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BROADWIND, INC. - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

 

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, 2013

 

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)

 

Delaware

 

88-0409160

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

3240 S. Central Avenue, Cicero, IL 60804

(Address of principal executive offices)

 

(708) 780-4800

(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:

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(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 October 24, 2013: 14,587,958.

 

 

 



Table of Contents

 

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 Stockholders’ Equity

3

 

Condensed Consolidated Statements of Cash Flows

4

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 3.

Defaults Upon Senior Securities

30

Item 4.

Mine Safety Disclosures

30

Item 5.

Other Information

30

Item 6.

Exhibits

30

Signatures

 

31

 



Table of Contents

 

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,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

22,826

 

$

516

 

Short-term investments

 

867

 

 

Restricted cash

 

331

 

330

 

Accounts receivable, net of allowance for doubtful accounts of $179 and $453 as of September 30, 2013 and December 31, 2012, respectively

 

21,927

 

20,039

 

Inventories, net

 

32,625

 

21,988

 

Prepaid expenses and other current assets

 

2,532

 

3,836

 

Assets held for sale

 

2,152

 

8,042

 

Total current assets

 

83,260

 

54,751

 

Property and equipment, net

 

72,761

 

79,889

 

Intangible assets, net

 

6,014

 

7,454

 

Other assets

 

2,194

 

816

 

TOTAL ASSETS

 

$

164,229

 

$

142,910

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Lines of credit and notes payable

 

$

 

$

955

 

Current maturities of long-term debt

 

342

 

352

 

Current portions of capital lease obligations

 

1,308

 

2,217

 

Accounts payable

 

29,063

 

16,377

 

Accrued liabilities

 

6,961

 

6,012

 

Customer deposits

 

21,482

 

4,063

 

Liabilities held for sale

 

 

3,860

 

Total current liabilities

 

59,156

 

33,836

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Long-term debt, net of current maturities

 

2,757

 

2,956

 

Long-term capital lease obligations, net of current portions

 

1,431

 

641

 

Other

 

3,342

 

2,169

 

Total long-term liabilities

 

7,530

 

5,766

 

 

 

 

 

 

 

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; 14,563,228 and 14,197,792 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

 

15

 

14

 

Additional paid-in capital

 

375,542

 

373,605

 

Accumulated deficit

 

(278,014

)

(270,311

)

Total stockholders’ equity

 

97,543

 

103,308

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

164,229

 

$

142,910

 

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

62,436

 

$

55,045

 

$

159,463

 

$

165,799

 

Cost of sales

 

56,783

 

52,097

 

147,399

 

158,155

 

Restructuring

 

1,097

 

233

 

2,758

 

1,038

 

Gross profit

 

4,556

 

2,715

 

9,306

 

6,606

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

5,247

 

5,197

 

15,788

 

16,658

 

Intangible amortization

 

111

 

664

 

1,441

 

1,094

 

Regulatory settlement

 

1,500

 

 

1,500

 

 

Restructuring

 

79

 

381

 

787

 

481

 

Total operating expenses

 

6,937

 

6,242

 

19,516

 

18,233

 

Operating loss

 

(2,381

)

(3,527

)

(10,210

)

(11,627

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE) , net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(177

)

(553

)

(795

)

(1,053

)

Other, net

 

(4

)

148

 

511

 

758

 

Restructuring

 

(1

)

(15

)

2,965

 

(86

)

Total other income (expense), net

 

(182

)

(420

)

2,681

 

(381

)

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations before provision for income taxes

 

(2,563

)

(3,947

)

(7,529

)

(12,008

)

Provision (benefit) for income taxes

 

28

 

(9

)

64

 

21

 

LOSS FROM CONTINUING OPERATIONS

 

(2,591

)

(3,938

)

(7,593

)

(12,029

)

LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX

 

100

 

 

(110

)

 

NET LOSS

 

$

(2,491

)

$

(3,938

)

$

(7,703

)

$

(12,029

)

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE - BASIC AND DILUTED:

 

 

 

 

 

 

 

 

 

Loss from continuing operations

 

$

(0.18

)

$

(0.28

)

$

(0.53

)

$

(0.86

)

Loss from discontinued operations

 

0.01

 

 

(0.01

)

 

Net loss

 

$

(0.17

)

$

(0.28

)

$

(0.53

)

$

(0.86

)

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted

 

14,525

 

14,093

 

14,405

 

14,022

 

 

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 STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share data)

 

 

 

Common Stock

 

 

 

 

 

 

 

 

 

Shares Issued
and Outstanding

 

Issued
Amount

 

Additional
Paid-in Capital

 

Accumulated
Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2011

 

13,977,920

 

$

140

 

$

370,123

 

$

(252,404

)

$

117,859

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for restricted stock

 

38,667

 

 

 

 

 

Stock issued under defined contribution 401(k) retirement savings plan

 

181,205

 

 

523

 

 

523

 

Reclass between APIC and CS due to 10-1 Split

 

 

 

(126

)

126

 

 

 

 

Share-based compensation

 

 

 

2,833

 

 

2,833

 

Net loss

 

 

 

 

(17,907

)

(17,907

)

BALANCE, December 31, 2012

 

14,197,792

 

$

14

 

$

373,605

 

$

(270,311

)

$

103,308

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock issued for restricted stock

 

222,011

 

1

 

 

 

1

 

Stock issued under defined contribution 401(k) retirement savings plan

 

143,425

 

 

499

 

 

499

 

Share-based compensation

 

 

 

1,438

 

 

1,438

 

Net loss

 

 

 

 

(7,703

)

(7,703

)

BALANCE, September 30, 2013

 

14,563,228

 

$

15

 

$

375,542

 

$

(278,014

)

$

97,543

 

 

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,

 

 

 

2013

 

2012

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(7,703

)

$

(12,029

)

 

 

 

 

 

 

Adjustments to reconcile net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

11,412

 

12,227

 

Impairment charges

 

288

 

 

Stock-based compensation

 

1,438

 

2,079

 

Allowance for doubtful accounts

 

(274

)

158

 

Common stock issued under defined contribution 401(k) plan

 

499

 

345

 

(Gain) loss on disposal of assets

 

(3,576

)

220

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,613

)

(3,318

)

Inventories

 

(10,637

)

(5,672

)

Prepaid expenses and other current assets

 

1,228

 

1,078

 

Accounts payable

 

12,337

 

(3,175

)

Accrued liabilities

 

1,054

 

(110

)

Customer deposits

 

17,419

 

(13,411

)

Other non-current assets and liabilities

 

(365

)

1,319

 

Net cash provided by (used in) operating activities

 

21,507

 

(20,289

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from sale of logistics business and related note receivable

 

250

 

375

 

Purchases of available for sale securities

 

(867

)

 

Purchases of property and equipment

 

(5,967

)

(3,300

)

Proceeds from disposals of property and equipment

 

12,533

 

106

 

(Increase) decrease in restricted cash

 

(1

)

546

 

Net cash provided by (used in) investing activities

 

5,948

 

(2,273

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Payments on lines of credit and notes payable

 

(80,233

)

(24,190

)

Proceeds from lines of credit and notes payable

 

75,208

 

36,908

 

Proceeds from sale-leaseback transactions

 

 

1,000

 

Payments for debt issuance costs

 

 

(630

)

Principal payments on capital leases

 

(120

)

(1,145

)

Net cash (used in) provided by financing activities

 

(5,145

)

11,943

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

22,310

 

(10,619

)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of the period

 

516

 

13,340

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

22,826

 

$

2,721

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

672

 

$

854

 

Income taxes paid

 

$

19

 

$

25

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

 

 

 

Issuance of restricted stock grants

 

$

1,025

 

$

1,307

 

 

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, 2013 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2013. The December 31, 2012 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, 2012.

 

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, “Subsidiaries”). All intercompany transactions and balances have been eliminated.

 

There have been no material changes in the Company’s significant accounting policies during the three and nine months ended September 30, 2013 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

 

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 Cicero, Illinois, and its 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 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 2013, 67% of the Company’s revenue was derived from sales associated with new wind turbine installations, versus 64% for the same period of 2012.

 

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.

 

Liquidity

 

The Company had cash and cash equivalents and short-term investments that totaled $23,693 as of September 30, 2013, up significantly from $516 as of December 31, 2012. The Company’s improved cash position is primarily the result of (i) the sale of its idle wind tower manufacturing facility in Brandon, South Dakota (the “Brandon Facility”), which occurred in April 2013 and generated approximately $8,000 in net proceeds after closing costs and repayment of the associated mortgage balance, and (ii) the receipt of customer deposits used mainly to fund raw material steel purchases associated with tower orders. During the third quarter of 2012, the Company entered into a three-year $20,000 credit agreement with AloStar Bank of Commerce (“AloStar”). Pursuant to this agreement, AloStar will advance funds, as requested, against the Company’s borrowing base, which consists of approximately 85% of eligible receivables and approximately 50% of eligible inventory. Under this borrowing structure, borrowings are continuous and all cash proceeds received by the Company and its Subsidiaries are automatically applied to the outstanding borrowed balance. At September 30, 2013, the AloStar line of credit was undrawn and the Company had the ability to borrow up to $15,480 thereunder.

 

The Company 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 of credit, and cash to be generated from operations 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, as of September 30, 2013, the Company is obligated to make principal payments on outstanding debt totaling $342 during the next twelve months. If assumptions regarding the Company’s production, sales and subsequent

 

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collections from several of the Company’s large customers, as well as customer advances and revenues generated from new customer orders, are not materially consistent with management’s expectations, the Company may in the future encounter cash flow and liquidity issues. If the Company cannot make scheduled payments on its debt, or comply with applicable covenants, it may lose operational flexibility or have to delay planned investments. 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, that it will be able to comply with applicable loan covenants 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.

 

Please refer to Note 17, “Restructuring” of these condensed consolidated financial statements for a discussion of the restructuring plan which the Company initiated in the third quarter of 2011. To date, the Company has incurred $8,500 of net costs in conjunction with its restructuring plan. Including costs incurred to date, the Company expects that a total of approximately $13,300 of net costs will be incurred to implement this restructuring plan. Of the total projected expenses, the Company anticipates that approximately $5,400 will be non-cash expenditures.

 

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, 2013 and 2012, as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Basic earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,491

)

$

(3,938

)

$

(7,703

)

$

(12,029

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

14,524,522

 

14,093,122

 

14,405,498

 

14,021,563

 

Basic net loss per share

 

$

(0.17

)

$

(0.28

)

$

(0.53

)

$

(0.86

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(2,491

)

$

(3,938

)

$

(7,703

)

$

(12,029

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

14,524,522

 

14,093,122

 

14,405,498

 

14,021,563

 

Common stock equivalents:

 

 

 

 

 

 

 

 

 

Stock options and unvested restricted stock units (1)

 

 

 

 

 

Weighted average number of common shares outstanding

 

14,524,522

 

14,093,122

 

14,405,498

 

14,021,563

 

Diluted net loss per share

 

$

(0.17

)

$

(0.28

)

$

(0.53

)

$

(0.86

)

 


(1)                   Stock options and unvested restricted stock units granted and outstanding of 974,296 and 1,064,525 as of September 30, 2013 and 2012, 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.

 

NOTE 3 — DISCONTINUED OPERATIONS

 

In December 2010, the Company’s Board of Directors approved a plan to divest the Company’s wholly-owned subsidiary Badger Transport, Inc. (“Badger”), which formerly comprised the Company’s Logistics segment. In March 2011, the Company completed the sale of Badger to BTI Logistics, LLC. As a component of the proceeds from the sale, the Company received a $1,500 secured promissory note payable from the purchaser. During the first quarter of 2013, the Company recorded a $210 discontinued operations charge to adjust the net balance of the Company’s note receivable down to the $150 estimated value of the Company’s security interest. During the third quarter of 2013, the Company received a payment under the note in excess of the $150 net receivable recorded, and recorded a discontinued operations gain of $100 to reflect the additional amount received. There is a balance of $860 outstanding on the note receivable, all of which is considered past due. As a result of the uncertainty related to any future expected payments from the purchaser, the note is fully reserved for at September 30, 2013.

 

NOTE 4 — CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

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. Marketable investments with original maturities between three and twelve months are recorded as short-term investments. The Company’s treasury policy is to invest excess cash in money market funds or other investments, which are generally of a short-term

 

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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, 2013 and December 31, 2012, cash and cash equivalents totaled $22,826 and $516, respectively, and short-term investments totaled $867 and $0, respectively. The components of cash and cash equivalents and short-term investments as of September 30, 2013 and December 31, 2012 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

Cash and cash equivalents:

 

 

 

 

 

Cash

 

$

14,640

 

$

464

 

Municipal bonds

 

8,186

 

52

 

Total cash and cash equivalents

 

22,826

 

516

 

 

 

 

 

 

 

Short-term investments (available-for-sale):

 

 

 

 

 

Municipal bonds

 

867

 

 

 

 

 

 

 

 

Total cash and cash equivalents and short-term investments

 

23,693

 

516

 

 

NOTE 5 — INVENTORIES

 

The components of inventories as of September 30, 2013 and December 31, 2012 are summarized as follows:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Raw materials

 

$

18,220

 

$

8,697

 

Work-in-process

 

11,461

 

9,505

 

Finished goods

 

4,642

 

4,558

 

 

 

34,323

 

22,760

 

Less: Reserve for excess and obsolete inventory

 

(1,698

)

(772

)

Net inventories

 

$

32,625

 

$

21,988

 

 

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 10 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 first three quarters of 2013, 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 was in excess of the carrying amount of the intangible assets, and no impairment to these assets was indicated as of September 30, 2013.

 

As of September 30, 2013 and December 31, 2012, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

 

 

September 30, 2013

 

December 31, 2012

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Net

 

Average

 

 

 

 

 

Net

 

Average

 

 

 

Cost

 

Accumulated

 

Book

 

Amortization

 

Cost

 

Accumulated

 

Book

 

Amortization

 

 

 

Basis

 

Amortization

 

Value

 

Period

 

Basis

 

Amortization

 

Value

 

Period

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

3,979

 

$

(3,584

)

$

395

 

7.2

 

$

3,979

 

$

(2,444

)

$

1,535

 

7.2

 

Trade names

 

7,999

 

(2,380

)

5,619

 

20.0

 

7,999

 

(2,080

)

5,919

 

20.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

$

11,978

 

$

(5,964

)

$

6,014

 

15.8

 

$

11,978

 

$

(4,524

)

$

7,454

 

15.8

 

 

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As of September 30, 2013, estimated future amortization expense is as follows:

 

2013

 

$

111

 

2014

 

444

 

2015

 

444

 

2016

 

444

 

2017

 

444

 

2018 and thereafter

 

4,127

 

Total

 

$

6,014

 

 

NOTE 7 — ACCRUED LIABILITIES

 

Accrued liabilities as of September 30, 2013 and December 31, 2012 consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Accrued payroll and benefits

 

$

3,821

 

$

2,913

 

Accrued property taxes

 

458

 

367

 

Income taxes payable

 

488

 

443

 

Accrued professional fees

 

199

 

526

 

Accrued warranty liability

 

675

 

707

 

Accrued regulatory settlement

 

500

 

 

Accrued environmental reserve

 

242

 

352

 

Accrued other

 

578

 

704

 

Total accrued liabilities

 

$

6,961

 

$

6,012

 

 

NOTE 8 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of September 30, 2013 and December 31, 2012 consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Lines of credit

 

$

 

$

955

 

Term loans and notes payable

 

3,099

 

3,308

 

Less: Current portion

 

(342

)

(1,307

)

Long-term debt, net of current maturities

 

$

2,757

 

$

2,956

 

 

Credit Facilities

 

AloStar Credit Facility

 

On August 23, 2012, the Company and its Subsidiaries entered into a Loan and Security Agreement (the “Loan Agreement”) with AloStar, providing the Company and its 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 when requested against a borrowing base consisting of approximately 85% of the face value of eligible receivables of the Company and its Subsidiaries and approximately 50% of the book value of eligible inventory of the Company and its Subsidiaries. Borrowings under the Credit Facility bear interest at a per annum rate equal to the one-month London Interbank Offered Rate 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 its Subsidiaries. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum monthly fixed charge coverage ratio and

 

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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. As of September 30, 2013, the Loan Agreement was amended to: (i) redefine certain exclusions to the fixed charge coverage ratio, (ii) exclude the periodic non-cash portion of the environmental regulatory settlement charges from the adjusted EBITDA calculation and (iii) increase the capital expenditure limit for 2013.

 

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 Company’s Subsidiaries and (ii) a first priority security interest in all of the equipment of Brad Foote.

 

As of September 30, 2013, there was no outstanding indebtedness under the Credit Facility. The Company had the ability to borrow up to $15,480 as of September 30, 2013, and the per annum interest rate would have been 5.25%. The Company was in compliance with all applicable covenants under the Loan Agreement as of September 30, 2013.

 

Great Western Bank Loan

 

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 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 was 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 agreed to subordinate all intercompany debt with Broadwind Towers to the GWB Term Loan. The documents evidencing and securing the GWB Term Loan contained representations, warranties and covenants customary for a term financing arrangement and contained no financial covenants.

 

The Brandon Facility was sold in April 2013 and the GWB Term Loan was repaid in its entirety with a portion of the proceeds.

 

Other

 

Included in Long Term Debt, Net of Current Maturities is $2,600 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. For the Company’s municipal bonds, we noted that although quoted prices are available and used to value said assets, they are traded less frequently.

 

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. The Company used market negotiations to value its Gearing assets.  The Company used real estate appraisals to value the Clintonville, WI facility.

 

The following table represents the fair values of the Company’s financial assets as of September 30 2013 and December 31, 2012:

 

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September 30, 2013

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

9,053

 

$

 

$

9,053

 

Assets measured on a nonrecurring basis:

 

 

 

 

 

 

 

 

 

Gearing equipment

 

 

 

1,331

 

1,331

 

Clintonville, WI facility

 

 

 

821

 

821

 

Total assets at fair value

 

$

 

$

9,053

 

$

2,152

 

$

11,205

 

 

 

 

December 31, 2012

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets measured on a recurring basis:

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

 

$

52

 

$

 

$

52

 

Total assets at fair value

 

$

 

$

52

 

$

 

$

52

 

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, 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. To the extent projections used in the Company’s evaluations are not achieved, there may be a negative effect on the valuation of these assets.

 

Due to the Company’s operating losses in each of the first three quarters of 2013 combined with its history of continued operating losses, the Company continues to evaluate the recoverability of certain of its identifiable intangible assets and certain property and equipment assets. Based upon the Company’s September 30, 2013 assessment, the recoverable amount of undiscounted cash flows based upon the Company’s most recent projections exceeded the carrying amount of invested capital by 120% and 56% for the Gearing and Services segments, respectively, and no impairment to these assets was indicated.

 

During the first half of 2013, the Company took a $288 charge to adjust the carrying value of its Clintonville, Wisconsin facility assets to fair value, and reclassified the resulting $790 carrying value from property and equipment to Assets Held for Sale. This treatment was due to management’s decision to list the property for sale as a result of its determination that the property was no longer required in its operations. Additionally, the Company took a $345 charge to adjust the carrying value of certain Gearing equipment to fair value, and reclassified the resulting $1,400 carrying value to Assets Held for Sale as a result of the decision to sell this equipment.

 

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, 2013, the Company had no net deferred income taxes due to the full recorded valuation allowance. During the three months ended September 30, 2013, the Company recorded a provision for income taxes of $28 compared to a benefit for income taxes of $9 during the three months ended September 30, 2012. During the nine months ended September 30, 2013, the Company recorded a provision for income taxes of $64, compared to a provision for income taxes of $21 during the nine months ended September 30, 2012.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of September 30, 2013, 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, 2012, the Company had net operating loss carryforwards of $153,629 expiring in various years through 2032.

 

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It is reasonably possible that unrecognized tax benefits will decrease by up to approximately $285 as a result of the expiration of the applicable statute of limitations within the next 12 months. In addition, 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 (“NOL”) 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 NOL 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 on NOL carryforwards and built-in losses available for utilization. To the extent the Company’s use of NOL 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 be if the Company were able to use NOL carryforwards and built-in losses without such limitation, which could result in lower profits and the loss of benefits from these attributes.

 

The Company announced on February 13, 2013, that its Board of Directors had adopted a Stockholder Rights Plan (the “Rights Plan”) designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under IRC Section 382. The Rights Plan is intended to act as a deterrent to any person or group, together with its affiliates and associates, being or becoming the beneficial owner of 4.9% or more of the Company’s common stock and thereby triggering a further limitation of the Company’s available NOL carryforwards. In connection with the adoption of the Rights Plan, the Board of Directors declared a non-taxable dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of the close of business on February 22, 2013. Each Right entitles its holder to purchase from the Company one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at an exercise price of $14.00 per Right, subject to adjustment. As a result of the Rights Plan, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock without the approval of the Company’s Board of Directors would be subject to significant dilution in the ownership interest of that person or group. Stockholders who owned 4.9% or more of the outstanding shares of the Company’s common stock as of February 12, 2013 will not trigger the preferred share purchase rights unless they acquire additional shares. The Rights Plan was subsequently approved by the Company’s stockholders at the Company’s 2013 Annual Meeting of Stockholders.

 

As of September 30, 2013, the Company has $484 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 $198 as of September 30, 2013. As of December 31, 2012, the Company had unrecognized tax benefits of $454, of which $168 represented accrued interest and penalties.

 

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.

 

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 depends to a large degree. As of September 30, 2013, the Company had reserved 96,247 shares for issuance upon the exercise of stock options outstanding and 92,209 shares for issuance upon the vesting of restricted stock unit (“RSU”) awards outstanding. As of September 30, 2013, 203,408 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

 

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September 30, 2013, the Company had reserved 138,590 shares for issuance upon the exercise of stock options outstanding and 647,250 shares for issuance upon the vesting of RSU awards outstanding. As of September 30, 2013, 111,053 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, 2013 under the Equity Incentive Plans, as follows:

 

 

 

Options

 

Weighted Average
Exercise Price

 

Outstanding as of December 31, 2012

 

286,455

 

$

26.80

 

Granted

 

 

$

 

Exercised

 

 

$

 

Forfeited

 

(37,579

)

$

15.94

 

Expired

 

(14,039

)

$

103.43

 

Outstanding as of September 30, 2013

 

234,837

 

$

23.96

 

 

 

 

 

 

 

Exercisable as of September 30, 2013

 

100,031

 

$

45.96

 

 

The following table summarizes RSU activity during the nine months ended September 30, 2013 under the Equity Incentive Plans, as follows:

 

 

 

Number of RSU’s

 

Weighted Average
Grant-Date Fair Value
Per RSU

 

Outstanding as of December 31, 2012

 

761,662

 

$

6.01

 

Granted

 

463,218

 

$

3.68

 

Vested

 

(280,624

)

$

6.76

 

Forfeited

 

(204,797

)

$

4.50

 

Outstanding as of September 30, 2013

 

739,459

 

$

4.66

 

 

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. There were no stock options granted during the nine months ended September 30, 2013.

 

The Company utilized a forfeiture rate of 25% during the nine months ended September 30, 2013 and 2012 for estimating the forfeitures of stock compensation 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, 2013 and 2012, as follows:

 

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Table of Contents

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Share-based compensation expense:

 

 

 

 

 

Selling, general and administrative

 

$

1,438

 

$

2,079

 

Income tax benefit (1)

 

 

 

Net effect of share-based compensation expense on net loss

 

$

1,438

 

$

2,079

 

 

 

 

 

 

 

Reduction in earnings per share:

 

 

 

 

 

Basic and diluted earnings per share (2)

 

$

0.10

 

$

0.15

 

 


(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, 2013 and 2012. 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, 2013 and 2012 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, 2013, 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 $2,879 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 (the “USDC”) against the Company and certain of its current or former officers and directors. The lawsuit was purportedly brought on behalf of purchasers of the Company’s common stock between March 17, 2009 and August 9, 2010. A lead plaintiff was appointed and an amended complaint was filed on September 13, 2011. The amended complaint named as additional defendants certain of the Company’s current and former directors, certain Tontine entities, and Jeffrey Gendell, a principal of Tontine. The complaint sought 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 “Offering”). The plaintiffs alleged 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 GAAP 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 relied 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 USDC granted in part and denied in part the Company’s motion. The USDC 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 USDC dismissed all claims with prejudice against the named Tontine entities and Mr. Gendell. The USDC 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. The plaintiffs’ class certification was filed on June 22, 2012, and the parties agreed to a briefing schedule. The parties participated in a mediation session on August 20, 2012, and reached agreement on a settlement of the matter in the amount of $3,915, which is payable by the Company’s insurance carrier. The USDC granted final approval of the settlement on June 27, 2013.

 

Between February 15, 2011 and March 30, 2011, three putative shareholder derivative lawsuits were filed in the USDC 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 Offering. One of the lawsuits also alleged 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 USDC were subsequently consolidated, and on May 15, 2012, the USDC granted the defendants’ motion to dismiss the consolidated cases and also entered an order dismissing the third case. The Company received a request from the Tontine defendants for indemnification in the derivative suits and

 

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the class action lawsuit 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.  The Company subsequently entered into an agreement with Tontine providing, among other things, for a settlement of these indemnification claims and related matters for a payment of $495. Because of the preliminary nature of these matters, the Company is not able to estimate a loss or range of loss, if any, that may be incurred in connection with these matters 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, which most likely arose out of a whistleblower complaint that the SEC received related to revenue recognition, cost accounting and intangible and fixed asset valuations at Brad Foote. The Company has been in regular contact with the SEC, and in its communications the SEC has clarified or supplemented its requests. The Company has produced documents responsive to such requests and completed the process of responding to the subpoena for documents. Following the issuance of subpoenas for testimony, the SEC has deposed certain current and former Brad Foote and Company employees. The Company cannot currently predict the outcome of this investigation. 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. All pending reimbursement requests from Tontine related to the SEC inquiry were resolved in the above-referenced settlement.

 

Environmental

 

The Company is aware of an investigation commenced by the United States Attorney’s Office, Northern District of Illinois (“USAO”), for potential violation of federal environmental laws. On February 15, 2011, pursuant to a search warrant, officials from the United States Environmental Protection Agency (“USEPA”) entered and conducted a search of a Brad Foote facility in Cicero, Illinois (the “Cicero Avenue Facility”) 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 a grand jury subpoena requesting testimony and the production of certain documents relating to the Cicero Avenue 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 Cicero Avenue Facility’s employees, environmental and manufacturing processes, and disposal practices. On April 5, 2012, the Company received a letter from the USAO requesting the production of certain financial records from 2008 to the present. The Company has completed its response to the subpoenas and to the USAO’s request. The Company has also voluntarily instituted corrective measures at the Cicero Avenue Facility, including changes to its wastewater disposal practices. On September 24, 2013, the USAO commenced a criminal action in the USDC based on this investigation. Brad Foote has agreed to enter into a plea agreement with the USAO (the “Plea Agreement”) with regard to this criminal action, pursuant to which Brad Foote would plead guilty to one count of knowingly violating the Clean Water Act, Title 33, United States Code, Section 1319(c)(2)(A) and pay a $1,500 fine (payable in three installments of $500 within three years of the date of sentencing). The Plea Agreement is subject to the approval of the USDC.

 

Other

 

The Company is also a party to additional claims and legal proceedings arising in the ordinary course of business, none of which is deemed to be individually significant at this time. 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.

 

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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 in close proximity to the primary U.S. domestic wind 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.

 

Gearing

 

The Company engineers, builds and remanufactures precision gears and gearing systems for oil and gas, wind, mining, steel 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 MW 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 Abilene, Texas gearbox service facility (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” comprises adjustments to reconcile segment results to consolidated results.

 

Summary financial information by reportable segment for the three and nine months ended September 30, 2013 and 2012 is as follows:

 

For the Three Months Ended September 30, 2013:

 

Towers and
Weldments

 

Gearing

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

48,594

 

$

10,138

 

$

3,704

 

$

 

$

 

$

62,436

 

Intersegment revenues (1)

 

64

 

251

 

 

 

(315

)

 

Operating profit (loss)

 

6,723

 

(5,653

)

(1,276

)

(2,197

)

22

 

(2,381

)

Depreciation and amortization

 

941

 

2,014

 

409

 

15

 

 

3,379

 

Capital expenditures

 

750

 

2,459

 

7

 

22

 

 

3,238

 

 

For the Three Months Ended September 30, 2012:

 

Towers and
Weldments

 

Gearing

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

37,423

 

$

10,778

 

$

6,844

 

$

 

$

 

$

55,045

 

Intersegment revenues (1)

 

 

478

 

55

 

 

(533

)

 

Operating profit (loss)

 

1,740

 

(2,637

)

(570

)

(2,048

)

(12

)

(3,527

)

Depreciation and amortization

 

942

 

2,995

 

413

 

17

 

 

4,367

 

Capital expenditures

 

127

 

893

 

44

 

71

 

 

1,135

 

 

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For the Nine Months Ended September 30, 2013:

 

Towers and
Weldments

 

Gearing

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

116,127

 

$

28,098

 

$

15,238

 

$

 

$

 

$

159,463

 

Intersegment revenues (1)

 

67

 

3,456

 

15

 

 

(3,538

)

 

Operating profit (loss)

 

12,828

 

(12,394

)

(3,239

)

(7,386

)

(19

)

(10,210

)

Depreciation and amortization

 

2,841

 

7,469

 

1,064

 

38

 

 

11,412

 

Capital expenditures

 

1,235

 

4,114

 

240

 

378

 

 

5,967

 

 

For the Nine Months Ended September 30, 2012:

 

Towers and
Weldments

 

Gearing

 

Services

 

Corporate

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

109,587

 

$

40,256

 

$

15,956

 

$

 

$

 

$

165,799

 

Intersegment revenues (1)

 

 

1,096

 

81

 

 

(1,177

)

 

Operating profit (loss)

 

3,306

 

(5,390

)

(3,331

)

(6,224

)

12

 

(11,627

)

Depreciation and amortization

 

2,722

 

8,217

 

1,237

 

51

 

 

12,227

 

Capital expenditures

 

540

 

1,657

 

944

 

159

 

 

3,300

 

 

 

 

Total Assets as of

 

 

 

September 30,

 

December 31,

 

Segments:

 

2013

 

2012

 

 

 

 

 

 

 

Towers and Weldments

 

$

51,054

 

$

50,801

 

Gearing

 

70,561

 

71,371

 

Services

 

15,906

 

13,976

 

Assets held for sale

 

2,152

 

8,042

 

Corporate

 

303,401

 

308,336

 

Eliminations

 

(278,845

)

(309,616

)

 

 

$

164,229

 

$

142,910

 

 


(1)         Intersegment revenues generally include a 10% markup over costs and primarily consist of sales from Gearing to Services. Sales from Gearing to Services totaled $3,456 and $1,096 for the nine months ended September 30, 2013 and 2012, respectively.

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES

 

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. 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 owners or operators of the site. These environmental laws can also impose liability on any person who arranges for the disposal or treatment of hazardous substances at a contaminated site. Third parties may also make claims against owners, operators and/or users of disposal sites for personal injuries and property damage associated with releases of hazardous substances from those sites.

 

In connection with the Company’s ongoing restructuring initiatives, during the third quarter of 2012, the Company identified a $352 liability associated with the planned sale of the Cicero Avenue Facility. The liability is associated with environmental remediation costs that were identified while preparing the site for sale. During the third quarter, the Company applied for entry into the Illinois Environmental Protection Agency voluntary site remediation program. The Company intends to submit its environmental sampling data, as well as its remedial objectives plan, during the fourth quarter. The Company will continue to reevaluate its reserve balance associated with this matter as it gathers additional information. As of September 30, 2013, the accrual balance remaining is $242.

 

Warranty Liability

 

The Company provides warranty terms that range from one to seven years for various products and services supplied by the Company. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for

 

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amounts paid to customers under warranty provisions. As of September 30, 2013 and 2012, estimated product warranty liability was $675 and $751, 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 nine months ended September 30, 2013 and 2012 were as follows:

 

 

 

For the Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Balance, beginning of period

 

$

707

 

$

983

 

Reduction of warranty reserve

 

(25

)

(133

)

Warranty claims

 

(7

)

(99

)

Balance, end of period

 

$

675

 

$

751

 

 

Allowance for Doubtful Accounts

 

Based upon past experience and judgment, the Company establishes an allowance for doubtful accounts with respect to accounts receivable. The Company’s standard allowance estimation methodology considers a number of factors that, based on its collections experience, the Company believes will have an impact on its credit risk and the collectability of its accounts receivable. These factors include individual customer circumstances, history with the Company, the length of the time period during which the account receivable has been past due and other relevant criteria.

 

The Company monitors its collections and write-off experience to assess whether or not adjustments to its allowance estimates are necessary. Changes in trends in any of the factors that the Company believes may impact the collectability of its accounts receivable, as noted above, or modifications to its credit standards, collection practices and other related policies may impact the Company’s allowance for doubtful accounts and its financial results. The activity in the accounts receivable allowance liability for the nine months ended September 30, 2013 and 2012 consists of the following:

 

 

 

For the Nine Months Ended September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Balance at beginning of period

 

$

453

 

$

438

 

Bad debt expense

 

(38

)

200

 

Write-offs

 

(236

)

(123

)

Balance at end of period

 

$

179

 

$

515

 

 

Collateral

 

In select instances, the Company has pledged specific inventory and machinery and equipment assets to serve as collateral on related payable or financing obligations.

 

Liquidated Damages

 

In certain customer contracts, the Company has agreed to pay liquidated damages in the event of qualifying delivery or production delays. These damages are typically limited to a specific percentage of the value of the product in question and dependent on actual losses sustained by the customer. The Company does not believe that potential exposure will have a material adverse effect on the Company’s consolidated financial position or results of operations. There was no reserve for liquidated damages as of September 30, 2013.

 

Workers’ Compensation Reserves

 

At the beginning of the third quarter of 2013, the Company began to self-insure for its workers’ compensation liabilities, including reserves for self-retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required workers’ compensation reserves. The Company takes into account claims incurred but not reported when determining its workers’ compensation reserves. Although the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred, the Company does not believe that any additional potential exposure will have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

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Other

 

As of September 30, 2013, approximately 19% of the Company’s employees were covered by two collective bargaining agreements with United Steelworkers local unions in Cicero, Illinois and Neville Island, Pennsylvania, which are scheduled to remain in effect through February 2014 and October 2017, respectively.

 

On July 20, 2011, the Company executed a strategic financing transaction (the “NMTC Transaction”) involving the following third parties: AMCREF Fund VII, LLC (“AMCREF”), a registered community development entity; COCRF Investor VIII, LLC (“COCRF”); and Capital One, National Association (“Capital One”). The NMTC Transaction allows the Company to receive below market interest rate funds through the federal New Markets Tax Credit (“NMTC”) program; see Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements. Pursuant to the NMTC Transaction, the gross loan and investment in the Gearbox Facility of $10,000 will generate $3,900 in tax credits over a period of seven years, which the NMTC Transaction makes available to Capital One. The Gearbox Facility must operate and be in compliance with the terms and conditions of the NMTC Transaction during the seven year compliance period, or the Company may be liable for the recapture of $3,900 in tax credits to which Capital One is otherwise entitled. The Company does not anticipate any tax credit recaptures will be required in connection with the NMTC Transaction.

 

NOTE 16 — NEW MARKETS TAX CREDIT TRANSACTION

 

On July 20, 2011, the Company received $2,280 in proceeds via the NMTC Transaction. The NMTC Transaction qualifies under the NMTC program and included a gross loan from AMCREF to Broadwind Services in the principal amount of $10,000, with a term of fifteen years and interest payable at the rate of 1.4% per annum, largely offset by a gross loan in the principal amount of $7,720 from the Company to COCRF, with a term of fifteen years and interest payable at the rate of 2.5% per annum.

 

The NMTC regulations permit taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities. The NMTC Transaction could generate $3,900 in tax credits, which the Company has made available under the structure by passing them through to Capital One. The proceeds have been applied to the Company’s investment in the Gearbox Facility assets and operating costs, as permitted under the NMTC program.

 

The Gearbox Facility must operate and be in compliance with various regulations and restrictions for seven years to comply with the terms of the NMTC Transaction, or the Company may be liable under its indemnification agreement with Capital One for the recapture of tax credits. In the event the Company does not comply with these regulations and restrictions, the NMTC program tax credits may be subject to 100% recapture for a period of seven years as provided in the IRC. The Company does not anticipate that any tax credit recapture events will occur or that it will be required to make any payments to Capital One under the indemnification agreement.

 

The Capital One contribution, including a loan origination payment of $320, has been included as other assets in the Company’s condensed consolidated balance sheet as of September 30, 2013. The NMTC Transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase Capital One’s interest in the third quarter of 2018. Capital One may exercise an option to put its investment and receive $130 from the Company. If Capital One does not exercise its put option, the Company can exercise a call option at the then fair market value of the call. The Company expects that Capital One will exercise the put option at the end of the tax credit recapture period. The Capital One contribution other than the amount allocated to the put obligation will be recognized as income only after the put/call is exercised and when Capital One has no ongoing interest. However, there is no legal obligation for Capital One to exercise the put, and the Company has attributed only an insignificant value to the put option included in this transaction structure.

 

The Company has determined that two pass-through financing entities created under this transaction structure are variable interest entities (“VIE’s”). The ongoing activities of the VIE’s—collecting and remitting interest and fees and complying with NMTC program requirements—were considered in the initial design of the NMTC Transaction and are not expected to significantly affect economic performance throughout the life of the VIE’s. In making this determination, management also considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees under the transaction structure, Capital One’s lack of a material interest in the underlying economics of the project, and the fact that the Company is obligated to absorb losses of the VIE’s. The Company has concluded that it is required to consolidate the VIE’s because the Company has both (i) the power to direct those matters that most significantly impact the activities of each VIE and (ii) the obligation to absorb losses or the right to receive benefits of each VIE.

 

The $262 of issue costs paid to third parties in connection with the NMTC Transaction are recorded as prepaid expenses, and are being amortized over the expected seven year term of the NMTC arrangement. Capital One’s net contribution of $2,600 is included in Long Term Debt, Net of Current Maturities in the condensed consolidated balance sheet as of September 30, 2013. Incremental costs to maintain the transaction structure during the compliance period will be recognized as they are incurred.

 

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NOTE 17 — RESTRUCTURING

 

During the third quarter of 2011, the Company conducted a review of its business strategies and product plans based on the outlook for the economy at large, the forecast for the industries it serves, and its business environment. The Company concluded that its manufacturing footprint and fixed cost base were too large and expensive for its medium-term needs and began restructuring its facility capacity and its management structure to consolidate and increase the efficiencies of its operations.

 

The Company is executing a plan to reduce its facility footprint by approximately 40% through the sale and/or closure through the end of 2014 of facilities comprising a total of approximately 600,000 square feet. As part of this plan, in the third quarter of 2011, the Company determined that the Brandon Facility should be sold, and as a result the Company reclassified the Brandon Facility property and equipment to Assets Held for Sale and the related indebtedness to Liabilities Held for Sale. In April 2013 the Company completed the sale of the Brandon Facility, generating approximately $8,000 in net proceeds after closing costs and the repayment of the mortgage on the Brandon Facility. Including the sale of the Brandon Facility, the Company has so far closed or reduced its leased presence at six facilities and achieved a reduction of approximately 400,000 square feet. During 2013, the Company determined that its Clintonville, Wisconsin was no longer required in its operations and reclassified the property and equipment associated with this facility, as well as certain Gearing equipment, to Assets Held for Sale. The most significant remaining reduction relates to the anticipated closure and disposition of the Cicero Avenue Facility. The Company believes its remaining locations will be sufficient to support its Towers and Weldments, Gearing, Services and general corporate and administrative activities, while allowing for growth for the next several years.

 

In the third quarter of 2012, the Company identified a $352 liability associated with the planned sale of the Cicero Avenue Facility. The liability is associated with environmental remediation costs that were identified while preparing the site for sale. The expenses associated with this liability have been recorded as a restructuring charge, and as of September 30, 2013 the accrual balance remaining is $242.

 

Additional restructuring plans were approved in the fourth quarter of 2011. Including costs incurred to date, the Company expects that a total of approximately $13,300 of net costs will be incurred to implement this restructuring initiative. To date, the Company has incurred approximately $8,500, or 64% of the total expected restructuring costs. Of the total projected costs, the Company anticipates that a total of approximately $5,400 will consist of non-cash charges. Restructuring costs incurred to date include $900 of involuntary terminations and $1,500 of accelerated depreciation of the Cicero Avenue Facility. The table below details the Company’s total net restructuring charges incurred to date and the total net expected restructuring charges as of September 30, 2013:

 

 

 

2011

 

2012

 

Q1 ‘13

 

Q2 ‘13

 

Q3 ‘13

 

Total

 

Total

 

 

 

Actual

 

Actual

 

Actual

 

Actual

 

Actual

 

Incurred

 

Projected

 

Capital expenditures:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gearing

 

$

5

 

$

2,072

 

$

359

 

$

817

 

$

514

 

$

3,767

 

$

5,007

 

Corporate

 

 

524

 

277

 

 

 

801

 

801

 

Total capital expenditures

 

5

 

2,596

 

636

 

817

 

514

 

4,568

 

5,808

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gearing

 

131

 

308

 

157

 

886

 

840

 

2,322

 

3,295

 

Services

 

 

225

 

119

 

115

 

 

459

 

459

 

Total cost of sales

 

131

 

533

 

276

 

1,001

 

840

 

2,781

 

3,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

 

130

 

78

 

37

 

50

 

295

 

295

 

Gearing

 

35

 

520

 

65

 

67

 

28

 

715

 

715

 

Services

 

 

40

 

 

 

 

40

 

40

 

Corporate

 

406

 

49

 

458

 

3

 

1

 

917

 

917

 

Total selling, general and administrative expenses

 

441

 

739

 

601

 

107

 

79

 

1,967

 

1,967

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other - Towers and Weldments gain on Brandon Facility:

 

 

 

 

(3,586

)

1

 

(3,585

)

(3,585

)

Non-cash expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

 

 

290

 

 

 

290

 

290

 

Gearing

 

247

 

1,166

 

179

 

550

 

257

 

2,399

 

4,989

 

Services

 

 

58

 

(15

)

 

 

43

 

43

 

Corporate

 

50

 

 

 

 

 

50

 

50

 

Total non-cash expenses

 

297

 

1,224

 

454

 

550

 

257

 

2,782

 

5,372

 

Grand total

 

$

874

 

$

5,092

 

$

1,967

 

$

(1,111

)

$

1,691

 

$

8,513

 

$

13,316

 

 

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Table of Contents

 

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, 2012. 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 per share data or unless otherwise stated)

 

OUR BUSINESS

 

Third Quarter Overview

 

Although we have significantly expanded our weldments revenues, our Towers and Weldments segment is still largely linked to new wind installations. Wind tower demand was strong through most of 2012, but weakened in the last quarter of the year as the market reacted to the scheduled expiration of the federal production tax credit (“PTC”) supporting the U.S. wind industry. Due to the scheduled expiration of the PTC and a federal trade case affecting imports of wind towers from certain Asian countries, a number of competitors, both foreign and domestic, have exited the market or repurposed some of their wind tower production assets. This has improved the near-term balance between supply and demand in the U.S. wind tower industry. New supporting legislation was approved in early 2013 that extended the PTC for new wind projects that start construction in calendar year 2013 and are completed by the end of 2015. This has generated significant demand for wind tower production, although actual wind farm construction and installation activity has been very weak in the first three quarters of 2013. With the new tax credit legislation in place, we received follow-on tower orders from two large turbine manufacturers. As a result, this segment continues to experience year-over-year growth in revenue and profitability, as well as increased order intake. At September 30, 2013, we had $141 million in towers backlog of which $43 million is scheduled for shipment in 2013.

 

In our Gearing segment, while we still have significant sales to support the installed base of wind turbines, we have diversified into industrial products for oil and gas, mining and rail customers. Sales to support the natural gas and mining industry softened in 2013. Consequently, we have experienced reduced orders and revenues from large customers in our Gearing segment for the year-to-date, although our order intake has recovered somewhat in the most recent quarter. In addition, our Gearing business continues to experience production delays and inefficiencies attributable to our plant consolidation and our transition to increased volumes of complex gearbox production.

 

In our Services segment, the low level of wind farm construction and installations in 2013 negatively affected our Services segment revenue, both directly and indirectly, as wind farm operators have increasingly performed non-routine maintenance projects themselves.

 

During 2011, we conducted a review of our business strategies and product plans given the outlook for the economy at large, the forecast for the industries we serve and our own business environment. As a result, we have been executing a restructuring plan to rationalize our facility capacity and our management structure, and to consolidate and increase the efficiencies of our operations.

 

In 2011, we concluded that our manufacturing footprint and fixed cost base were too large and expensive for our medium-term needs. We are executing a plan to reduce our facility footprint by approximately 40% through the sale and/or closure of facilities comprising a total of approximately 600,000 square feet. In April 2013, we completed the sale of our idle 146,000 square foot Brandon, South Dakota tower manufacturing facility (the “Brandon Facility”), generating approximately $8,000 in net proceeds after closing costs and the repayment of the mortgage on the Brandon Facility. To date, we have closed or reduced our leased presence at six facilities and achieved a reduction of approximately 400,000 square feet. The most significant remaining reduction relates to the anticipated closure and disposition of one of our Cicero, Illinois gearing facilities. We believe the remaining locations will be sufficient to support our Towers and Weldments, Gearing, Services and general corporate and administrative activities while allowing for growth for the next several years. These factors have required management to reassess its estimates of the fair value of some of our assets.

 

We expect to incur net restructuring costs associated with the restructuring plan totaling an estimated $13,300, of which $8,500 (or 64%) has been incurred through September 30, 2013. Costs are expected to include approximately $5,800 in capital expenditures and $7,500 in net expenses, of which approximately $5,400 is anticipated to be non-cash expenses and $2,100 is anticipated to be cash expenses. We anticipate annual savings going forward of approximately $6,000 related to the restructuring.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2013, Compared to Three Months Ended September 30, 2012

 

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 September 30, 2013, compared to the three months ended September 30, 2012.

 

 

 

Three Months Ended September 30,

 

2013 vs. 2012

 

 

 

2013

 

% of Total
Revenue

 

2012

 

% of Total
Revenue

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

62,436

 

100.0

%

$

55,045

 

100.0

%

$

7,391

 

13.4

%

Cost of sales

 

56,783

 

90.9

%

52,097

 

94.6

%

4,686

 

9.0

%

Restructuring

 

1,097

 

1.8

%

233

 

0.4

%

864

 

370.8

%

Gross profit

 

4,556

 

7.3

%

2,715

 

5.0

%

1,841

 

67.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

5,247

 

8.4

%

5,197

 

9.4

%

50

 

1.0

%

Intangible amortization

 

111

 

0.2

%

664

 

1.2

%

(553

)

-83.3

%

Regulatory settlement

 

1,500

 

2.4

%

 

0.0

%

1,500

 

#DIV/0!

 

Restructuring

 

79

 

0.1

%

381

 

0.7

%

(302

)

-79.3

%

Total operating expenses

 

6,937

 

11.1

%

6,242

 

11.3

%

695

 

11.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(2,381

)

-3.8

%

(3,527

)

-6.3

%

1,146

 

32.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(177

)

-0.3

%

(553

)

-1.0

%

376

 

68.0

%

Other, net

 

(4

)

0.0

%

148

 

0.3

%

(152

)

-102.7

%

Restructuring

 

(1

)

0.0

%

(15

)

0.0

%

14

 

93.3

%

Total other income (expense), net

 

(182

)

-0.3

%

(420

)

-0.7

%

238

 

56.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations before provision for income taxes

 

(2,563

)

-4.1

%

(3,947

)

-7.0

%

1,384

 

35.1

%

Provision (benefit) for income taxes

 

28

 

0.0

%

(9

)

0.0

%

37

 

411.1

%

Loss from continuing operations

 

(2,591

)

-4.1

%

(3,938

)

-7.0

%

1,347

 

34.2

%

Loss from discontinued operations, net of tax

 

100

 

0.2

%

 

0.0

%

100

 

#DIV/0!

 

Net loss

 

$

(2,491

)

-3.9

%

$

(3,938

)

-7.0

%

$

1,447

 

36.7

%

 

Consolidated

 

Revenues increased by $7,391, from $55,045 during the three months ended September 30, 2012, to $62,436 during the three months ended September 30, 2013. We experienced a significant increase in Towers and Weldments revenue, partially offset by decreases in our Gearing and Services business segments. Towers and Weldments revenues increased 30% while tower sections sold only increased by 18% in the current year period because we produced a larger number of smaller sections in the prior year period. Weldments revenue decreased 29% over the prior year quarter due to a downturn in customer demand related to the mining industry. Gearing segment revenues decreased by 8% due to decreased mining related sales due to a decline in industrial demand as compared to the prior year quarter, as well as a lower order intake during the first half of the year. Services segment revenues decreased by 46% as a result of lower gearbox sales and lower construction and field service activity compared to the prior year quarter.

 

Gross profit increased by $1,841, from $2,715 during the three months ended September 30, 2012, to $4,556 during the three months ended September 30, 2013. The increase in gross profit was attributable to increased Towers and Weldments volumes and margins on the current mix of towers, partially offset by lower margins and lower volumes in Gearing and Services. As a result, our total gross margin increased from 5.0% during the three months ended September 30, 2012, to 7.3% during the three months ended September 30, 2013. Gross profit margin, excluding restructuring charges, increased 69% to 9.1% in the current year period from 5.4% in the prior year quarter.

 

Selling, general and administrative expenses increased by $50, from $5,197 during the three months ended September 30, 2012, to $5,247 during the three months ended September 30, 2013. The increase was primarily attributable to higher legal and professional expenses, partially offset by lower employee compensation expenses. Selling, general and administrative expenses as a percentage of sales decreased from 9.4% in the prior year quarter to 8.4% in the current year quarter.

 

Intangible amortization expense decreased from $664 during the three months ended September 30, 2012, to $111 during the three months ended September 30, 2013. The decrease was attributable to the accelerated amortization of a portion of our customer relationship intangible assets over a one-year period, starting in July 2012 and ending with full amortization as of June 30, 2013.

 

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Table of Contents

 

Restructuring operating expenses decreased from $381 during the three months ended September 30, 2012, to $79 during the three months ended September 30, 2013. We also recorded a $1,500 regulatory settlement charge in the current year third quarter in conjunction with entering into a plea agreement with the United States Attorney’s Office related to an existing environmental investigation from prior years (the “Plea Agreement”).

 

Net loss decreased from $3,938 during the three months ended September 30, 2012, to $2,491 during the three months ended September 30, 2013, as a result of the factors described above, and a $100 gain on discontinued operations.

 

Towers and Weldments Segment

 

The following table summarizes the Towers and Weldments segment operating results for the three months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

48,658

 

$

37,423

 

Operating income

 

6,723

 

1,740

 

Operating margin

 

13.8

%

4.6

%

 

Towers and Weldments revenues increased by $11,235, from $37,423 during the three months ended September 30, 2012, to $48,658 during the three months ended September 30, 2013. Towers and Weldments revenues increased 30% due to increased customer demand and better operational throughput in our production facilities. Weldments revenue for large industrial customers decreased 29% as compared to the prior year period, due to a downturn in customer demand related to the weak mining industry; we expect continued weakness in this section in the near to mid-term.

 

Towers and Weldments segment operating income increased by $4,983, from $1,740 during the three months ended September 30, 2012, to $6,723 during the three months ended September 30, 2013. The significant increase in operating income was attributable to increased volumes and margins on the current mix of towers which includes less variability in tower designs than in the prior year quarter, the resultant increase in labor productivity in the current quarter, and the reduction of production inefficiencies experienced in the prior year quarter. Operating margin increased from 4.6% during the three months ended September 30, 2012, to 13.8% during the three months ended September 30, 2013.

 

Gearing Segment

 

The following table summarizes the Gearing segment operating results for the three months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

10,389

 

$

11,256

 

Operating loss

 

(5,653

)

(2,637

)

Operating margin

 

-54.4

%

-23.4

%

 

Gearing segment revenues decreased by $867, from $11,256 during the three months ended September 30, 2012, to $10,389 during the three months ended September 30, 2013. The 8% decrease in total revenues was due to decreased mining related sales due to a decline in industrial demand, as compared to the prior year quarter.

 

Gearing segment operating loss increased by $3,016, from $2,637 during the three months ended September 30, 2012, to $5,653 during the three months ended September 30, 2013. The increase in operating loss was due to lower sales and production volumes, an unfavorable product mix, increased restructuring expenses, as well as a $1,500 regulatory settlement charge recorded in conjunction with entering into the Plea Agreement. These factors were partially offset by lower depreciation and amortization. As a result of the factors described above, operating margin deteriorated from (23.4%) during the three months ended September 30, 2012, to (54.4%) during the three months ended September 30, 2013.

 

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Table of Contents

 

Services Segment

 

The following table summarizes the Services segment operating results for the three months ended September 30, 2013 and 2012:

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

3,704

 

$

6,899

 

Operating loss

 

(1,276

)

(570

)

Operating margin

 

-34.4

%

-8.3

%

 

Services segment revenues decreased by $3,195, from $6,899 during the three months ended September 30, 2012, to $3,704 during the three months ended September 30, 2013. The 46% decrease in revenue was a result of lower gearbox sales, and lower construction and field service activity, compared to the prior year quarter. The low level of wind farm construction and installations in the third quarter of 2013 negatively affected our Services revenue, both directly and indirectly, as wind farm operators have increasingly performed non-routine maintenance projects themselves.

 

Services segment operating loss increased by $706, from $570 during the three months ended September 30, 2012, to $1,276 during the three months ended September 30, 2013. The decline was due to a charge of $238 related to a provision for obsolete inventory as well as lower revenues, partly offset by lower operating expenses as we reduced headcount in reaction to lower levels of activity. Operating margin declined from (8.3%) during the three months ended September 30, 2012, to (34.4%) during the three months ended September 30, 2013.

 

Corporate and Other

 

Corporate and Other expenses increased by $115, from $2,060 during the three months ended September 30, 2012, to $2,175 during the three months ended September 30, 2013. The increase in expense was primarily attributable to increased legal expense of $324, partially offset by lower employee compensation costs of $162.

 

Nine Months Ended September 30, 2013, Compared to Nine Months Ended September 30, 2012

 

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 nine months ended September 30, 2013, compared to the nine months ended September 30, 2012.

 

23



Table of Contents

 

 

 

Nine Months Ended September 30,

 

2013 vs. 2012

 

 

 

2013

 

% of Total
Revenue

 

2012

 

% of Total
Revenue

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

159,463

 

100.0

%

$

165,799

 

100.0

%

$

(6,336

)

-3.8

%

Cost of sales

 

147,399

 

92.4

%

158,155

 

95.4

%

(10,756

)

-6.8

%

Restructuring

 

2,758

 

1.7

%

1,038

 

0.6

%

1,720

 

165.7

%

Gross profit

 

9,306

 

5.9

%

6,606

 

4.0

%

2,700

 

40.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

15,788

 

9.9

%

16,658

 

10.0

%

(870

)

-5.2

%

Intangible amortization

 

1,441

 

0.9

%

1,094

 

0.7

%

347

 

31.7

%

Regulatory settlement

 

1,500

 

0.9

%

 

0.0

%

1,500

 

#DIV/0!

 

Restructuring

 

787

 

0.5

%

481

 

0.3

%

306

 

63.6

%

Total operating expenses

 

19,516

 

12.2

%

18,233

 

11.0

%

1,283

 

7.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(10,210

)

-6.3

%

(11,627

)

-7.0

%

1,417

 

12.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(795

)

-0.5

%

(1,053

)

-0.6

%

258

 

24.5

%

Other, net

 

511

 

0.3

%

758

 

0.5

%

(247

)

-32.6

%

Restructuring

 

2,965

 

1.9

%

(86

)

-0.1

%

3,051

 

3547.7

%

Total other income (expense), net

 

2,681

 

1.7

%

(381

)

-0.2

%

3,062

 

803.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss from continuing operations before provision for income taxes

 

(7,529

)

-4.6

%

(12,008

)

-7.2

%

4,479

 

37.3

%

Provision for income taxes

 

64

 

0.1

%

21

 

0.0

%

43

 

204.8

%

Loss from continuing operations

 

(7,593

)

-4.7

%

(12,029

)

-7.2

%

4,436

 

36.9

%

Loss from discontinued operations, net of tax

 

(110

)

-0.1

%

 

0.0

%

(110

)

N/A

 

Net loss

 

$

(7,703

)

-4.8

%

$

(12,029

)

-7.2

%

$

4,326

 

36.0

%

 

Consolidated

 

Revenues decreased by $6,336, from $165,799 during the nine months ended September 30, 2012, to $159,463 during the nine months ended September 30, 2013. We experienced a revenue decline of 24% in our Gearing business segment due to production delays and decreased industrial demand, as compared to the prior year period. We experienced a 6% increase in Towers and Weldments revenue in spite of a reduction of $4,448 attributable to fabrication-only towers sold in the current year period when compared with no fabrication-only towers sold in the prior year period. In our Services business segment, we experienced a decrease in revenue in the current year period compared to the prior year period due to sharp declines in construction activity, partially offset by a one-time industrial project performed by the Gearbox Facility in the first half of 2013.

 

Gross profit increased by $2,700, from $6,606 during the nine months ended September 30, 2012, to $9,306 during the nine months ended September 30, 2013. The increase in gross profit was attributable to increased Towers and Weldments volumes and margins on the current mix of towers, partially offset by lower margins and lower volumes in Gearing and Services for the period ended September 30, 2013 as compared to the period ended September 30, 2012. As a result, our gross margin increased from 4.0% during the nine months ended September 30, 2012, to 5.9% during the nine months ended September 30, 2013. Gross profit margin excluding restructuring charges increased to 7.6% in the current year period, from 4.6% in the prior year period.

 

Selling, general and administrative expenses decreased by $870, from $16,658 during the nine months ended September 30, 2012, to $15,788 during the nine months ended September 30, 2013. The decrease was primarily attributable to lower employee costs of $382, lower legal expenses of $234, lower facility costs of $220, lower bad debt of $131, partially offset by a variety of other net items. Selling, general and administrative expenses as a percentage of sales decreased slightly from 10.0% in the prior year period to 9.9% in the current year period.

 

Intangible amortization expense increased from $1,094 during the nine months ended September 30, 2012, to $1,441 during the nine months ended September 30, 2013. The increase was attributable to the accelerated amortization of a portion of our customer relationship intangible assets over a one-year period, starting in July 2012 and ending with full amortization as of June 30, 2013. Restructuring expenses increased from $481 during the nine months ended September 30, 2012, to $787 during the nine months ended September 30, 2013. We recorded a $1,500 charge in the third quarter 2013 for an expected regulatory settlement associated with the Plea Agreement.

 

Net loss improved from $12,029 during the nine months ended September 30, 2012, to $7,703 during the nine months ended September 30, 2013, as a result of the factors described above and a $3,586 gain on the sale of the Brandon Facility.

 

24



Table of Contents

 

Towers and Weldments Segment

 

The following table summarizes the Towers and Weldments segment operating results for the nine months ended September 30, 2013 and 2012:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

116,194

 

$

109,587

 

Operating income

 

12,828

 

3,306

 

Operating margin

 

11.0

%

3.0

%

 

Towers and Weldments revenues increased by $6,607, from $109,587 during the nine months ended September 30, 2012, to $116,194 during the nine months ended September 30, 2013. We experienced somewhat lower volume in the beginning of the current year period, due to the need to ramp up from very low levels of production at the end of 2012. Towers and Weldments revenues increased 6%, while tower sections sold decreased by 3% in the current year period largely because we produced a larger number of smaller sections in the prior year period. In addition, we produced fabrication-only towers in the current year period and none in the prior year period, and consequently our current year period revenue and direct materials were $4,448 lower than if we had sold these units on a complete-tower basis. Weldments revenue for large industrial customers increased 31% as compared to the prior year period, consistent with our strategic focus on diversifying our end-markets; however, our most recent quarter showed our first period-over-period weldments decline due to a downturn in the mining industry.

 

Towers and Weldments segment operating income increased by $9,522, from $3,306 during the nine months ended September 30, 2012, to $12,828 during the nine months ended September 30, 2013. The increase in operating income was attributable to increased volumes and margins on the current mix of towers which includes less variability in tower designs than in the prior year period, the reduction of production inefficiencies experienced in the prior year period and the expansion of weldments revenue. Operating margin increased from 3.0% during the nine months ended September 30, 2012, to 11.0% during the nine months ended September 30, 2013.

 

Gearing Segment

 

The following table summarizes the Gearing segment operating results for the nine months ended September 30, 2013 and 2012:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

31,554

 

$

41,352

 

Operating loss

 

(12,394

)

(5,390

)

Operating margin

 

-39.3

%

-13.0

%

 

Gearing segment revenues decreased by $9,798, from $41,352 during the nine months ended September 30, 2012, to $31,554 during the nine months ended September 30, 2013. The 24% decrease in total revenues was due to production delays attributable to our plant consolidation and the transition to increased volumes of complex gearbox production, and decreased mining and natural gas related sales due to a decline in industrial demand, as compared to the prior year period.

 

Gearing segment operating loss increased by $7,004, from $5,390 during the nine months ended September 30, 2012, to $12,394 during the nine months ended September 30, 2013. The increase in operating loss was due to lower sales and production volumes, an unfavorable product mix, increased restructuring expenses, and a $1,500 regulatory settlement associated with the Plea Agreement, partially offset by lower depreciation and lower employee compensation expense. As a result of the factors described above, operating margin deteriorated from (13.0%) during the nine months ended September 30, 2012, to (39.3%) during the nine months ended September 30, 2013.

 

Services Segment

 

The following table summarizes the Services segment operating results for the nine months ended September 30, 2013 and 2012:

 

25



Table of Contents

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2013

 

2012

 

 

 

 

 

 

 

Revenues

 

$

15,253

 

$

16,037

 

Operating loss

 

(3,239

)

(3,331

)

Operating margin

 

-21.2

%

-20.8

%

 

Services segment revenues decreased by $784, from $16,037 during the nine months ended September 30, 2012, to $15,253 during the nine months ended September 30, 2013. The 5% decrease in revenue was primarily the result of greatly decreased construction activity, partially offset by a one-time industrial project performed in the first half of 2013 at the Gearbox Facility. The low level of wind farm construction and installations in 2013 negatively affected our Services revenue, both directly and indirectly, as wind farm operators have performed non-routine maintenance projects themselves.

 

Services segment operating loss improved by $92, from $3,331 during the nine months ended September 30, 2012, to $3,239 during the nine months ended September 30, 2013. The slight improvement reflects higher margins in the first half of the year due to the one-time industrial project, and lower margins in the third quarter offset by lower operating expenses due to a reduction in headcount in response to the downturn in activity experienced in the current year period. Operating margin deteriorated from (20.8%) during the nine months ended September 30, 2012, to (21.2%) during the nine months ended September 30, 2013.

 

Corporate and Other

 

Corporate and Other expenses increased by $1,193, from $6,212 during the nine months ended September 30, 2012, to $7,405 during the nine months ended September 30, 2013. The increase in expense was primarily attributable to increased restructuring expense of $451, increased employee compensation costs of $106, increased professional fees of $240, and increased legal expenses of $178.

 

SELECTED FINANCIAL DATA

 

The following non-GAAP financial measure presented below relates to earnings before interest, taxes, depreciation, amortization, restructuring and share-based payments (“Adjusted EBITDA”) and is presented for illustrative purposes as an accompaniment to our unaudited financial results of operations for the three and nine months ended September 30, 2013 and 2012. Adjusted EBITDA should not be considered an alternative to, nor is there any implication that it is more meaningful than, any measure of performance or liquidity promulgated under accounting principles generally accepted in the United States (“GAAP”). We believe that Adjusted EBITDA is particularly meaningful due principally to the role acquisitions have played in our development and because of the significant restructuring activity underway since 2011. Historically, our growth through acquisitions has resulted in significant non-cash depreciation and amortization expense, which was primarily attributable to a significant portion of the purchase price of our acquired businesses being allocated to depreciable fixed assets and definite-lived intangible assets. The following Adjusted EBITDA calculation is derived from our unaudited condensed consolidated financial results for the three and nine months ended September 30, 2013 and 2012, as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

(unaudited)

 

(unaudited)

 

Operating loss

 

$

(2,381

)

$

(3,527

)

$

(10,210

)

$

(11,627

)

Depreciation and amortization

 

3,178

 

4,195

 

10,826

 

11,590

 

Restructuring

 

1,176

 

614

 

3,545

 

1,519

 

Other income

 

(4

)

148

 

511

 

758

 

Share-based compensation and other stock payments

 

645

 

982

 

1,970

 

2,619

 

Adjusted EBITDA

 

$

2,614

 

$

2,412

 

$

6,642

 

$

4,859

 

 

SUMMARY OF CRITICAL ACCOUNTING POLICIES

 

We have identified significant accounting policies that, as a result of the judgments, uncertainties, uniqueness and complexities of the underlying accounting standards and operations involved, could result in material changes to our financial condition or results of operations under different conditions or using different assumptions.  Our most critical accounting policies are related to the following areas: revenue recognition, warranty liability, inventories, intangible assets, long-lived assets, workers

 

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compensation expense and income taxes. Details regarding our application of these policies and the related estimates are described fully in our Annual Report on Form 10-K for the year ended December 31, 2012 and are supplemented by the following additional disclosure regarding our assessment of Intangible Assets and Long-Lived Assets.

 

Intangible Assets

 

We review intangible assets for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. If such events or changes in circumstances occur, we will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the assets are less than the carrying value of the related asset. The impairment loss would adjust the asset to its fair value.

 

In evaluating the recoverability of intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to intangible assets. Asset recoverability is first measured by comparing the assets’ carrying amounts to their expected future undiscounted net cash flows to determine if the assets are impaired. If such assets are considered to be impaired, the impairment recognized is measured based on the amount by which the carrying amount of the assets exceeds the fair value.

 

Due to the Gearing segment’s operating losses in each of the first three quarters of 2013 combined with its history of continued operating losses, we continue to evaluate the recoverability of certain of our intangible assets associated with the Gearing segment. Based upon our September 30, 2013 assessment, the recoverable amount was in excess of the carrying amount of the related assets by 120%, and no impairment to these assets was indicated. To the extent the projections used in our analysis are not achieved, there may be a negative effect on the valuation of these assets.

 

Long-Lived Assets

 

We review property and equipment and other long-lived assets for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. If such events or changes in circumstances occur, we will recognize an impairment loss if the undiscounted future cash flows expected to be generated by the assets are less than the carrying value of the related assets. The impairment loss would adjust the asset to its fair value.

 

In evaluating the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If our fair value estimates or related assumptions change in the future, we may be required to record impairment charges related to property and equipment and other long-lived assets. Asset recoverability is first measured by comparing the assets’ carrying amounts to their expected future undiscounted net cash flows to determine if the assets are impaired. If such assets are considered to be impaired, the impairment recognized is measured based on the amount by which the carrying amount of the assets exceeds the fair value.

 

Due to the Gearing and Services segments’ operating losses in each of the first three quarters of 2013 combined with their history of continued operating losses, we continue to evaluate the recoverability of certain of the long-lived assets associated with the Services and Gearing segments. Based upon our September 30, 2013 assessment, the recoverable amount of undiscounted cash flows based upon our most recent projections exceeded the carrying amount of invested capital by 120% and 56% for the Gearing and Services segments, respectively, and no impairment to these assets was indicated. To the extent projections used in our evaluations are not achieved, there may be a negative effect on the valuation of these assets.

 

During the first half of 2013, we took a $288 charge to adjust the carrying value of our Clintonville, Wisconsin facility assets to fair value, and reclassified the resulting $790 carrying value from property and equipment to Assets Held for Sale. This treatment was due to our decision to list the property for sale as a result of our determination that the property was no longer required in our operations. Additionally, we took a $345 charge to adjust the carrying value of certain Gearing equipment to fair value, and reclassified the resulting $1,400 carrying value to Assets Held for Sale as a result of a decision to sell this equipment.

 

Workers’ Compensation Reserves

 

At the beginning of the third quarter of 2013, we began to self-insure for our workers’ compensation liabilities that include reserves for self-retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required workers’ compensation reserves. We take into account claims incurred but not reported when determining our workers’ compensation reserves. Workers’ compensation reserves are included in accrued liabilities. While we believe that we have adequately reserved for these claims, the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred.

 

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Recent Accounting Pronouncements

 

We review new accounting standards as issued. Although some of the accounting standards issued or effective after the end of our previous fiscal year may be applicable to us, we believe that none of the new standards will have a significant impact on our condensed consolidated financial statements.

 

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

 

During the third quarter of 2012, we entered into a three-year $20,000 revolving credit agreement with AloStar Bank of Commerce (“AloStar”). In connection with this agreement, AloStar will advance funds against our borrowing base, which consists of approximately 85% of eligible receivables and approximately 50% of eligible inventory. Under this borrowing structure, borrowings are continuous and all cash receipts are automatically applied to the outstanding borrowed balance. As a result of this structure, we anticipate that cash balances will remain at a minimum at all times when there are amounts outstanding under the credit line. At September 30, 2013, the AloStar facility was undrawn and we were in compliance with all applicable covenants.

 

As of September 30, 2013, cash and cash equivalents and short-term investments totaled $23,693, an increase of $5,826 from June 30, 2013. Debt and capital leases totaled $5,838 at September 30, 2013, and we had the ability to borrow up to $15,480 under the AloStar facility. We anticipate that we will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and lease commitments through at least the next 12 months primarily with current cash on hand and cash generated by operations.

 

While we believe that we will continue to have sufficient cash flows to operate our businesses and meet our financial obligations and debt covenants, there can be no assurances that our operations will generate sufficient cash, that we will be able to comply with applicable loan covenants or that credit facilities will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.

 

Sources and Uses of Cash

 

Operating Cash Flows

 

During the nine months ended September 30, 2013, net cash provided by operating activities totaled $21,507, compared to net cash used in operating activities of $20,289 during the nine months ended September 30, 2012. The increase in net cash provided by operating activities was primarily attributable to higher receipts of customer deposits associated primarily with tower orders which were used to fund raw material steel purchases.

 

Investing Cash Flows

 

During the nine months ended September 30, 2013, net cash provided by investing activities totaled $5,948, compared to net cash used in investing activities of $2,273 during the nine months ended September 30, 2012. The increase in net cash provided by investing activities as compared to the prior year period was primarily attributable to the sale of the Brandon Facility, which resulted in gross proceeds of approximately $12,000.

 

Financing Cash Flows

 

During the nine months ended September 30, 2013, net cash used in financing activities totaled $5,145, compared to net cash provided by financing activities of $11,943 during the nine months ended September 30, 2012. The increase in net cash used in financing activities as compared to the prior year period was primarily attributable to increased net payments on outstanding debt including the elimination of our AloStar line of credit balance, and the extinguishment of our Brandon Facility mortgage.

 

Cautionary Note Regarding Forward-Looking Statements

 

The preceding discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q 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, 2012. Portions of this Quarterly Report on Form 10-Q, including the discussion and analysis in this Item 2, contain “forward-looking statements”— that is, statements related to future, not past, events—as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect our current expectations regarding our future growth, results of operations, financial condition, cash flows, performance and business prospects, and opportunities, as well as assumptions made by, and information currently available to, our management. Forward-looking statements include any statement that does not directly relate to a current or historical fact. We have tried to identify forward-looking statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “may,” “plan” and similar

 

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expressions, but these words are not the exclusive means of identifying forward-looking statements. These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed in Item 1A “Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended December 31, 2012, that could cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects, and opportunities to differ materially from those expressed in, or implied by, these statements. Our forward-looking statements may include or relate to the following: (i) our plans to continue to grow our business through organic growth; (ii) our beliefs with respect to the sufficiency of our liquidity and our plans to evaluate alternate sources of funding if necessary; (iii) our plans and assumptions, including estimated costs and saving opportunities, regarding our ongoing restructuring efforts designed to improve our financial performance; (iv) our expectations relating to state, local and federal regulatory frameworks affecting the industries in which we compete, including the wind energy industry and the related extension, continuation or renewal of federal tax incentives and grants and state renewable portfolio standards; (v) our expectations with respect to our customer relationships and efforts to diversify our customer base and sector focus and leverage customer relationships across business units; (vi) our ability to realize revenue from customer orders and backlog; (vii) our plans with respect to the use of proceeds from financing activities and our ability to operate our business efficiently, manage capital expenditures and costs effectively, and generate cash flow; (viii) our beliefs and expectations relating to the economy and the potential impact it may have on our business, including our customers; (ix) our beliefs regarding the state of the wind energy market and other energy and industrial markets generally and the impact of competition and economic volatility in those markets; (x) our expectations relating to the impact of pending securities litigation, the inquiry by the U.S. Securities and Exchange Commission (“SEC”), and environmental compliance matters; and (xi) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances or for any other reason.

 

Item 3.                     Quantitative and Qualitative Disclosures About Market Risk

 

There has been no significant change in our exposure to market risk during the nine months ended September 30, 2013. For a discussion of our exposure to market risk, refer to “Quantitative and Qualitative Disclosures About Market Risk,” contained in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 4.                     Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported on herein.

 

Based on that evaluation, management identified a material weakness in our internal control over financial reporting related to the revenue recognition process in our Towers and Weldments Segment, specifically related to management’s requisite knowledge on the application of the revenue recognition accounting guidance to a purchase order from one of our customers. There was no related impact to our results of operations for any period. As a result of this material weakness, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective.

 

Subsequent to the discovery of the material weakness, we are in the process of changing our internal control process and procedures and the contractual terms with this customer. We began remediating the material weakness in the third quarter by initiating detailed customer contract reviews and having relevant personnel participate in accounting training classes including SEC reporting and revenue recognition content.

 

PART II.   OTHER INFORMATION

 

Item 1.                     Legal Proceedings

 

The information required by this item is incorporated herein by reference to Note 12, “Legal Proceedings” in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

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Item 1A.            Risk Factors

 

There are no material changes to our risk factors as previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Item 2.                     Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3.                     Defaults Upon Senior Securities

 

None

 

Item 4.                     Mine Safety Disclosures

 

Not Applicable

 

Item 5.                     Other Information

 

None

 

Item 6.                     Exhibits

 

The exhibits listed on the Exhibit Index following the signature page are filed as part of this Quarterly Report.

 

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SIGNATURES

 

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

BROADWIND ENERGY, INC.

 

 

 

 

October 31, 2013

By:

/s/ Peter C. Duprey

 

 

Peter C. Duprey

 

 

President and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

October 31, 2013

By:

/s/ Stephanie K. Kushner

 

 

Stephanie K. Kushner

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

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EXHIBIT INDEX

BROADWIND ENERGY, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2013

 

Exhibit
Number

 

Exhibit

10.1

 

Second Amendment to Loan and Security Agreement dated as of August 23, 2012, by and among the Company, the Subsidiaries and AloStar Bank of Commerce*

31.1

 

Rule 13a-14(a) Certification of Chief Executive Officer*

31.2

 

Rule 13a-14(a) Certification of Chief Financial Officer*

32.1

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer*

32.2

 

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial Officer*

 


*                                         Filed herewith.

 

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