BROADWIND, INC. - Quarter Report: 2012 September (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 September 30, 2012

 

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  x  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:

 

 

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 October 31, 2012: 14,110,127.

 

 

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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	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures		30

 

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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 and per share data)

 

		September 30,			December 31,
		2012			2011
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	2,721		$	13,340
Restricted cash		330			876
Accounts receivable, net of allowance for doubtful accounts of $515 and $438 as of September 30, 2012 and December 31, 2011, respectively		28,471			25,311
Inventories, net		29,027			23,355
Prepaid expenses and other current assets		3,219			4,033
Assets held for sale		8,044			8,052
Total current assets		71,812			74,967
Property and equipment, net		81,299			87,766
Intangible assets, net		8,119			9,214
Other assets		654			944
TOTAL ASSETS		$	161,884		$	172,891
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	17,585		$	1,566
Current maturities of long-term debt		349			636
Current portions of capital lease obligations		2,242			965
Accounts payable		14,338			17,358
Accrued liabilities		5,627			5,749
Customer deposits		3,908			17,328
Liabilities held for sale		4,083			4,833
Total current liabilities		48,132			48,435
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		2,781			4,797
Long-term capital lease obligations, net of current portions		1,116			975
Other		1,601			825
Total long-term liabilities		5,498			6,597
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; 30,000,000 shares authorized; 14,110,127 and 13,977,920 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively		14			140
Additional paid-in capital		372,673			370,123
Accumulated deficit		(264,433		)	(252,404		)
Total stockholders’ equity		108,254			117,859
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	161,884		$	172,891

 

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 September 30,						Nine Months Ended September 30,
		2012			2011			2012			2011
Revenues		$	55,045		$	47,899		$	165,799		$	130,761
Cost of sales		52,097			47,098			158,155			124,449
Restructuring		233			89			1,038			89
Gross profit		2,715			712			6,606			6,223
OPERATING EXPENSES:
Selling, general and administrative		5,197			6,442			16,658			19,807
Intangible amortization		664			214			1,094			644
Restructuring		381			300			481			300
Total operating expenses		6,242			6,956			18,233			20,751
Operating loss		(3,527		)	(6,244		)	(11,627		)	(14,528		)
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(553		)	(276		)	(1,053		)	(845		)
Other, net		148			127			758			559
Restructuring		(15		)	(202		)	(86		)	(202		)
Total other (expense) income, net		(420		)	(351		)	(381		)	(488		)
Net loss from continuing operations before provision for income taxes		(3,947		)	(6,595		)	(12,008		)	(15,016		)
(Benefit) provision for income taxes		(9		)	(9		)	21			24
LOSS FROM CONTINUING OPERATIONS		(3,938		)	(6,586		)	(12,029		)	(15,040		)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX		—			—			—			(1,184		)
NET LOSS		$	(3,938	)	$	(6,586	)	$	(12,029	)	$	(16,224	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Loss from continuing operations		$	(0.28	)	$	(0.60	)	$	(0.86	)	$	(1.39	)
Loss from discontinued operations		—			—			—			(0.11		)
Net loss		$	(0.28	)	$	(0.60	)	$	(0.86	)	$	(1.50	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		14,093			11,037			14,022			10,822

 

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)

 

		Nine Months Ended September 30,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(12,029	)	$	(16,224	)
Loss from discontinued operations		—			1,184
Loss from continuing operations		(12,029		)	(15,040		)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization expense		12,227			10,910
Stock-based compensation		2,079			1,395
Allowance for doubtful accounts		158			542
Common stock issued under defined contribution 401(k) plan		345			150
Loss on disposal of assets		220			390
Changes in operating assets and liabilities:
Accounts receivable		(3,318		)	(2,586		)
Inventories		(5,672		)	(13,544		)
Prepaid expenses and other current assets		1,078			(411		)
Accounts payable		(3,175		)	806
Accrued liabilities		(110		)	(1,112		)
Customer deposits		(13,411		)	6,822
Other non-current assets and liabilities		1,319			186
Net cash used in operating activities of continuing operations		(20,289		)	(11,492		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of logistics business		375			761
Purchases of property and equipment		(3,300		)	(4,134		)
Proceeds from disposals of property and equipment		106			1,850
Decrease in restricted cash		546			(1,276		)
Net cash used in investing activities of continuing operations		(2,273		)	(2,799		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock		—			11,739
Payments on lines of credit and notes payable		(24,190		)	(1,055		)
Proceeds from lines of credit and notes payable		36,908			2,307
Proceeds from sale-leaseback transactions		1,000			—
Payments for debt issuance costs		(630		)	—
Principal payments on capital leases		(1,145		)	(674		)
Net cash provided by financing activities of continuing operations		11,943			12,317
DISCONTINUED OPERATIONS:
Operating cash flows		—			(829		)
Financing cash flows		—			(83		)
Net cash used in discontinued operations		—			(912		)
Add: Cash balance of discontinued operations, beginning of period		—			530
NET DECREASE IN CASH AND CASH EQUIVALENTS		(10,619		)	(2,356		)
CASH AND CASH EQUIVALENTS, beginning of the period		13,340			15,331
CASH AND CASH EQUIVALENTS, end of the period		$	2,721		$	12,975
Supplemental cash flow information:
Interest paid, net of capitalized interest		$	854		$	757
Income taxes paid		$	25		$	34
Non-cash investing and financing activities:
Issuance of restricted stock grants		$	1,307		$	633
Common stock issued under defined contribution 401(k) plan		$	345		$	150

 

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 and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2012. The December 31, 2011 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the condensed consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly-owned subsidiaries Broadwind Towers, Inc. (“Broadwind Towers”), Brad Foote Gear Works, Inc. (“Brad Foote”) and Broadwind Services, LLC (“Broadwind Services”) (collectively, the “Subsidiaries”). All intercompany transactions and balances have been eliminated. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

There have been no material changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2012 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

Company Description

 

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 the Subsidiaries.

 

Broadwind provides technologically advanced high-value products and services to energy, mining and infrastructure sector customers, primarily in the U.S. The Company’s most significant presence is within the U.S. wind industry, although it has increasingly diversified into other industrial markets in order to improve its capacity utilization and reduce its exposure to uncertainty related to favorable governmental policies currently supporting the U.S. wind industry. For the first nine months of 2012, the Company’s revenue was derived 64% from sales associated with new wind turbine installations, down from 73% for the same period of 2011.

 

The Company’s product and service portfolio provides its wind energy customers, including wind turbine manufacturers, wind farm developers and wind farm operators, with access to a broad array of component and service offerings. Outside of the wind market, the Company provides precision gearing and specialty weldments to a broad range of industrial customers for oil and gas, mining and other industrial applications.

 

Reverse Stock Split

 

On August 22, 2012, the Company filed an Amendment to its Certificate of Incorporation to effect a reverse split of its common stock with a ratio of one post-split share for every ten shares issued and outstanding. As a result of the reverse stock split, the number of authorized shares of the Company’s common stock automatically decreased to 30 million shares, without any change in the par value of such shares. All references in these financial statements and notes to the  number of shares, price per share and weighted average number of shares outstanding of the Company’s common stock prior to the reverse stock split have been adjusted to reflect the reverse stock split on a retroactive basis unless otherwise noted.

 

Liquidity

 

During the third quarter of 2012, the Company established a new three-year $20,000 credit agreement with AloStar Bank of Commerce (“AloStar”). Pursuant to this agreement, AloStar will advance funds against the Company’s borrowing base, which consists of approximately 85% of eligible receivables and approximately 50% of eligible inventory. Proceeds from the transaction were used to repay certain outstanding indebtedness, including the outstanding debt associated with the Wells Fargo AP Agreements

 

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(hereinafter defined). Under this new recapitalized borrowing structure, borrowings are continuous and all cash proceeds received by the Company and the Subsidiaries are automatically applied to the outstanding borrowed balance. As a result of this structure, the Company anticipates that cash balances will remain at a minimum while there are outstanding borrowed amounts on the line of credit.

 

The Company has a limited history of operations and has incurred operating losses since inception, partly due to large non-cash charges attributable to significant capital expenditures and acquisition outlays during 2007 and 2008. The Company anticipates that current cash resources, amounts available on the AloStar line, and cash to be generated from operations over the next twelve months will be adequate to meet the Company’s liquidity needs for at least the next twelve months. As discussed further in Note 8, “Debt and Credit Agreements” of these condensed consolidated financial statements, the Company is obligated to make principal payments on outstanding debt totaling $349 during the next twelve months, has $4,083 of indebtedness associated with its Liabilities Held for Sale and is obligated to make purchases totaling $341 during the same period under the purchase commitments described in Note 15, “Commitments and Contingencies” of these condensed consolidated financial statements. The Company also has a $17,585 balance on its three-year AloStar line of credit. If assumptions regarding the Company’s restructuring efforts, production, 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, which could affect its overall operations. If the Company cannot make scheduled payments on our debt, or comply with applicable covenants, it will be in default and, as a result, among other things, its debt holders could declare all outstanding principal and interest to be due and payable. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, will likely require new financial covenants or impose other restrictions on the Company. While the Company believes that it will continue to have sufficient cash flows to operate its businesses and to meet its financial obligations and debt covenants, there can be no assurances that its operations will generate sufficient cash or that credit facilities will be available in an amount sufficient to enable the Company to pay its indebtedness or to fund its other liquidity needs.

 

In addition, please refer to Note 17, “Restructuring” of these condensed consolidated financial statements for a discussion of the Company’s restructuring plan which the Company initiated in the third quarter of 2011. To date, the Company has incurred $3,708 of costs in conjunction with its restructuring plan. Including costs incurred to date, the Company expects that a total of approximately $13,468 of costs will be incurred to implement this restructuring plan. Of the total projected expenses, the Company anticipates that approximately $3,406 will be non-cash expenditures. The Company anticipates that the remaining cash expenditures will be funded substantially by net proceeds from asset sales of approximately $7,200. The Company anticipates cash flow savings of approximately $5,500 annually from the restructuring efforts.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2012 and 2011, as follows:

(1)                   Stock options and unvested restricted stock units granted and outstanding of 1,064,525 and 292,926 as of September 30, 2012 and 2011, respectively, are excluded from the computation of diluted earnings per share 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 — DISCONTINUED OPERATIONS

 

In March 2011, the Company completed the divestiture of its logistics business, through the sale of its wholly-owned subsidiary Badger Transport, Inc. (“Badger”) to BTI Logistics, LLC (“BTI Logistics”). Proceeds from the sale included approximately $800 in cash, a $1,500 secured promissory note payable in quarterly installments of $125 beginning September 30, 2011, and 10,000 shares of Broadwind common stock held by the buyer. The purchase price was subject to final working capital adjustments and certain contingencies and indemnifications. In addition, BTI Logistics assumed approximately $2,600 of debt and capital leases, plus approximately $1,600 of operating lease obligations.

 

Results for Badger, which are reflected as discontinued operations in the Company’s condensed consolidated statements of income for the three and nine months ended September 30, 2012 and 2011, were as follows:

 

		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2012			2011			2012			2011
Revenues		$	—		$	—		$	—		$	435
Loss before benefit for income taxes		—			—			—			(1,182		)
Income tax provision (benefit)		—			—			—			2
Loss from discontinued operations		$	—		$	—		$	—		$	(1,184	)

 

NOTE 4 — CASH AND CASH EQUIVALENTS

 

Cash and cash equivalents typically comprise cash balances and readily marketable investments with original maturities of three months or less, such as money market funds, short-term government bonds, Treasury bills, marketable securities and commercial paper. The Company’s treasury policy is to invest excess cash in money market funds or other investments, which are generally of a short-term duration based upon operating requirements. Income earned on these investments is recorded to interest income in the Company’s condensed consolidated statements of operations. As of September 30, 2012 and December 31, 2011, cash and cash equivalents totaled $2,721 and $13,340, respectively.

 

Cash and cash equivalents consisted of the following as of September 30, 2012 and December 31, 2011:

 

		September 30,			December 31,
		2012			2011
Cash and cash equivalents:
Cash		$	2,721		$	11,127
Certificates of deposits		—			707
Municipal bonds		—			1,506
Total cash and cash equivalents		2,721			13,340

 

NOTE 5 — INVENTORIES

 

The components of inventories as of September 30, 2012 and December 31, 2011 are summarized as follows:

 

		September 30,			December 31,
		2012			2011
Raw materials		$	13,829		$	11,943
Work-in-process		10,617			7,437
Finished goods		5,395			4,921
		29,841			24,301
Less: Reserve for excess and obsolete inventory		(814		)	(946		)
Net inventories		$	29,027		$	23,355

 

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NOTE 6 — INTANGIBLE ASSETS

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships as part of the Company’s acquisition of Brad Foote completed during 2007. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 8 to 20 years. The Company tests intangible assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. During the third quarter of 2012, the Company identified triggering events associated with the Company’s current period operating loss combined with its history of continued operating losses. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets. Based upon the Company’s assessment, the recoverable amount and the fair value were substantially in excess of the carrying amount of the intangible assets, and no impairment to these assets was indicated as of September 30, 2012. During the second quarter of 2012, the Company concluded that it was appropriate to shorten the useful life associated with a $2,216 portion of the customer relationships intangible assets and amortize it over one year, instead of over the remaining five years as previously assigned to this portion of the intangible assets.

 

As of September 30, 2012 and December 31, 2011, the cost basis, accumulated amortization, impairment charge and net book value of intangible assets were as follows:

 

		September 30, 2012												December 31, 2011
											Net												Net
		Cost			Accumulated			Impairment			Book			Cost			Accumulated			Impairment			Book
		Basis			Amortization			Charge			Value			Basis			Amortization			Charge			Value
Intangible assets:
Customer relationships		$	3,979		$	(1,878	)	$	—		$	2,101		$	3,979		$	(1,084	)	$	—		$	2,895
Trade names		7,999			(1,981		)	—			6,018			7,999			(1,680		)	—			6,319
Intangible assets		$	11,978		$	(3,859	)	$	—		$	8,119		$	11,978		$	(2,764	)	$	—		$	9,214

 

NOTE 7 — ACCRUED LIABILITIES

 

Accrued liabilities as of September 30, 2012 and December 31, 2011 consisted of the following:

 

		September 30,			December 31,
		2012			2011
Accrued payroll and benefits		$	1,962		$	2,762
Accrued property taxes		544			250
Income taxes payable		388			386
Accrued professional fees		1,087			433
Accrued warranty liability		751			983
Accrued other		895			935
Total accrued liabilities		$	5,627		$	5,749

 

NOTE 8 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of September 30, 2012 and December 31, 2011 consisted of the following:

 

		September 30,			December 31,
		2012			2011
Lines of credit		$	17,585		$	—
Term loans and notes payable		3,130			6,999
		20,715			6,999
Less: Current maturities		(17,934		)	(2,202		)
Long-term debt, net of current maturities		$	2,781		$	4,797

 

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Credit Facilities

 

AloStar Credit Facility

 

On August 23, 2012, the Company and the Subsidiaries entered into a Loan and Security Agreement (the “Loan Agreement”) with AloStar, providing the Company and the Subsidiaries with a new $20,000 secured credit facility (the “Credit Facility”). The Credit Facility is a secured three-year asset-based revolving credit facility, pursuant to which AloStar will advance funds against a borrowing base consisting of approximately 85% of the face value of eligible receivables of the Company and the Subsidiaries and approximately 50% of the book value of eligible inventory of the Company and the Subsidiaries. Borrowings under the Credit Facility bear interest at a per annum rate equal to the one-month London Interbank Offered Rate (“LIBOR”) plus a margin of 4.25%, with a minimum interest rate of 5.25% per annum. The Company must also pay an unused facility fee to AloStar equal to 0.50% per annum on the unused portion of the Credit Facility along with other standard fees. The initial term of the Loan Agreement ends on August 23, 2015.

 

The Loan Agreement contains customary representations and warranties applicable to the Company and the Subsidiaries. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum monthly fixed charge coverage ratio and minimum monthly earnings before interest, taxes, depreciation, amortization, restructuring and share-based payments (“Adjusted EBITDA”), along with other customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications.

 

The obligations under the Loan Agreement are secured by, subject to certain exclusions, (i) a first priority security interest in all of the accounts, inventory, chattel paper, payment intangibles, cash and cash equivalents and other working capital assets and stock or other equity interests in the Subsidiaries and (ii) a first priority security interest in all of the equipment of Brad Foote.

 

As described in greater detail below, the Company  used the initial proceeds from the Credit Facility to:  (i) repay all outstanding obligations under the Wells Fargo credit facility established pursuant to the AP Agreements; (ii) repay all outstanding obligations under the ICB Notes; (iii) repay all outstanding obligations under the Company’s Second Amended and Restated Promissory Note to J. Cameron Drecoll dated July 17, 2012 in the original principal amount of approximately $1,453; and (iv) pay fees and expenses associated with these transactions.  The Company will use future proceeds from the Credit Facility to finance its ongoing general corporate needs.

 

As of September 30, 2012, the total outstanding indebtedness under the Credit Facility was $17,585, the Company had the ability to borrow up to an additional $2,415 and the per annum interest rate was 5.25%. The Company was in compliance with all covenants under the documents evidencing and securing the Credit Facility as of September 30, 2012.

 

Great Western Bank Loans

 

On April 28, 2009, Broadwind Towers entered into a Construction Loan Agreement with Great Western Bank (“GWB”), pursuant to which GWB agreed to provide up to $10,000 in financing (the “GWB Construction Loan”) to fund construction of Broadwind Towers’ wind tower manufacturing facility in Brandon, South Dakota (the “Brandon Facility”). Pursuant to a Change in Terms Agreement dated April 5, 2010 between GWB and Broadwind Towers, the GWB Construction Loan was converted to a term loan (the “GWB 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%.

 

The GWB Term Loan is secured by a first mortgage on the Brandon Facility and all fixtures and proceeds relating thereto, pursuant to a Mortgage and a Commercial Security Agreement, each between Broadwind Towers and GWB, and by a Commercial Guaranty from the Company. In addition, the Company has agreed to subordinate all intercompany debt with Broadwind Towers to the GWB Term Loan. The documents evidencing and securing the GWB Term Loan contain representations, warranties and covenants that are customary for a term financing arrangement and contain no financial covenants. As of September 30, 2012, the total outstanding indebtedness under the GWB Term Loan was $4,083, which is recorded as Liabilities Held for Sale within the condensed consolidated balance sheet in light of the Company having initiated a process to sell the Brandon Facility. The Company was also in compliance with all covenants associated with GWB Term Loan as of September 30, 2012.

 

Wells Fargo Account Purchase Agreements

 

On September 29, 2010, the Company, the Subsidiaries and Badger entered into account purchase agreements (the “AP Agreements”) with Wells Fargo Business Credit, a division of Wells Fargo Bank, N.A. (“Wells Fargo”). Under the terms of the AP Agreements, when requested by the Company, Wells Fargo would advance to the Subsidiaries approximately 80% of the face value of eligible receivables arising from sales of the Subsidiaries’ products and services. The aggregate facility limit of the AP Agreements was $10,000. For Wells Fargo’s services under the AP Agreements, the Subsidiaries agreed to pay Wells Fargo (i) a floating discount

 

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fee of the then-prevailing LIBOR plus 3.75% per annum on the sum of the outstanding financed accounts, (ii) an annual facility fee of 1% of the aggregate facility limit, and (iii) an annual unused line fee of 0.042% on the portion of the credit facility which was unused. The initial term of the AP Agreements was scheduled to end on September 29, 2013, with an early termination fee of up to 2% of the aggregate facility limit applicable if the AP Agreements were terminated prior to that date.

 

On August 23, 2012, in connection with consummation of the Credit Facility as described above, the Subsidiaries used proceeds of the Credit Facility to repay all outstanding obligations under the credit facility established pursuant to the AP Agreements.  In connection with this repayment, which included a $200 termination fee, the AP agreements were terminated.

 

Investors Community Bank Loans

 

On April 7, 2008, one of the Company’s former wholly-owned subsidiaries which was subsequently merged into Broadwind Towers executed four promissory notes with Investors Community Bank (“ICB”) in the aggregate principal amount of approximately $3,781. Three of these notes were term notes, with initial principal balances totaling $2,049, bearing interest at fixed rates ranging from 5.65% to 6.85% per annum, with maturities ranging from October 2012 to April 2013 (collectively, the “ICB Notes”). The fourth note was a line of credit note, which has been repaid in full.

 

On August 23, 2012, in connection with consummation of the Credit Facility as described above, the Company used proceeds of the Credit Facility to repay all outstanding obligations under the ICB Notes. Upon such repayment, the ICB Notes were cancelled and the mortgage securing the ICB Loans was released.

 

Selling Shareholder Notes

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the three former owners of Brad Foote, including J. Cameron Drecoll, who served as the Company’s Chief Executive Officer and a member of its Board of Directors until December 1, 2010. The Settlement Agreement 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 former owners in the aggregate principal amount of $3,000, bearing interest at a rate of 7% per annum and maturing on May 29, 2012.

 

The notes issued to the former owners other than Mr. Drecoll, each with an original principal amount of $340, were repaid upon maturity in May 2012. Mr. Drecoll’s note, with an original principal amount of $2,320, was amended on July 1, 2011, to (i) change the maturity date to January 10, 2014, (ii) increase the interest rate to 9% per annum, and (iii) amend the repayment schedule to amortize the principal amount outstanding over the remaining term of the note, beginning with payments commencing in the fourth quarter of 2011. Under the terms of the amendment, the Company reduced the principal amount outstanding under the note to $1,677. On July 17, 2012, the note was further amended to provide for payment of the remaining balance in two equal installments on October 10, 2012 and January 10, 2013, or sooner if the Company’s cash balance and credit availability met certain thresholds. On August 23, 2012, in connection with the consummation of the Credit Facility as described above, the Company used proceeds of the Credit Facility to repay all outstanding obligations under Mr. Drecoll’s note. Upon such repayment, the note was cancelled.

 

Other

 

Included in Long Term Debt, Net of Current Maturities is $2,280 associated with the New Markets Tax Credit transaction described further in Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements.

 

NOTE 9 — FAIR VALUE MEASUREMENTS

 

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. Financial instruments are assessed quarterly to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications are made based upon the nature and type of the observable inputs. The fair value hierarchy is defined as follows:

 

Level 1 — Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly.

 

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Level 3 — Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and customer deposits approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is approximately equal to its fair value.

 

Assets measured at fair value on a nonrecurring basis

 

The fair value measurement approach for long-lived assets utilizes a number of significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of the Company’s future operating results, the implied fair value of these assets using an income approach by preparing a discounted cash flow analysis and a market-based approach based on the Company’s market capitalization, and other subjective assumptions. During the third quarter of 2012, the Company identified triggering events associated with the Company’s current period operating loss combined with its history of continued operating losses. As a result, the Company evaluated the recoverability of certain of its identifiable intangible assets and certain property and equipment assets. Based upon the Company’s assessment, no additional impairment to these assets was identified as of September 30, 2012.

 

NOTE 10 — INCOME TAXES

 

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 September 30, 2012, the Company had no net deferred income taxes due to the full recorded valuation allowance. During the three months ended September 30, 2011 and 2012, the Company recorded a benefit for income taxes of $9 from continuing operations. During the nine months ended September 30, 2012, the Company recorded a provision for income taxes of $21 from continuing operations compared to a provision for income taxes of $24 from continuing operations during the nine months ended September 30, 2011.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of September 2012, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. As of December 31, 2011, the Company had net operating loss carryforwards of $136,189 expiring in various years through 2031.

 

The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next twelve months. However, Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), generally imposes an annual limitation on the amount of net operating loss carryforwards and associated built-in losses that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. The Company’s ability to utilize net operating loss carryforwards and built-in losses may be limited, under this section or otherwise, by the Company’s issuance of common stock or by other changes in stock ownership. Upon completion of the Company’s analysis of IRC Section 382, the Company has determined that aggregate changes in stock ownership have triggered an annual limitation of net operating loss carryforwards and built-in losses available for utilization. To the extent the Company’s use of net operating loss carryforwards and associated built-in losses is significantly limited in the future due to additional changes in stock ownership, the Company’s income could be subject to U.S. corporate income tax earlier than it would if the Company were able to use net operating loss carryforwards and built-in losses without such limitation, which could result in lower profits and the loss of benefits from these attributes.

 

As of September 30, 2012, the Company has $445 of unrecognized tax benefits, all of which would have a favorable impact on income tax expense. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company has accrued interest and penalties of $159 as of September 30, 2012. As of December 31, 2011, the Company had unrecognized tax benefits of $417, of which $131 represented accrued interest and penalties.

 

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NOTE 11 — SHARE-BASED COMPENSATION

 

Overview of Share-Based Compensation Plans

 

2007 Equity Incentive Plan

 

The Company has granted  incentive stock options and other equity awards pursuant to the Amended and Restated Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “2007 EIP”), which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June 2008. The 2007 EIP has been amended periodically since its original approval. Specifically, (i) the 2007 EIP was amended by the Company’s stockholders in June 2009 to increase the number of shares of common stock authorized for issuance under the 2007 EIP, (ii) the 2007 EIP was further amended and restated in March 2011 by the Company’s Board of Directors to limit share recycling under the 2007 EIP, to include a minimum vesting period for time-vesting restricted stock awards and restricted stock units (“RSU’s”) and to add a clawback provision, and (iii) the 2007 EIP was further amended at the Company’s Annual Meeting of Stockholders on May 4, 2012 to increase the number of shares of common stock authorized for issuance under the 2007 EIP to provide sufficient authorized shares to settle certain awards granted in December 2011.

 

The 2007 EIP reserved 691,051 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates depend to a large degree. As of September 30, 2012, the Company had reserved 122,358 shares for issuance upon the exercise of stock options outstanding and 417,223 shares for issuance upon the vesting of RSU awards outstanding. As of September 30, 2012, 85,099 shares of common stock reserved for stock options and RSU awards under the 2007 EIP have been issued in the form of common stock.

 

2012 Equity Incentive Plan

 

On March 8, 2012, the Company’s Board of Directors approved the Broadwind Energy, Inc. 2012 Equity Incentive Plan (the “2012 EIP;” together with the 2007 EIP, the “Equity Incentive Plans”), and at the Company’s Annual Meeting of Stockholders on May 4, 2012, the Company’s stockholders approved the adoption of the 2012 EIP. The purposes of the 2012 EIP are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2012 EIP by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining officers, other employees, non-employee directors, and independent contractors; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders. Under the 2012 EIP, the Company may grant (i) non-qualified stock options; (ii) “incentive stock options” (within the meaning of IRC Section 422); (iii) stock appreciation rights; (iv) restricted stock and RSU’s; and (v) performance awards.

 

The 2012 EIP reserves 1,200,000 shares of the Company’s 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 September 30, 2012, the Company had reserved 164,997 shares for issuance upon the exercise of stock options outstanding, 359,947 shares for issuance upon the vesting of RSU awards outstanding, and 675,056 additional shares for future awards under the 2012 EIP. As of September 30, 2012, no shares of common stock reserved for stock options and RSU awards under the 2012 EIP have been issued in the form of common stock.

 

Stock Options.  The exercise price of stock options granted under the Equity Incentive Plans 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. The fair value of stock options granted is expensed ratably over their vesting term.

 

Restricted Stock Units.  The granting of RSU’s is provided for under the Equity Incentive Plans. RSU’s generally vest on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. The fair value of each RSU granted is equal to the closing price of the Company’s common stock on the date of grant and is generally expensed ratably over the vesting term of the RSU award.

 

The following table summarizes stock option activity during the nine months ended September 30, 2012 under the Equity Incentive Plans, as follows:

 

		Options		Weighted Average Exercise Price
Outstanding as of December 31, 2011		127,505		$	60.07
Granted		164,997		$	3.39
Exercised		—		$	—
Forfeited		(5,147	)	$	89.11
Expired		—		$	—
Outstanding as of September 30, 2012		287,355		$	27.01
				$	—
Exercisable as of September 30, 2012		57,602		$	86.18

 

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The following table summarizes RSU activity during the nine months ended September 30, 2012 under the Equity Incentive Plans, as follows:

 

		Number of RSU’s		Weighted Average Grant-Date Fair Value Per RSU
Outstanding as of December 31, 2011		364,600		$	13.16
Granted		500,996		$	4.28
Vested		(44,516	)	$	20.41
Forfeited		(43,910	)	$	12.55
Outstanding as of September 30, 2012		777,170		$	7.04

 

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 nine months ended September 30, 2012 and 2011, and the assumptions used to value these stock options, are as follows:

 

		Nine Months Ended September 30,
		2012			2011
Dividend yield		—			—
Risk-free interest rate		1.1		%	2.6		%
Weighted average volatility		99.98		%	96.09		%
Expected life (in years)		6.3			6.3
Weighted average grant date fair value per share of options granted		$	2.70		$	10.70

 

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 nine months ended September 30, 2011 and 2012, the Company utilized a standard volatility assumption of 99.98% and 96.09%, respectively, 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.

 

The Company utilized a forfeiture rate of 25% during the nine months ended September 30, 2012 and 2011 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 nine months ended September 30, 2012 and 2011, as follows:

 

		Nine Months Ended September 30,
		2012			2011
Share-based compensation expense:
Selling, general and administrative		$	2,079		$	1,395
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net loss		$	2,079		$	1,395
Reduction in earnings per share:
Basic and diluted earnings per share (2)		$	0.15		$	0.13

 

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(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 nine months ended September 30, 2012 and 2011. 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 nine months ended September 30, 2012 and 2011 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 September 30, 2012, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and RSU’s, in the amount of approximately $3,461 will be recognized through 2016. 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 12 — LEGAL PROCEEDINGS

 

Shareholder Lawsuits

 

On February 11, 2011, a putative class action was filed in the United States District Court for the Northern District of Illinois, Eastern Division, against the Company and certain of its current or former officers and directors. The lawsuit is purportedly brought on behalf of purchasers of the Company’s common stock between March 17, 2009 and August 9, 2010. A lead plaintiff has been appointed and an amended complaint was filed on September 13, 2011. The amended complaint names as additional defendants certain of the Company’s current and former directors, certain Tontine entities, and Jeffrey Gendell, a principal of Tontine. The complaint seeks to allege that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and/or Section 20(a) of the Exchange Act by issuing or causing to be issued a series of allegedly false and/or misleading statements concerning the Company’s financial results, operations, and prospects, including with respect to the January 2010 secondary public offering of the Company’s common stock. The plaintiffs allege that the Company’s statements were false and misleading because, among other things, the Company’s reported financial results during the class period allegedly violated generally accepted accounting principles because they failed to reflect the impairment of goodwill and other intangible assets, and the Company allegedly failed to disclose known trends and other information regarding certain customer relationships at Brad Foote. In support of their claims, the plaintiffs rely in part upon six alleged confidential informants, all of whom are alleged to be former employees of the Company. On November 18, 2011, the Company filed a motion to dismiss.  On April 19, 2012, the Court granted in part and denied in part the Company’s motion. The Court dismissed all claims with prejudice against each of the named current and former officers except for J. Cameron Drecoll and held that the plaintiffs had failed to state a claim for any alleged misstatements made after March 19, 2010. In addition, the Court dismissed all claims with prejudice against the named Tontine entities and Mr. Gendell. The Court denied the motion with respect to certain of the claims asserted against the Company and Mr. Drecoll. The Company filed its answer and affirmative defenses on May 21, 2012. On June 22, 2012, plaintiffs filed a motion for class certification which is not yet fully briefed. The Company intends to vigorously defend the remaining claims asserted against it. Between February 15, 2011 and March 30, 2011, three putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of Illinois, Eastern Division against certain of the Company’s current and former officers and directors, and certain Tontine entities, seeking to challenge alleged breaches of fiduciary duty, waste of corporate assets, and unjust enrichment, including in connection with the January 2010 secondary public offering of the Company’s common stock. One of the lawsuits also alleges that certain directors violated Section 14(a) of the Exchange Act in connection with the Company’s Proxy Statement for its 2010 Annual Meeting of Stockholders. Two of the matters pending in the federal court were subsequently consolidated, and on May 15, 2012, the Court granted defendants’ motion to dismiss the consolidated cases and also entered an order dismissing the third case. The Company has received a request from the Tontine defendants for indemnification in the derivative suits and the class action lawsuit and may receive additional requests for indemnification from Tontine and/or Mr. Gendell pursuant to various agreements related to shares owned by Tontine. The Company maintains directors and officers liability insurance; however, the costs of indemnification for Mr. Gendell and/or Tontine would not be covered by any Company insurance policy. Because of the preliminary nature of these lawsuits, the Company is not able to estimate a loss or range of loss, if any, that may be incurred in connection with this matter at this time.

 

SEC Inquiry

 

In August 2011, the Company received a subpoena from the United States Securities and Exchange Commission (“SEC”) seeking documents and other records related to certain accounting practices at Brad Foote. The subpoena was issued in connection with an informal inquiry that the Company received from the SEC in November 2010 arising out of a whistleblower complaint received by the SEC related to revenue recognition, cost accounting and intangible and fixed asset valuations at Brad Foote. The Company has been providing information to the SEC in response to the informal inquiry and subpoena. The Company cannot currently predict the outcome of this investigation. The Company does not believe that the resolution of this matter will have a

 

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material adverse effect on the Company’s consolidated financial position or results of operations. The Company has received a request from Tontine for indemnification of expenses incurred in connection with an SEC subpoena and may receive additional requests for indemnification from Tontine and/or Mr. Gendell pursuant to various agreements related to shares owned by Tontine. No estimate regarding the loss or range of loss, if any, that may be incurred in connection with this matter is possible at this time.

 

Environmental

 

The Company is aware of a grand jury investigation commenced by the United States Attorney’s Office, Northern District of Illinois, for potential violation of federal environmental laws. On February 15, 2011, pursuant to a search warrant, officials from the United States Environmental Protection Agency entered and conducted a search of one of Brad Foote’s facilities in Cicero, Illinois, in connection with the alleged improper disposal of industrial wastewater to the sewer. Also on or about February 15, 2011, in connection with the same matter, the Company received two grand jury subpoenas requesting testimony and the production of certain documents relating to the Brad Foote facility’s past compliance with certain environmental laws and regulations relating to the generation, discharge and disposal of wastewater from certain of its processes between 2004 and the present. On or about February 23, 2011, the Company received another grand jury subpoena relating to the same investigation, requesting testimony and the production of certain other documents relating to certain of the Brad Foote facility’s employees, environmental and manufacturing processes, and disposal practices. The Company has produced e-mails, reports and correspondence as requested, and completed its response to these subpoenas on August 17, 2011.  The Company does not currently have information as to when the investigation may be concluded, and is also conducting an internal investigation of any possible non-compliance. The Company has also voluntarily instituted corrective measures at the Brad Foote facility, including changes to its wastewater disposal practices.  At this time, the Company has been advised that Brad Foote is a target of the investigation, but no fines or penalties have been suggested.  There can be no assurances that the conclusion of the investigation will not result in a determination that applicable environmental, health and safety laws and regulations were violated at the Brad Foote facility. Any violations found, or any criminal or civil fines, penalties and/or other sanctions imposed could be substantial and materially and adversely affect the Company. The Company had recorded a liability of $675 at December 31, 2010, which represented the low end of its estimate of remediation-related costs and expenses; as of September 30, 2012, those initial costs have been incurred, and additional costs have been expensed as incurred. No additional remediation related expenses are anticipated or have been accrued; however, the outcome of the investigation, the liability in connection therewith, and the impact to the Company’s operations cannot be predicted at this time. The Company does not believe that the resolution of this matter will have a material adverse effect on the Company’s consolidated financial position or results of operations. No estimate regarding the loss or range of loss, if any, that may be incurred in connection with this matter is possible at this time.

 

Other

 

The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on the Company’s results of operations, financial position or liquidity. It is possible that if one or more of the matters described above were decided against the Company, the effects could be material to the Company’s results of operations in the period in which the Company would be required to record or adjust the related liability and could also be material to the Company’s cash flows in the periods the Company would be required to pay such liability.

 

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

 

The Company reviews new accounting standards as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal year may be applicable to the Company, the Company has not identified any new standards that it believes merit further discussion. The Company believes that none of the new standards will have a significant impact on its condensed consolidated financial statements.

 

NOTE 14 — SEGMENT REPORTING

 

The Company is organized into reporting segments based on the nature of the products and services offered and business activities from which it earns revenues and incurs expenses for which discrete financial information is available and regularly reviewed by the Company’s chief operating decision maker. The Company’s segments and their product and service offerings are summarized below:

 

Towers and Weldments

 

The Company manufactures towers for wind turbines, specifically the large and heavier wind towers that are designed for 2 megawatt (“MW”) and larger wind turbines. Production facilities, located in Manitowoc, Wisconsin and Abilene, Texas, are situated

 

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in close proximity to the primary U.S. domestic energy and equipment manufacturing hubs. The two facilities have a combined annual tower production capacity of approximately 500 towers, sufficient to support turbines generating more than 1,200 MW of power. This product segment also encompasses the manufacture of specialty fabrications and specialty weldments for mining and other industrial customers. Consistent with the Company’s diversification strategy, during 2012 a portion of the Company’s tower capacity has been shifted to support the growing demand for specialty weldments.

 

Gearing

 

The Company engineers, builds and remanufactures precision gears and gearing systems for oil and gas, wind, mining and other industrial applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment in Neville Island, Pennsylvania.

 

Services

 

The Company offers a comprehensive range of services, primarily to wind farm developers and operators. The Company specializes in non-routine maintenance services for both kilowatt and megawatt turbines. The Company also offers comprehensive field services to the wind industry. The Company is increasingly focusing its efforts on the identification and/or development of product and service offerings which will improve the reliability and efficiency of wind turbines, and therefore enhance the economic benefits to its customers. The Company provides wind services across the U.S., with primary service locations in South Dakota and Texas. In February 2011, the Company put into operation its dedicated drivetrain service center in Abilene, Texas (the “Gearbox Facility”), which is focused on servicing the growing installed base of MW wind turbines as they come off warranty and, to a limited extent, industrial gearboxes requiring precision repair and testing.

 

Corporate and Eliminations

 

“Corporate” includes the assets and selling, general and administrative expenses of the Company’s corporate office. “Eliminations” is comprised of adjustments to reconcile segment results to consolidated results.

 

Summary financial information by reportable segment for the three and nine months ended September 30, 2012 and 2011 was as follows: