BROADWIND, INC. - Quarter Report: 2014 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the quarterly period ended March 31, 2014

 

OR

 

 

For the transition period from                   to                  

 

Commission file number 0-31313

 

 

BROADWIND ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

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 twelve 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 twelve months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

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

 

 

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

 

Number of shares of registrant’s common stock, par value $0.001, outstanding as of April 24, 2014: 14,711,595.

 

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of 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	25
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
Signatures		28

 

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PART I.                          FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

		March 31,			December 31,
		2014			2013
		(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	9,601		$	24,936
Short-term investments		1,795			1,143
Restricted cash		83			83
Accounts receivable, net of allowance for doubtful accounts of $59 and $17 as of March 31, 2014 and December 31, 2013, respectively		23,640			18,735
Inventories, net		39,123			37,143
Prepaid expenses and other current assets		1,925			2,325
Assets held for sale		1,582			1,970
Total current assets		77,749			86,335
Property and equipment, net		67,797			69,077
Intangible assets, net		5,792			5,903
Other assets		2,278			2,379
TOTAL ASSETS		$	153,616		$	163,694
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Lines of credit and notes payable		$	—		$	—
Current maturities of long-term debt		179			201
Current portions of capital lease obligations		946			933
Accounts payable		24,424			27,537
Accrued liabilities		7,327			8,115
Customer deposits		18,727			22,993
Liabilities held for sale		361			749
Total current liabilities		51,964			60,528
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities		2,612			2,755
Long-term capital lease obligations, net of current portions		952			1,193
Other		3,415			3,888
Total long-term liabilities		6,979			7,836
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; 14,696,157 and 14,627,990 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively		15			15
Additional paid-in capital		376,511			376,125
Accumulated deficit		(281,853		)	(280,810		)
Total stockholders’ equity		94,673			95,330
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	153,616		$	163,694

 

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

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share data)

 

		Three Months Ended March 31,
		2014			2013
Revenues		$	58,800		$	45,506
Cost of sales		53,438			42,881
Restructuring		269			455
Gross profit		5,093			2,170
OPERATING EXPENSES:
Selling, general and administrative		5,917			5,388
Intangible amortization		111			665
Restructuring		60			601
Total operating expenses		6,088			6,654
Operating loss		(995		)	(4,484		)
OTHER (EXPENSE) INCOME, net:
Interest expense, net		(160		)	(391		)
Other, net		136			335
Gain on sale of assets and restructuring		—			13
Total other (expense) income, net		(24		)	(43		)
Net loss from continuing operations before provision for income taxes		(1,019		)	(4,527		)
Provision for income taxes		24			22
LOSS FROM CONTINUING OPERATIONS		(1,043		)	(4,549		)
LOSS FROM DISCONTINUED OPERATIONS, NET OF TAX		—			(210		)
NET LOSS		$	(1,043	)	$	(4,759	)
NET LOSS PER COMMON SHARE - BASIC AND DILUTED:
Loss from continuing operations		$	(0.07	)	$	(0.32	)
Loss from discontinued operations		—			(0.01		)
Net loss		$	(0.07	)	$	(0.33	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted		14,659			14,267

 

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, 2012		14,197,792		$	14		$	373,605		$	(270,311	)	$	103,308
Stock issued for restricted stock		258,284		1			—			—			1
Stock issued under stock option plans		5,400		—			18						18
Stock issued under defined contribution 401(k) retirement savings plan		166,514		—			681			—			681
Share-based compensation		—		—			1,821			—			1,821
Net loss		—		—			—			(10,499		)	(10,499		)
BALANCE, December 31, 2013		14,627,990		$	15		$	376,125		$	(280,810	)	$	95,330
Stock issued for restricted stock		50,921		—			—			—			—
Stock issued under defined contribution 401(k) retirement savings plan		17,246		—			163			—			163
Share-based compensation		—		—			223			—			223
Net loss		—		—			—			(1,043		)	(1,043		)
BALANCE, March 31, 2014		14,696,157		$	15		$	376,511		$	(281,853	)	$	94,673

 

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

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)

 

		Three Months Ended March 31,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(1,043	)	$	(4,759	)
Loss from discontinued operations		—			210
Loss from continuing operations		(1,043		)	(4,549		)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization expense		3,114			3,986
Stock-based compensation		223			427
Allowance for doubtful accounts		42			(154		)
Common stock issued under defined contribution 401(k) plan		163			138
Loss on disposal of assets		5			15
Changes in operating assets and liabilities:
Accounts receivable		(4,947		)	(6,156		)
Inventories		(1,980		)	(8,058		)
Prepaid expenses and other current assets		457			(503		)
Accounts payable		(2,672		)	7,852
Accrued liabilities		(788		)	(69		)
Customer deposits		(4,266		)	4,149
Other non-current assets and liabilities		(425		)	82
Net cash used in operating activities		(12,117		)	(2,840		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available for sale securities		(2,543		)	—
Sales and maturities of available for sale securities		1,890
Purchases of property and equipment		(2,200		)	(1,375		)
Proceeds from disposals of property and equipment		45			4
Net cash used in investing activities		(2,808		)	(1,371		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on lines of credit and notes payable		(164		)	(44,606		)
Proceeds from lines of credit and notes payable		—			49,408
Principal payments on capital leases		(246		)	(570		)
Net cash (used in) provided by financing activities		(410		)	4,232
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(15,335		)	21
CASH AND CASH EQUIVALENTS, beginning of the period		24,936			516
CASH AND CASH EQUIVALENTS, end of the period		$	9,601		$	537
Supplemental cash flow information:
Interest paid		$	143		$	334
Income taxes paid		$	2		$	13
Non-cash investing and financing activities:
Issuance of restricted stock grants		$	138		$	317

 

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

 

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BROADWIND ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands, except share and per share data)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2014. The December 31, 2013 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, 2013.

 

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 months ended March 31, 2014 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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 energy 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 energy industry. For the first three months of 2014, 81% of the Company’s revenue was derived from sales associated with new wind turbine installations.

 

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 energy 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

 

On August 23, 2012, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with AloStar Bank of Commerce (“AloStar”), providing the Company with a new $20,000 secured credit facility (the “Credit Facility”). Pursuant to the Loan 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 are automatically applied to the outstanding borrowed balance. As of March 31, 2014, the Company had cash and cash equivalents and short-term investments that totaled $11,396, the Credit Facility was undrawn and the Company had the ability to borrow up to $15,201 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 under the Credit Facility, 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 March 31, 2014, the Company is obligated to make principal payments on outstanding debt totaling $179 during the next twelve months. If assumptions regarding the Company’s production, sales and subsequent 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

 

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cannot make scheduled payments on its debt, or comply with applicable covenants, it may lose operational flexibility and/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 $12,300 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 restructuring costs incurred, approximately $4,800 consists of non-cash charges.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three months ended March 31, 2014 and 2013, as follows:

(1)                   Stock options and unvested restricted stock units granted and outstanding of 824,426 and 953,899 as of March 31, 2014 and 2013, 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 (the “Board”) 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. 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 March 31, 2014.

 

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 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 March 31, 2014 and December 31, 2013, cash and cash equivalents totaled

 

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$9,601 and $24,936, respectively, and short-term investments totaled $1,795 and $1,143, respectively. The components of cash and cash equivalents and short-term investments as of March 31, 2014 and December 31, 2013 are summarized as follows:

 

		March 31,			December 31,
		2014			2013
Cash and cash equivalents:
Cash		$	9,196		$	12,021
Money market funds		369			7,423
Municipal bonds		36			5,492
Total cash and cash equivalents		9,601			24,936
Short-term investments (available-for-sale):
Municipal bonds		1,795			1,143
Total cash and cash equivalents and short-term investments		11,396			26,079

 

NOTE 5 — INVENTORIES

 

The components of inventories as of March 31, 2014 and December 31, 2013 are summarized as follows:

 

		March 31,			December 31,
		2014			2013
Raw materials		$	21,848		$	21,859
Work-in-process		12,168			11,212
Finished goods		7,537			6,381
		41,553			39,452
Less: Reserve for excess and obsolete inventory		(2,430		)	(2,309		)
Net inventories		$	39,123		$	37,143

 

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 quarter of 2014, 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 March 31, 2014.

 

As of March 31, 2014 and December 31, 2013, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

		March 31, 2014											December 31, 2013
											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		$	(3,606	)	$	373		7.2		$	3,979		$	(3,595	)	$	384		7.2
Trade names		7,999			(2,580		)	5,419			20.0		7,999			(2,480		)	5,519			20.0
Intangible assets		$	11,978		$	(6,186	)	$	5,792		15.8		$	11,978		$	(6,075	)	$	5,903		15.8

 

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As of March 31, 2014, estimated future amortization expense is as follows:

 

2014		$	333
2015		444
2016		444
2017		444
2018		444
2019 and thereafter		3,683
Total		$	5,792

 

NOTE 7 — ACCRUED LIABILITIES

 

Accrued liabilities as of March 31, 2014 and December 31, 2013 consisted of the following:

 

		March 31,			December 31,
		2014			2013
Accrued payroll and benefits		$	3,636		$	5,144
Accrued property taxes		211			143
Income taxes payable		514			493
Accrued professional fees		137			36
Accrued warranty liability		370			457
Accrued regulatory settlement		500			—
Accrued environmental reserve		500			500
Accrued self-insurance reserve		1,018			803
Accrued other		441			539
Total accrued liabilities		$	7,327		$	8,115

 

NOTE 8 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of March 31, 2014 and December 31, 2013 consisted of the following:

 

		March 31,			December 31,
		2014			2013
Lines of credit		$	—		$	—
Term loans and notes payable		2,791			2,956
Less: Current portion		(179		)	(201		)
Long-term debt, net of current maturities		$	2,612		$	2,755

 

Credit Facilities

 

AloStar 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 accounts receivable of the Company and approximately 50% of the book value of eligible inventory of the Company. 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 Loan Agreement ends on August 23, 2015.

 

The Loan Agreement contains customary representations and warranties. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum monthly fixed charge coverage ratio and minimum monthly earnings before interest, taxes,

 

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depreciation, amortization, restructuring and share-based payments (“Adjusted EBITDA”), along with other customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications.

 

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

 

As of March 31, 2014, there was no outstanding indebtedness under the Credit Facility, the Company had the ability to borrow up to $15,201 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 March 31, 2014.

 

Other

 

Included in Long Term Debt, Net of Current Maturities is $2,600 associated with the New Markets Tax Credit (“NMTC”) transaction described further in Note 16, “New Markets Tax Credit Transaction” of these condensed consolidated financial statements. Additionally, the Company has approximately $191 of other term loans outstanding.

 

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 note 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, Wisconsin facility (the “Clintonville Facility”).

 

The following table represents the fair values of the Company’s financial assets as of March 31, 2014 and December 31, 2013:

 

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		March 31, 2014
		Level 1			Level 2			Level 3			Total
Assets measured on a recurring basis:
Municipal bonds and money market funds		$	—		$	2,200		$	—		$	2,200
Assets measured on a nonrecurring basis:
Gearing equipment		—			—			761			761
Clintonville, WI facility								821			821
Gearing Cicero Ave. facility		—			—			560			560
Total assets at fair value		$	—		$	2,200		$	2,142		$	4,342

 

		December 31, 2013
		Level 1			Level 2			Level 3			Total
Assets measured on a recurring basis:
Municipal bonds and money market funds		$	—		$	14,058		$	—		$	14,058
Assets measured on a nonrecurring basis:
Gearing equipment		—			—			1,149			1,149
Clintonville, WI facility								821			821
Gearing Cicero Ave. facility		—			—			560			560
Total assets at fair value		$	—		$	14,058		$	2,530		$	16,588

 

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 the first quarter of 2014 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 March 31, 2014 assessment, the recoverable amount of undiscounted cash flows based upon the Company’s most recent projections substantially exceeded the carrying amount of invested capital for the Gearing and Services segments, respectively, and no impairment to these assets was indicated.

 

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 March 31, 2014, the Company had no net deferred income taxes due to the full recorded valuation allowance. During the three months ended March 31, 2014, the Company recorded a provision for income taxes of $24 compared to a provision for income taxes of $22 during the three months ended March 31, 2013.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of March 31, 2014, 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, 2013, the Company had net operating loss (“NOL”) carryforwards of $167,229 expiring in various years through 2033.

 

It is reasonably possible that unrecognized tax benefits will decrease by up to approximately $32 as a result of the expiration of the applicable statutes of limitations within the next twelve months. In addition, Section 382  of the Internal Revenue Code of 1986,

 

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as amended (the “IRC”), generally imposes an annual limitation on the amount of 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 the Board 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 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 Board 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 March 31, 2014, the Company had $286 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 had accrued interest and penalties of $219 as of March 31, 2014. As of December 31, 2013, the Company had unrecognized tax benefits of $495, of which $209 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 Board 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 March 31, 2014, the Company had reserved 73,897 shares for issuance upon the exercise of stock options outstanding and 74,659 shares for issuance upon the vesting of restricted stock unit (“RSU”) awards outstanding. As of March 31, 2013, 213,070 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

 

The Company has granted incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2012 Equity Incentive Plan (the “2012 EIP;” together with the 2007 EIP, the “Equity Incentive Plans”), which was approved by the Board in March 2012 and by the Company’s stockholders in May 2012. 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 RSUs; 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 March 31, 2014, the Company had reserved 116,987 shares for issuance upon the exercise of stock options outstanding and 558,883 shares

 

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for issuance upon the vesting of RSU awards outstanding. As of March 31, 2014, 192,193 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 RSUs is provided for under the Equity Incentive Plans. RSUs 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 three months ended March 31, 2014 under the Equity Incentive Plans, as follows:

 

		Options		Weighted Average Exercise Price
Outstanding as of December 31, 2013		207,775		$	26.22
Granted		—		$	—
Exercised		—		$	—
Forfeited		—		$	—
Expired		(16,891	)	$	101.25
Outstanding as of March 31, 2014		190,884		$	19.58
Exercisable as of March 31, 2014		91,440		$	35.62

 

The following table summarizes RSU activity during the three months ended March 31, 2014 under the Equity Incentive Plans, as follows:

 

		Number of RSU’s		Weighted Average Grant-Date Fair Value Per RSU
Outstanding as of December 31, 2013		670,338		$	4.47
Granted		48,784		$	8.86
Vested		(76,639	)	$	4.52
Forfeited		(8,941	)	$	4.60
Outstanding as of March 31, 2014		633,542		$	4.80

 

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 three months ended March 31, 2014.

 

The Company utilized a forfeiture rate of 25% during the three months ended March 31, 2014 and 2013 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 three months ended March 31, 2014 and 2013, as follows:

 

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		Three Months Ended March 31,
		2014			2013
Share-based compensation expense:
Cost of Sales		$	62		$	31
Selling, general and administrative		161			396
Income tax benefit (1)		—			—
Net effect of share-based compensation expense on net loss		$	223		$	427
Reduction in earnings per share:
Basic and diluted earnings per share (2)		$	0.02		$	0.03

(1) Income tax benefit is not illustrated because the Company is currently operating at a loss and an actual income tax benefit was not realized for the three months ended March 31, 2014 and 2013. The result of the loss situation creates a timing difference, resulting in a deferred tax asset, which is fully reserved for in the Company’s valuation allowance.

 

(2) Diluted earnings per share for the three months ended March 31, 2014 and 2013 does not include common stock equivalents due to their anti-dilutive nature as a result of the Company’s net losses for these respective periods. Accordingly, basic earnings per share and diluted earnings per share are identical for all periods presented.

 

As of March 31, 2014, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and RSUs, in the amount of approximately $2,263 will be recognized through 2017. 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

 

Between February 15, 2011 and March 30, 2011, three putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of Illinois (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 January 2010 secondary public offering of the Company’s common stock. One of the lawsuits also alleged that certain directors violated Section 14(a) of the Securities Exchange Act of 1934, as amended, 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. On January 17, 2014, the Company and the plaintiffs from the consolidated derivative lawsuit filed a joint motion to reopen the derivative action and preliminarily approve a derivative settlement. The USDC subsequently reopened the derivative action and granted preliminary approval of the settlement on February 3, 2014. The settlement resolves outstanding shareholder derivative claims, including those raised in certain shareholder demand letters received by the Board. The terms of the settlement include the adoption by the Company of certain corporate governance reforms, along with other remedial measures. The settlement provides for the Company’s insurance carrier and/or the Company to pay plaintiffs’ counsel’s attorneys’ fees and expenses in the amount of $600. The USDC granted final approval of the settlement on April 3, 2014.

 

The Company received a request from the Tontine defendants for indemnification in the derivative lawsuits from Tontine and/or Mr. Gendell pursuant to various agreements related to shares of the Company’s common stock 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 the settlement of these indemnification claims and related matters in consideration for a payment in the amount of $495, which was paid in 2013.

 

SEC Inquiry

 

In August 2011, the Company received a subpoena from the United States Securities and Exchange Commission (“SEC”) seeking documents related to certain accounting practices at Brad Foote. The subpoena was issued following an informal inquiry that the Company received from the SEC in November 2010, which 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 clarified or supplemented the requests for documents contained in the SEC’s subpoena. The Company has produced documents responsive to such requests and completed the process of responding to

 

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the subpoena for documents. Following the issuance of subpoenas for testimony, the SEC has deposed certain current and former 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

 

On February 15, 2011, pursuant to a search warrant, officials from the United States Environmental Protection Agency (“USEPA”) entered and conducted a search of Brad Foote’s facility at 1309 Cicero Avenue 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 United States Attorney’s Office, Northern District of Illinois (“USAO”) requesting the production of certain financial records from 2008 to the present. The Company completed its response to the subpoenas and to the USAO’s request and 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. Subsequently, Brad Foote entered into a plea agreement with the USAO (the “Plea Agreement”) with regard to this criminal action, pursuant to which Brad Foote agreed to 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 annual installments of $500 within three years of the date of sentencing), subject to the USDC’s approval of the Plea Agreement. Brad Foote pled guilty pursuant to the Plea Agreement on November 13, 2013, and the USDC approved the Plea Agreement on February 19, 2014.

 

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.

 

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 two 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 up to 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.

 

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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 megawatt turbines. The Company also offers comprehensive field services to the wind energy 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 drivetrain service center 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 months ended March 31, 2014 and 2013 is as follows:

 

 

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