receivable, net of allowance for doubtful accounts of $2,145 and $1,641 as of March 31, 2010 and December 31, 2009, respectively		14,664			21,920
Inventories, net		14,761			9,039
Prepaid expenses and other current assets		4,511			5,688
Total current assets		60,279			43,486
Property and equipment, net		133,954			136,249
Goodwill		9,715			9,715
Intangible assets, net		36,173			37,248
Other assets		3,337			3,338
TOTAL ASSETS		$	243,458		$	230,036
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	—		$	10,717
Current maturities of long-term debt		2,655			9,021
Current portions of capital lease obligations		1,143			1,130
Accounts payable		12,265			14,710
Accrued liabilities		6,115			6,965
Deferred revenue		7,973			10,199
Total current liabilities		30,151			52,742
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		12,301			15,778
Long-term capital lease obligations, net of current portions		3,010			3,286
Interest rate swap agreements		—			253
Deferred income tax liabilities		465			403
Other		1,829			1,979
Total long-term liabilities		17,605			21,699
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value; 150,000,000 shares authorized; 106,746,705 and 96,701,127 shares issued and outstanding as of March 31, 2010 and December 31, 2009, respectively		107			97
Additional paid-in capital		355,000			300,779
Accumulated deficit		(159,405		)	(145,281		)
Total stockholders’ equity		195,702			155,595
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	243,458		$	230,036

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)

 

		Three Months Ended March 31,
		2010			2009
Revenues		$	22,170		$	53,062
Cost of sales		26,654			48,377
Gross (loss) profit		(4,484		)	4,685
OPERATING EXPENSES:
Selling, general and administrative		8,214			8,916
Intangible amortization		1,075			2,906
Total operating expenses		9,289			11,822
Operating loss		(13,773		)	(7,137		)
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(362		)	(542		)
Other, net		132			93
Total expense, net		(230		)	(449		)
Net loss before provision (benefit) for income taxes		(14,003		)	(7,586		)
PROVISION (BENEFIT) FOR INCOME TAXES		121			(436		)
NET LOSS		$	(14,124	)	$	(7,150	)
NET LOSS PER COMMON SHARE - Basic and diluted		$	(0.14	)	$	(0.07	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		104,371			96,492

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(In thousands)

 

		Three Months Ended March 31,
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(14,124	)	$	(7,150	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense		4,834			6,607
Change in fair value of interest rate swap agreements		(253		)	(85		)
Deferred income taxes		62			(356		)
Stock-based compensation		366			536
Allowance for doubtful accounts		504			(1,050		)
Gain on disposal of assets		(7		)	(7		)
Changes in operating assets and liabilities:
Accounts receivable		6,753			11,938
Inventories		(5,722		)	(1,438		)
Prepaid expenses and other current assets		1,176			693
Accounts payable		(1,199		)	(4,846		)
Accrued liabilities		(1,012		)	(1,981		)
Deferred revenues		(2,226		)	(3,162		)
Other non-current assets and liabilities		(101		)	—
Net cash used in operating activities		(10,949		)	(301		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,596		)	(6,743		)
Proceeds from disposals of property and equipment		7			24
Decrease in restricted cash		2,010			—
Net cash used in investing activities		(579		)	(6,719		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock		53,467			—
Common stock issued under defined contribution 401(k) plan		172			—
Payments on lines of credit and notes payable		(20,561		)	(4,634		)
Proceeds from lines of credit and notes payable		—			1,542
Proceeds from sales-leaseback transactions		—			1,235
Principal payments on capital leases		(263		)	(325		)
Issuance of restricted stock grants		227			282
Net cash provided by (used in) financing activities		33,042			(1,900		)
NET INCREASE (DECREASE) IN CASH		21,514			(8,920		)
CASH, beginning of the period		4,829			15,253
CASH, end of the period		$	26,343		$	6,333
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	433		$	676
Income taxes paid		$	38		$	506
Non-cash financing activities:
Common stock issued under defined contribution 401(k) plan		$	172		$	—
Issuance of restricted stock grants		$	227		$	282

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands, except share and per share data)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The December 31, 2009 consolidated balance sheets were derived from audited financial statements, but do not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly owned subsidiaries. As of March 31, 2010, the Company had four operating subsidiaries, which consisted of Brad Foote Gear Works, Inc. (“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”), Energy Maintenance Service, LLC (“EMS”) and Badger Transport, Inc. (“Badger”). All inter-company transactions and balances have been eliminated. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

Business Overview

 

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” “Broadwind,” and the “Company,” refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Naperville, Illinois, and its wholly owned subsidiaries. The Company is an independent, horizontally integrated supplier of customized products and services to the U.S. wind energy industry. The Company’s product and service portfolio provides its customers, including wind turbine manufacturers, wind farm developers and wind farm operators, with access to a broad array of wind component and service offerings. The Company manufactures gearing systems and wind towers for the wind industry, and provides technical service and precision repair and engineering and specialized logistics to the wind industry in the United States.

 

In December 2009, the Company revised its reporting segment presentation into four reportable operating segments: Towers, Gearing, Technical and Engineering Services, and Logistics. Accordingly, all current and prior period financial results have been revised to reflect these changes. See Note 12, “Segment Reporting,” of the notes to these condensed consolidated financial statements for further discussion of the Company’s reportable segments.

 

Towers

 

The Company manufactures wind towers, specifically the large and heavier wind towers that are designed for 2 megawatt (“MW”) and larger wind turbines. The Company’s production facilities are strategically located in close proximity to the primary U.S. wind resource regions, sited in Wisconsin and Texas, including a recently constructed third wind tower manufacturing facility in Brandon, South Dakota, which will become operational as business warrants and pending the installation of certain additional equipment. The Company also manufactures other specialty weldments and structures for industrial customers.

 

Gearing

 

The Company manufactures precision gearing systems for the wind industry in North America and products for industrial markets including mining and oilfield equipment, with facilities in Illinois and Pennsylvania. The Company uses an integrated manufacturing process, which includes a machining process in Cicero, Illinois, a heat treatment process in Neville Island, Pennsylvania and a finishing process in the Company’s Cicero factory.

 

Technical and Engineering Services

 

The Company is an independent service provider of construction support and operations and maintenance services to the wind industry. The Company’s specialty services include oil change-out, up-tower tooling for gearing systems, drive-train and blade repairs and component replacement. The Company’s construction support capabilities include assembly of towers, nacelles, blades

 

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and other components. The Company also provides customer support, preventive maintenance and wind technician training. The Company’s technicians utilize regional service centers for storage and repair of parts as well as for training. Through its precision repair and engineering services, the Company repairs and refurbishes complex wind components, including control systems, gearboxes and blades. The Company also conducts warranty inspections, commissions turbines and provides technical assistance.

 

Logistics

 

The Company offers specialized transportation, permitting and logistics management to the wind industry for oversize and overweight machinery and equipment. The Company delivers complete turbines to the installation site, including blades, nacelles and tower sections for final erection. The Company focuses on the project management of the delivery of complete wind turbine farms.

 

Financing and Liquidity

 

As of March 31, 2010, the Company had $26,343 in cash on hand. As discussed further in Note 6, “Debt and Credit Agreements,” of the notes to these condensed consolidated financial statements, the Company repaid in January 2010 outstanding indebtedness in the amount of $16,076 and $3,066 to Bank of America and Investors Community Bank, respectively. The repayment of this indebtedness released the Company from certain financial covenants and debt service requirements.

 

The Company’s management anticipates that the Company will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and debt and lease commitments through at least the next 12 months primarily with current cash on hand, cash generated by operations or other financing arrangements. The Company’s ability to make scheduled payments on debt and other financial obligations will depend on future financial and operating performance. However, if sales and subsequent collections from several of the Company’s large customers, as well as revenues generated from new customer orders, are not materially consistent with management’s expectations, the Company may encounter cash flow and liquidity issues. Additional funding may not be available when needed or on terms acceptable to the Company. Furthermore, if the Company is unable to obtain additional capital, the Company will likely be required to delay, reduce the scope of or eliminate the Company’s plans for expansion and growth, and this could affect the Company’s overall operations. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, will likely require financial covenants or other restrictions on the Company.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2010 and 2009 as follows:

 

		Three months ended March 31,
		2010			2009
Basic earnings per share calculation:
Net loss to common stockholders		$	(14,124	)	$	(7,150	)
Weighted average number of common shares outstanding		104,370,962			96,491,885
Basic net loss per share		$	(0.14	)	$	(0.07	)
Diluted earnings per share calculation:
Net loss to common stockholders		$	(14,124	)	$	(7,150	)
Weighted average number of common shares outstanding		104,370,962			96,491,885
Common stock equivalents:
Stock options and unvested restricted stock units (1)		—			—
Weighted average number of common shares outstanding		104,370,962			96,491,885
Diluted net loss per share		$	(0.14	)	$	(0.07	)

 

(1) Stock options and unvested restricted stock units granted and outstanding of 1,883,751 and 2,032,375 as of March 31, 2010 and 2009, respectively, are excluded from the computation of diluted earnings due to the anti-dilutive effect as a result of the Company’s net loss for these respective periods.

 

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NOTE 3 — INVENTORIES

 

Inventories are stated at the lower of cost or market value and primarily consist of raw material, work-in-process, and finished goods. Work-in-process consists of labor and overhead, processing costs, purchased subcomponents and materials purchased for specific customer orders. Finished goods consist of components purchased from third parties as well as components manufactured by the Company that will be used to produce final customer products.

 

The components of inventories as of March 31, 2010 and December 31, 2009 are summarized as follows:

 

		March 31,			December 31,
		2010			2009
Raw materials		$	7,172		$	4,957
Work-in-process		7,471			2,921
Finished goods		1,803			3,338
		16,446			11,216
Less: Reserve for excess and obsolete inventory		(1,685		)	(2,177		)
Net inventories		$	14,761		$	9,039

 

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess of cost over fair market value of identifiable net assets acquired through business purchases. The Company performs an annual goodwill impairment test during the fourth quarter of each year, or more frequently when events or circumstances indicate that the carrying value of its assets may not be recovered. Intangible assets represent the fair value assigned to definite-lived assets such as trade names, customer relationships, and noncompete agreements as part of acquisitions completed during 2007 and 2008. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 3 to 20 years. The Company tests intangible assets for impairment only when events or circumstances indicate that the carrying value of these assets may not be recovered.

 

As a result of the reduction in the Company’s revenues during the first quarter of 2010 from original projections, the Company evaluated the recoverability of certain of its identifiable intangible assets and goodwill balances. Based upon the Company’s assessment, no impairment to these assets was identified as of March 31, 2010.

 

As of March 31, 2010 and December 31, 2009, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

		March 31, 2010									December 31, 2009
		Adjusted						Net												Net
		Cost			Accumulated			Book			Cost			Accumulated			Impairment			Book
		Basis			Amortization			Value			Basis			Amortization			Charge			Value
Intangible assets:
Customer relationships		$	33,059		$	(6,412	)	$	26,647		$	106,638		$	(21,332	)	$	(57,835	)	$	27,471
Trade names		10,159			(1,212		)	8,947			10,279			(1,099		)	(107		)	9,073
Noncompete agreements		1,490			(911		)	579			1,490			(786		)	—			704
Intangible assets		$	44,708		$	(8,535	)	$	36,173		$	118,407		$	(23,217	)	$	(57,942	)	$	37,248

 

Intangible investments associated with customer relationships, trade names and noncompete agreements are being amortized ratably over the estimated life of the related intangible assets. Amortization expense was $1,075 and $2,906 for the three months ended March 31, 2010 and 2009, respectively.

 

NOTE 5 — ACCRUED LIABILITIES

 

Accrued liabilities as of March 31, 2010 and December 31, 2009 consisted of the following:

 

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		March 31,			December 31,
		2010			2009
Accrued operating expenditures		$	125		$	954
Accrued payroll and benefits		2,829			2,295
Accrued professional fees		456			1,067
Accrued warranty		1,047			918
Accrued other		1,658			1,731
Total accrued liabilities		$	6,115		$	6,965

 

NOTE 6 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of March 31, 2010 and December 31, 2009 consisted of the following:

 

		March 31,			December 31,
		2010			2009
Lines of credit		$	—		$	10,601
Term loans and notes payable		12,636			22,595
Related party note		2,320			2,320
		14,956			35,516
Less - Current maturities		(2,655		)	(19,738		)
Long-term debt, net of current maturities		$	12,301		$	15,778

 

Credit Facilities

 

Brad Foote

 

In connection with the Company’s acquisition of Brad Foote in October 2007, the Company assumed outstanding debt and available lines of credit totaling approximately $25,500 under various secured debt facilities (the “BOA Debt Facilities”) with Bank of America. The BOA Debt Facilities were governed by a Loan and Security Agreement dated as of January 17, 1997 (as amended and/or restated, the “Loan Agreement”).

 

On January 22, 2010, (i) Brad Foote repaid all of the outstanding principal and interest under the BOA Debt Facilities in the aggregate amount of $16,076, and (ii) the BOA Debt Facilities were terminated.

 

Tower Tech

 

ICB Line

 

In October 2007, Tower Tech obtained a secured line of credit (the “ICB Line”) from Investors Community Bank in the amount of $2,500, which was subsequently increased to $5,500 on March 21, 2008. On March 13, 2009, Investors Community Bank agreed to extend the maturity date of the ICB Line to March 13, 2010 (the “ICB Line Extension Agreement”). Pursuant to a Master Amendment dated as of December 30, 2009 (the “ICB Master Amendment”) among Investors Community Bank, Tower Tech and Broadwind (as guarantor), the amount of the ICB Line was increased to $6,500, subject to borrowing base availability. On January 26, 2010, Tower Tech repaid all of the outstanding indebtedness under the ICB Line in the amount of $3,066 and allowed the ICB Line to expire on March 13, 2010.

 

ICB Notes

 

On April 7, 2008, the Company’s wholly owned subsidiary R.B.A., Inc. (“RBA”) executed four (4) promissory notes with Investors Community Bank (the “ICB Notes”), in the aggregate principal amount of approximately $3,781, as follows: (i) a term note in the maximum principal amount of approximately $421, bearing interest at a per annum rate of 6.85%, with a maturity date of October 5, 2012; (ii) a term note in the maximum principal amount of $700, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; (iii) a term note in the maximum principal amount of $928, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; and (iv) a line of credit note in the maximum principal amount of $1,732, bearing interest at a per annum rate of 4.48% until May 1, 2008 and thereafter at LIBOR plus 1.75%, with a maturity date of April 5, 2009 (the

 

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“Line of Credit Note”). The Line of Credit Note was subsequently modified on March 13, 2009 to extend the maturity date to March 13, 2010 and to change the interest rate to the greater of (A) 5% or (B) prime. The ICB Notes provide for multiple advances, and were secured by substantially all of the assets of RBA.

 

Pursuant to the merger of RBA into Tower Tech on December 31, 2009, Tower Tech became the successor by merger to RBA’s interest in the loans from Investors Community Bank to RBA evidenced by the ICB Notes (other than the Line of Credit Note, which was repaid in full in January 2010). As of March 31, 2010, (i) the total amount of outstanding indebtedness under the ICB Notes was $1,563, and (ii) the effective interest rate of the ICB Notes was 5.85%.

 

As of March 31, 2010, Tower Tech was in compliance with all applicable financial covenants related to the ICB Notes.

 

Great Western Loan

 

On April 28, 2009 (the “Construction Loan Closing Date”), Tower Tech entered into a Construction Loan Agreement (the “Construction Loan Agreement”) with Great Western Bank (“Great Western”), pursuant to which Great Western agreed to provide up to $10,000 in financing (the “Construction Loan”) to fund construction of Tower Tech’s wind tower manufacturing facility in Brandon, South Dakota (the “Facility”). The Construction Loan bore interest at a rate of 7.5% per annum on all advances. The Construction Loan was originally scheduled to mature on January 5, 2010, but was subsequently extended by mutual agreement.

 

The Construction Loan was secured by a first mortgage on the Facility and all fixtures, accounts and proceeds relating thereto, pursuant to a Mortgage (the “Mortgage”) and a Commercial Security Agreement, each between Tower Tech and Great Western and entered into on the Construction Loan Closing Date. In addition, pursuant to an Assignment of Deposit Account (the “Assignment of Deposit Account”) entered into on the Construction Loan Closing Date, Tower Tech granted Great Western a security interest in a $2,000 deposit account (the “Deposit Account”). The Company also executed a Commercial Guaranty (the “Commercial Guaranty”) and entered into a Subordination Agreement in connection with the Construction Loan, under which it agreed to guarantee Tower Tech’s performance and to subordinate all intercompany debt with Tower Tech to the Construction Loan.

 

Pursuant to a Letter Agreement dated as of the Construction Loan Closing Date among Great Western, Tower Tech and the Company, Tower Tech was granted the right, at any time prior to the maturity date of the Construction Loan, and subject to certain parameters, to convert the Construction Loan into a term loan. Tower Tech timely exercised this conversion right, and pursuant to a Change in Terms Agreement dated April 5, 2010 (the “Change in Terms Agreement”) between Great Western and Tower Tech, the Construction Loan was converted to a term loan (the “Great Western Term Loan”) providing for monthly payments of principal plus interest, extending the maturity date to November 5, 2016, reducing the principal amount to $6,500, and changing the per annum interest rate to 8.5%. Tower Tech was required to pay a 1.0% origination fee upon the conversion.

 

In connection with the conversion to the Great Western Term Loan as described above, (i) approximately $248 of the amount held in the Deposit Account was applied as a principal reduction payment in order to reduce the principal amount of the Great Western Term Loan to $6,500, (ii) the balance of the amount held in the Deposit Account was released to Tower Tech on March 31, 2010, (iii) the Construction Loan Agreement was terminated and replaced with a Business Loan Agreement dated April 5, 2010 (the “Business Loan Agreement”) by and between Great Western and Tower Tech, (iv) the Mortgage was amended in certain respects pursuant to an Amendment to Mortgage dated April 5, 2010 (the “Mortgage Amendment”) between Great Western and Tower Tech, and (v) pursuant to a Letter Agreement dated April 5, 2010 (the “Letter Agreement”) by and among Great Western, Tower Tech and the Company, the Commercial Guaranty, the Business Loan Agreement and the Promissory Note executed in connection with the Construction Loan were each modified in certain respects.

 

The Great Western Term Loan contains representations, warranties and covenants that are customary to a term financing arrangement and contains no financial covenants. As of March 31, 2010, total outstanding indebtedness under the Construction Loan was $6,500.

 

Badger

 

On March 13, 2009, Badger obtained a term loan (the “FNB Term Loan”) from First National Bank (“FNB”) in the principal amount of approximately $1,538. A portion of the proceeds from the FNB Term Loan was used to pay off Badger’s existing term loan and revolving line of credit with FNB, with the remainder available for working capital. The FNB Term Loan is secured by the inventory, accounts receivable and certain equipment of Badger, and is guaranteed by the Company. The FNB Term Loan bears interest at a rate of 6.75% per annum, matures on March 13, 2013, and requires monthly payments of principal and interest. The FNB Term Loan contains no financial covenants. As of March 31, 2010, the total amount of outstanding indebtedness under the FNB Term Loan was $1,190.

 

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On September 30, 2009, Badger obtained a term loan (the “GE Capital Term Loan”) from General Electric Capital Corporation in the principal amount of approximately $1,000. The GE Capital Term Loan is secured by certain equipment of Badger, and is guaranteed by the Company. The GE Capital Term Loan bears interest at a rate of 7.76% per annum, matures on September 30, 2014, and requires monthly payments of principal and interest. The GE Capital Term Loan contains no financial covenants. As of March 31, 2010, the total amount of outstanding indebtedness under the GE Capital Term Loan was $907.

 

Selling Shareholder Notes

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the former owners of Brad Foote (the “Selling Shareholders”), including J. Cameron Drecoll, the Company’s Chief Executive Officer and a member of its Board of Directors, related to the post-closing escrow established in connection with the Company’s acquisition of Brad Foote. Under the terms of the Settlement Agreement, among other terms, the Company issued three promissory notes to the Selling Shareholders in the aggregate principal amount of $3,000 (the “Selling Shareholder Notes”). The Selling Shareholder Notes mature on May 28, 2012 and bear interest at a rate of 7% per annum, with interest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecoll in the principal amount of $2,320 and pursuant to the terms of the Settlement Agreement is deemed by the Company to be a related party transaction. As of March 31, 2010, principal of $3,000 and accrued interest of $52 were outstanding under the Selling Shareholder Notes. The Company has accounted for the Selling Shareholder Notes as long-term debt in its condensed consolidated balance sheets.

 

NOTE 7 — INTEREST RATE SWAP AGREEMENTS

 

As part of the Company’s acquisition of Brad Foote in October 2007, the Company assumed two interest rate swap agreements. These swap agreements were intended to minimize the impact of interest rate fluctuations on certain debt instruments. Interest rate swap agreements involve exchanges of fixed or floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. Derivatives are measured at fair value and recognized as either assets or liabilities on the Company’s balance sheet. The accounting for changes in the fair value of a derivative is dependent upon the use of the derivative and its resulting designation. Unless specific hedge accounting criteria are met, changes in the fair value of the derivative must be recognized currently in earnings. The Company’s interest rate swaps did not qualify for hedge accounting, and therefore, the Company was required to recognize the swap agreements at their fair market value and record the fluctuations in the fair value of the swap agreements in current earnings.

 

In February 2010, the Company settled both interest rate swap agreements for $270 in connection with the repayment of all outstanding indebtedness to Bank of America in January 2010.

 

NOTE 8 — STOCKHOLDERS’ EQUITY

 

On January 21, 2010, the Company completed a public offering of its common stock, par value $0.001 per share, at an offering price of $5.75 per share. In the offering, the Company sold 10,000,000 newly issued shares of its common stock for approximately $54,625 in proceeds after deducting underwriting discounts, but before deducting other offering related costs. In connection with the offering, the Company incurred $1,158 in costs associated with professional and other offering related expenses, which have been netted against the proceeds received in additional paid-in capital in the Company’s consolidated balance sheets as of March 31, 2010.

 

On March 26, 2010, the Company issued 32,761 shares of its common stock for an aggregate fair value of $172 in connection with matching contributions made under its defined contribution 401(k) safe harbor plan.

 

NOTE 9 — INCOME TAXES

 

The Company accounts for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of March 31, 2010 and December 31, 2009, the Company had accrued interest or penalties related to uncertain tax positions totaling $32 and $10, respectively.

 

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The Company files income tax returns in U.S. federal and state jurisdictions. As of March 31, 2010, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. No changes in settled tax years have occurred through March 31, 2010. The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.

 

The following table presents the income tax provision (benefit) for the three months ended March 31, 2010 and 2009 as follows:

 

		For the Three Months Ended March 31,
		2010			2009
Net loss before (benefit) provision for income taxes		$	(14,003	)	$	(7,586	)
Provision (benefit) for income taxes		121			(436		)
Net loss		$	(14,124	)	$	(7,150	)

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in the Company’s valuation allowance, permanent differences and provisions for state and local income taxes. As of March 31, 2010, the Company had a net deferred tax liability of $465 primarily related to temporary differences in indefinite-lived assets. These indefinite-lived assets consist of tax deductible goodwill from business acquisitions completed during 2007 and 2008. During the three months ended March 31, 2010, the Company recorded a provision for income taxes of $121 compared to a benefit for income taxes of $436 during the three months ended March 31, 2009. The increase in income taxes during the three months ended March 31, 2010 was primarily attributable to a full income tax valuation allowance for federal income tax reporting purposes resulting from the Company’s net operating loss carryforwards and due to a favorable change in the method of calculating state income taxes in the prior year. The income tax benefit recorded during the three months ended March 31, 2009 related to a decrease in state income taxes and deferred state income tax liabilities as a result of a favorable change in the state of Wisconsin’s method of calculating state income taxes.

 

NOTE 10 — SHARE-BASED COMPENSATION

 

Overview of Share-Based Compensation Plan

 

The Company grants incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “EIP”), which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June 2008. The EIP was subsequently amended in August 2008 by the Company’s Board of Directors to include certain non-material amendments to clarify the terms and conditions of restricted stock awards and to provide that the administrator of the EIP has the authority to authorize future amendments to the EIP. The EIP was further amended by the Company’s stockholders in June 2009 to increase the number of shares of common stock authorized for issuance under the EIP. As amended, the EIP reserves 5,500,000 shares of common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of March 31, 2010, the Company had reserved 1,472,565 shares for the exercise of stock options outstanding, 411,186 shares for restricted stock unit awards outstanding and 3,374,275 additional shares for future stock awards under the EIP. As of March 31, 2010, 241,974 shares of common stock reserved for stock options and restricted stock unit awards under the EIP have been issued in the form of common stock.

 

Stock Options.    The exercise price of stock options granted under the EIP is equal to the closing price of the Company’s common stock on the date of grant. Stock options generally become exercisable on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. Additionally, stock options expire ten years after the date of grant. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to unvested stock option awards.

 

Restricted Stock.    The granting of restricted stock units is provided for under the EIP. Restricted stock units generally vest on the anniversary of the grant date, with vesting terms that range from immediate vesting to five years from the date of grant. The fair value of each unit granted is equal to the closing price of the Company’s common stock on the date of grant and is expensed ratably over the vesting term of the restricted stock award. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to any unvested portion of the restricted stock units.

 

The following table summarizes stock option activity during the three months ended March 31, 2010 under the EIP as follows:

 

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		Options		Weighted Average Exercise Price
Outstanding as of December 31, 2009		1,402,163		$	11.08
Granted		229,828		$	5.44
Exercised		—		—
Forfeited		(122,366	)	$	10.40
Expired		(37,060	)	$	19.56
Outstanding as of March 31, 2010		1,472,565		$	10.04
Exercisable as of March 31, 2010		375,933		$	10.30

 

The following table summarizes restricted stock unit activity during the three months ended March 31, 2010 under the EIP as follows:

 

		Number of Units		Weighted Average Grant-Date Fair Value Per Unit
Outstanding as of December 31, 2009		279,151		$	8.76
Granted		150,019		$	5.43
Vested		(17,984	)	$	6.03
Forfeited		—		—
Outstanding as of March 31, 2010		411,186		$	7.66

 

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected life of the awards and actual and projected stock option exercise behavior. The weighted average fair value per share of stock option awards granted during the three months ended March 31, 2010 and 2009, and assumptions used to value stock options, are as follows:

 

		For the Three Months Ended March 31,
		2010			2009
Dividend yield		—			—
Risk-free interest rate		3.1		%	2.0		%
Weighted average volatility		85.0		%	85.0		%
Expected life (in years)		6.5			6.5
Weighted average grant date fair value per share of options granted		$	4.02		$	2.29

 

Dividend yield is zero as the Company currently does not pay a dividend.

 

Risk-free rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the award.

 

During the three months ended March 31, 2010 and 2009, the Company utilized a standard volatility assumption of 85% for estimating the fair value of stock options awarded based on comparable volatility averages for the energy related sector.

 

The expected life of each stock option award granted is derived using the “simplified method” for estimating the expected term of a “vanilla-option” in accordance with Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” as amended by SAB No. 110, “Share-Based Payment.” The fair value of each unit of restricted stock is equal to the fair market value of the Company’s common stock as of the date of grant.

 

During the three months ended March 31, 2010 and 2009, the Company utilized a forfeiture rate of 10% for estimating the forfeitures of stock options granted.

 

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the three months March 31, 2010 and 2009 as follows:

 

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		For the Three Months Ended March 31,
		2010			2009
Share-based compensation expense:
Selling, general and administrative		$	593		$	818
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net loss		$	593		$	818
Reduction in earnings per share:
Basic and diluted earnings per share (2)		$	0.01		$	0.01

 

(1) Income tax benefit is not illustrated because the Company is currently operating at a loss and an actual income tax benefit was not realized for the three months ended March 31, 2010 and 2009. The result of the loss situation creates a timing difference, resulting in a deferred tax asset, which is fully reserved for in the Company’s valuation allowance.

 

(2) Diluted earnings per share for the three months ended March 31, 2010 and 2009 does not include common stock equivalents due to their anti-dilutive nature as a result of the Company’s net losses for these respective periods. Accordingly, basic earnings per share and diluted earnings per share are identical for all periods presented.

 

As of March 31, 2010, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and restricted stock units, in the amount of approximately $7,863 will be recognized through the year 2014. The Company expects to satisfy the exercise of stock options and future distribution of shares of restricted stock by issuing new shares of common stock.

 

NOTE 11 — RECENT ACCOUNTING PRONOUNCEMENTS

 

The following is a listing of recent accounting standards issued by the Financial Accounting Standards Board (“FASB”) and their effect on the Company.

 

In February 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-09, Subsequent Events (Topic 855). ASU 2010-09 removes the requirements for Securities and Exchange Commission (“SEC”) registrants to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. The adoption of this standard did not have a material effect on the financial position, results of operations or cash flows of the Company.

 

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  ASU 2010-06 provides additional disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Disclosure requirements applicable to Level 3 transactions are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years, with early adoption permitted.  The portion of ASU 2010-06 that was effective beginning after December 15, 2009 did not have a material effect on the financial position, results of operations or cash flows of the Company. Additionally, the Company does not anticipate that the disclosure requirements applicable to Level 3 transactions that are effective for fiscal years beginning after December 15, 2010 will have a material effect on the financial position, results of operations or cash flows of the Company.

 

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605). ASU 2009-13 provides additional guidance related to the accounting for multiple-deliverable arrangements to account for products or services (deliverables) separately rather than as a combined unit and eliminates the residual method of allocation.  ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not anticipate that the provisions of ASU 2009-13 will have a material effect on the financial position, results of operations or cash flows of the Company.

 

NOTE 12 — SEGMENT REPORTING

 

In December 2009, the Company revised its reporting segments. The revised reporting structure includes four reportable segments: “Towers” (formerly “Products”), “Gearing” (formerly “Products”), “Technical and Engineering Services” (formerly “Services”) and “Logistics”(formerly “Services”). Accordingly, all prior period segment information has been reclassified to properly reflect the Company’s current reportable segments.

 

The Company’s segments and their product and service offerings are summarized below:

 

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Towers

 

The Company manufactures wind towers, specifically the large and heavier wind towers that are designed for 2 MW and larger wind turbines. The Company’s production facilities are strategically located in close proximity to the primary U.S. wind resource regions, sited in Wisconsin and Texas, including a recently constructed third wind tower manufacturing facility in Brandon, South Dakota, which will become operational as business warrants and pending the installation of certain additional equipment. The Company also manufactures other specialty weldments and structures for industrial customers.

 

Gearing

 

The Company manufactures precision gearing systems for the wind industry in North America and products for industrial markets including mining and oilfield equipment, with facilities in Illinois and Pennsylvania. The Company uses an integrated manufacturing process, which includes a machining process in Cicero, Illinois, a heat treatment process in Neville Island, Pennsylvania and a finishing process in the Company’s Cicero factory.

 

Technical and Engineering Services

 

The Company is an independent service provider of construction support and operations and maintenance services to the wind industry. The Company’s specialty services include oil change-out, up-tower tooling for gearing systems, drive-train and blade repairs and component replacement. The Company’s construction support capabilities include assembly of towers, nacelles, blades and other components. The Company also provides customer support, preventive maintenance and wind technician training. The Company’s technicians utilize regional service centers for storage and repair of parts as well as for training. Through its precision repair and engineering services, the Company repairs and refurbishes complex wind components, including control systems, gearboxes and blades. The Company also conducts warranty inspections, commissions turbines and provides technical assistance. The Company’s service locations are in Illinois, California, South Dakota, Texas and Colorado.

 

Logistics

 

The Company offers specialized transportation, permitting and logistics management to the wind industry for oversize and overweight machinery and equipment. The Company delivers complete turbines to the installation site, including blades, nacelles and tower sections for final erection. The Company focuses on the project management of the delivery of complete wind turbine farms.

 

Corporate and Other

 

“Corporate and Other” is comprised of adjustments to reconcile segment results to consolidated results, which primarily includes corporate administrative expenses and intercompany eliminations.

 

Summary financial information by reportable segment is as follows:

 

		Revenues						Operating (Loss) Profit
		For the Three Months Ended March 31,						For the Three Months Ended March 31,
		2010			2009			2010			2009
Segments:
Towers		$	12,046		$	20,104		$	(1,277	)	$	(68	)
Gearing		7,717			23,030			(5,128		)	(3,867		)
Technical and Engineering Services		2,022			7,410			(2,450		)	24
Logistics		460			2,819			(1,708		)	(950		)
Corporate and Other (1)		(75		)	(301		)	(3,210		)	(2,276		)
		$	22,170		$	53,062		$	(13,773	)	$	(7,137	)

 

		Depreciation and Amortization						Capital Expenditures
		For the Three Months Ended March 31,						For the Three Months Ended March 31,
		2010			2009			2010			2009
Segments:
Towers		$	854		$	748		$	1,252		$	6,925
Gearing (2)		2,448			4,245			1,106			(634		)
Technical and Engineering Services		817			741			228			82
Logistics		674			839			6			368
Corporate and Other (1)		41			34			4			2
		$	4,834		$	6,607		$	2,596		$	6,743

 

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		Total Assets as of
		March 31,			December 31,
		2010			2009
Segments:
Towers		$	81,039		$	80,146
Gearing		86,956			92,665
Technical and Engineering Services		33,500			36,417
Logistics		20,226			21,259
Corporate and Other (3)		21,737			(451		)
		$	243,458		$	230,036

 

(1) “Corporate and Other” includes corporate administrative expenses and intercompany eliminations. Corporate selling, general and    administrative expenses includes corporate salaries and benefits, share-based compensation, and professional fees.

 

(2) Gearing segment capital expenditures for the three months ended March 31, 2009 reflects cash amounts received in connection with the return of certain capital equipment expenditures made during 2008.

 

(3) “Corporate and Other” includes assets of the corporate headquarters and intercompany eliminations.

 

NOTE 13 — COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments

 

During 2010, the Company issued purchase commitments in connection with equipment purchases for the Company’s MW gearbox refurbishment center, which totaled $2,700 as of March 31, 2010.

 

During 2009 and 2010, the Company issued purchase commitments in connection with equipment purchases for the Company’s wind tower manufacturing facility located in Brandon, South Dakota, which totaled approximately $1,269 as of March 31, 2010.

 

During 2008, the Company issued purchase commitments in connection with gearing equipment totaling $4,888, of which the Company made a $1,324 deposit. As of March 31, 2010, outstanding purchase orders totaled $3,564.

 

Legal Proceedings

 

From time to time, the Company is subject to legal proceedings or claims arising from its normal course of operations. The Company accrues for costs related to loss contingencies when such costs are probable and reasonably estimable. As of March 31, 2010, the Company is not aware of any material pending legal proceedings or threatened litigation that would have a material adverse effect on the Company’s financial condition or results of operations, although no assurance can be given with respect to the ultimate outcome of pending actions.

 

Customer Disputes

 

From time to time, the Company may be involved in disputes with its customers regarding matters such as warranty liability, pricing and contract performance. During the third quarter of 2009, the Company became involved in a contract dispute with a customer, pursuant to which it initially reserved $1,500 related to the settlement of this matter. The Company and the customer are currently in negotiations to resolve this dispute. As of March 31, 2010, the Company had recorded an aggregate reserve of $1,900 related to disputes with its customers, of which $1,600 is reserved in the Company’s allowance for doubtful accounts and $300 in its warranty reserves.

 

Environmental Compliance and Remediation Liabilities

 

The Company’s operations and products are subject to a variety of environmental laws and regulations in the jurisdictions in which the Company operates and sells products governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous materials, soil and groundwater contamination, employee health and safety, and product content, performance and packaging. Also, certain environmental laws can impose the entire cost or a portion of the cost of investigating and cleaning up a contaminated site, regardless of fault, upon any one or more of a number of parties, including the current or previous owner or operator of the site. These environmental laws also impose liability on any person who arranges for the disposal or treatment

 

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of hazardous substances at a contaminated site. Third parties may also make claims against owners or operators of sites and users of disposal sites for personal injuries and property damage associated with releases of hazardous substances from those sites.

 

Warranty Liability

 

The Company provides warranty terms that range from two to seven years for various products relating to workmanship and materials supplied by the Company. From time to time, customers may submit warranty claims against the Company. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for amounts paid to customers under warranty provisions. As of March 31, 2010 and December 31, 2009, estimated product warranty liability was $1,047 and $918, respectively, and is recorded within accrued liabilities in the Company’s condensed consolidated balance sheets.

 

The changes in the carrying amount of the Company’s total product warranty liability for the three months ended March 31, 2010 and 2009 were as follows:

 

		As of
		March 31,
		2010			2009
Balance, beginning of period		$	918		$	890
Warranty expense		138			320
Warranty claims		(9		)	(13		)
Balance, end of period		$	1,047		$	1,197

 

Sale-Leaseback Transactions

 

The Company has entered into sale-leaseback agreements whereby certain owned equipment is sold to a third party financing company in exchange for cash and the applicable subsidiary then leases back the equipment from the purchaser. The primary purpose of these arrangements is to provide additional liquidity to meet working capital requirements. Depending on the terms of the lease agreement, the lease may be classified as an operating or capital lease. In addition, the sale of the assets may result in a gain or loss, which must be amortized to other income or loss in the Company’s statement of operations over the life of the operating lease. As of March 31, 2010, the minimum monthly payments due under these lease agreements totaled $98.

 

Other

 

As of March 31, 2010, approximately 27% of the Company’s employees were covered by two collective bargaining agreements with local unions in Cicero, Illinois and Neville Island, Pennsylvania. Collective bargaining agreements with the Company’s Cicero and Neville Island unions were ratified by local unions in the fourth quarter of 2009 and the first quarter of 2010, respectively, and are scheduled to remain in effect through October 2012 and February 2014, respectively.

 

NOTE 14 — SUBSEQUENT EVENTS

 

As described above in Note 6 “Debt and Credit Agreements”, pursuant to the Change in Terms Agreement, as of April 5, 2010, the Construction Loan was converted to the Great Western Term Loan, providing for monthly payments of principal plus interest, extending the maturity date to November 5, 2016, reducing the principal amount to $6,500, and changing the per annum interest rate to 8.5%.   In connection therewith, (i) approximately $248 of the amount held in the Deposit Account was applied as a principal reduction payment in order to reduce the principal amount of the Great Western Term Loan to $6,500, (ii) the balance of the amount held in the Deposit Account was released to Tower Tech on March 31, 2010, (iii) the Construction Loan Agreement was terminated and replaced with the Business Loan Agreement, (iv) the Mortgage was amended in certain respects pursuant to the Mortgage Amendment, and (v) the Commercial Guaranty, the Business Loan Agreement and the Promissory Note executed in connection with the Construction Loan were each modified in certain respects pursuant to the Letter Agreement.  Tower Tech was required to pay a 1.0% origination fee upon the conversion. The Great Western Term Loan contains no financial covenants.

 

On April 27, 2010, Tower Tech entered into an Amended and Restated Lease for Industrial/Manufacturing Space with City Centre, L.L.C., a Wisconsin limited liability company, with an effective date of May 1, 2010 (the “Lease”).  The Lease amends and restates in its entirety the existing lease for Tower Tech’s wind tower manufacturing facility in Manitowoc, Wisconsin.  Among other terms, (i) the description of the leased premises was modified to include additional land for staging and laydown of materials, employee parking, and a potential railroad spur line, and (ii) the rental amounts were increased to reflect the expanded premises.  The

 

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expiration date of the current lease term will remain December 31, 2014, and Tower Tech will continue to have five (5) consecutive options to extend the lease term for five (5) years each.

 

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto in Item 1, “Financial Statements,” of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2009. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including, but not limited to, those identified in “Cautionary Note Regarding Forward-Looking Statements” at the end of Item 2.  Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties.

 

 (Dollars are presented in thousands except share data or unless otherwise stated)

 

OUR BUSINESS

 

First Quarter Overview

 

During the first quarter of 2010, the Company continued to be affected by the ongoing economic slowdown in the wind energy industry. On a consolidated basis, revenues for the three months ended March 31, 2010 decreased by approximately 58% compared to revenues during the comparable period in the prior year. Our reduction in revenues was due to the continuation in the delay and curtailment of tower and gearing production orders under some of our key customer agreements, lower service contracts resulting from the timing of wind farm installation and maintenance projects and a reduction in non-wind related revenues. We believe these factors were largely attributable to underlying market and economic conditions, and created production and volume inefficiencies for the Company. These inefficiencies negatively affected our operating profits and margins. Although we anticipate that our revenues and operating profits will improve during the balance of the year based upon an increase in our quoting activity, timing of our backlog, and wind farm development and installation projects scheduled for the current year, we cannot provide reasonable assurance that improved market conditions will occur or that we will be able to capitalize on these opportunities.

 

As a result of the reduction in our revenues during the quarter from original projections, we evaluated the recoverability of certain identifiable intangible assets and goodwill balances. Based upon our assessment, we determined that no impairment had occurred as of March 31, 2010. We believe that the revenue weakness we anticipate to occur during the first half of this year is short-term and market driven in nature and that we do not expect this to impact our long-term prospects and cash flows. However, a continued economic slowdown may result in impairment to our goodwill and intangible assets and could result in changes to our expectations with respect to future financial results and cash flows. These changes could indicate an unfavorable change in management’s estimates of the fair value of our reportable segments and could result in a review of our goodwill and intangible assets, which could indicate potential impairment to the carrying value of the Company’s assets.

 

We improved our liquidity position by completing a common stock offering in January 2010, whereby we raised $54,625 in proceeds, net of underwriting discounts, through the sale of 10,000,000 shares of our common stock. A portion of the proceeds from this offering were used to repay outstanding indebtedness under debt agreements with Bank of America and Investors Community Bank and to settle our interest rate swap agreements. We intend to use the remainder of these proceeds for general operating purposes and specific capital expenditures to help us grow our revenues and to improve the profitability of our business.

 

During the quarter, we completed the construction of a new wind tower manufacturing facility in Brandon, South Dakota. This new wind tower manufacturing facility will increase our presence in a key demographic region in the U.S. wind energy market and will provide for additional production capacity. We have purchase commitments for manufacturing equipment for this facility and we anticipate that these commitments will be fulfilled and that this location will become operational as business warrants.

 

In addition, we are in the process of establishing a MW gearbox refurbishment center to service the growing number of up-tower gearboxes with product warranty expirations. The refurbishment center will be part of our operations within our Technical and Engineering Services segment and will be located in Abilene, Texas. We are currently in the process of making capital expenditures and we anticipate commencing operations during the fourth quarter of this year.

 

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RESULTS OF OPERATIONS

 

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

 

The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the three months ended March 31, 2010 compared to the three months ended March 31, 2009.

 

		Three Months Ended March 31,										2010 vs. 2009
		2010			% of Total Revenue		2009			% of Total Revenue		$ Change			% Change
Revenues		$	22,170		100.0	%	$	53,062		100.0	%	$	(30,892	)	-58.2	%
Cost of sales		26,654			120.2	%	48,377			91.2	%	(21,723		)	-44.9	%
Gross (loss) profit		(4,484		)	-20.2	%	4,685			8.8	%	(9,169		)	-195.7	%
Operating expenses
Selling, general and administrative expenses		8,214			37.1	%	8,916			16.8	%	(702		)	-7.9	%
Intangible amortization		1,075			4.8	%	2,906			5.5	%	(1,831		)	-63.0	%
Total operating expenses		9,289			41.9	%	11,822			22.3	%	(2,533		)	-21.4	%
Operating loss		(13,773		)	-62.1	%	(7,137		)	-13.5	%	(6,636		)	93.0	%
Other income (expense)
Interest expense, net		(362		)	-1.6	%	(542		)	-1.0	%	180			-33.2	%
Other, net		132			0.6	%	93			0.2	%	39			41.9	%
Other expense, net		(230		)	-1.0	%	(449		)	-0.8	%	219			-48.8	%
Net loss before provision (benefit) for income taxes		(14,003		)	-63.1	%	(7,586		)	-14.3	%	(6,417		)	84.6	%
Provision (benefit) for income taxes		121			0.6	%	(436		)	-0.8	%	557			127.8	%
Net loss		$	(14,124	)	-63.7	%	$	(7,150	)	-13.5	%	$	(6,974	)	97.5	%

 

Consolidated

 

Revenues decreased $30,892 or 58%, from $53,062 during the three months ended March 31, 2009, to $22,170 during the three months ended March 31, 2010. The decrease in revenues was primarily attributable to the continued economic slowdown in the wind energy industry, which resulted in fewer wind towers and gearing sets shipped, increased competition and competitive pricing pressure in our logistics and technical and engineering services business, and a general decline in non-wind related revenues associated with the broader economic market conditions.

 

Gross profit decreased $9,169, from $4,685 during the three months ended March 31, 2009, to a gross loss of $4,484 during the three months March 31, 2010. The decrease in gross profit was primarily attributable to the overall reduction in revenues, which created production and volume inefficiencies. The reduction in wind tower and gearing orders led to the under absorption of overhead costs and the reduction in service and transportation contracts negatively affected our overhead cost structures. As a result, our gross margin declined from 8.8% during the three months ended March 31, 2009, to (20.2%) during the three months ended March 31, 2010.

 

Selling, general and administrative expenses decreased from $8,916 during the three months ended March 31, 2009, to $8,214 during the three months ended March 31, 2010. The decrease was primarily attributable to cost reduction initiatives implemented in the beginning of 2009 to mitigate the effects of an overall decline in production volumes, lower professional and audit related fees associated with the completion of certain compliance and regulatory reporting initiatives, and the absence of one-time start up costs incurred in the prior year related to the commencement of operations at our Abilene, Texas wind tower manufacturing facility.

 

Intangible amortization expense decreased from $2,906 during the three months ended March 31, 2009, to $1,075 during the three months ended March 31, 2010. The decrease in amortization expense was due to a $57,942 impairment charge taken with respect to customer relationships and trade name intangibles during the fourth quarter of 2009.  The result of the impairment charge

 

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