BROADWIND, INC. - Annual Report: 2018 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

BROADWIND ENERGY, INC.

(Exact name of Registrant as specified in its charter)

 

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐  No ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ☒  No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☒

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period to comply with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☒

As of June 30, 2018 the aggregate market value of the Registrant’s voting common stock held by non‑affiliates of the Registrant was approximately $28,651,000, based upon the $2.36 per share closing sale price of the Registrant’s common stock as reported on the NASDAQ Capital Market. For purposes of this calculation, the Registrant’s directors and executive officers and holders of 5% or more of the Registrant’s outstanding shares of voting common stock have been assumed to be affiliates, with such affiliates holding an aggregate of 3,330,000 shares of the Registrant’s voting common stock on June 30, 2018.

The number of shares of the Registrant’s common stock, par value $0.001, outstanding as of February 22, 2019, was 15,708,685.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Registrant’s 2019 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

BROADWIND ENERGY, INC.

FORM 10‑K

TABLE OF CONTENTS

 

 

PART I

Cautionary Note Regarding Forward‑Looking Statements

This Annual Report on Form 10 K (“Annual Report”) contains “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, business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward looking statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “may,” “plan” and similar expressions, but these words are not the exclusive means of identifying forward looking statements. Forward looking statements include any statement that does not directly relate to a current or historical fact. Our forward-looking statements may include or relate to our beliefs, expectations, plans and/or assumptions with respect to the following: (i) 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; (ii) our customer relationships and our substantial dependency on a few significant customers and our efforts to diversify our customer base and sector focus and leverage relationships across business units; (iii) our ability to continue to grow our business organically and through acquisitions; (iv) the production, sales, collections, customer deposits and revenues generated by new customer orders and our ability to realize the resulting cash flows; (v) the sufficiency of our liquidity and alternate sources of funding, if necessary; (vi) our ability to realize revenue from customer orders and backlog; (vii) our ability to operate our business efficiently, comply with our debt obligations, manage capital expenditures and costs effectively, and generate cash flow; (viii) the economy and the potential impact it may have on our business, including our customers; (ix) 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) the effects of market disruptions and regular market volatility, including fluctuations in the price of oil, gas and other commodities; (xi) the effects of the change of administrations in the U.S. federal government; (xii) our ability to successfully integrate and operate companies and to identify, negotiate and execute future acquisitions; (xiii) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC” (xiv)  the limited trading market for our securities and the volatility of market price for our securities; and (xv) the impact of future sales of our common stock or securities convertible into our common stock on our stock price. These statements are based on information currently available to us and are subject to various risks, uncertainties and other factors that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements. We are under no duty to update any of these statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or other factors that could cause our current beliefs, expectations, plans and/or assumptions to change. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results.

(Dollar amounts are presented in thousands, except per share data and unless otherwise stated)

ITEM 1.  BUSINESS

As used in this Annual Report, the terms “we,” “us,” “our,” “Broadwind” and the “Company” refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Cicero, Illinois, and its wholly‑owned subsidiaries (the “Subsidiaries”). Dollars are presented in thousands unless otherwise stated.

Business Overview

We provide technologically advanced high‑value products to energy, mining and infrastructure sector customers, primarily in the United States of America (the “U.S.”). Our most significant presence is within the U.S. wind energy industry, although we have diversified into other industrial markets in order to improve our capacity utilization, reduce our customer concentrations, and reduce our exposure to uncertainty related to governmental policies currently impacting the U.S. wind energy industry. The December 2015 multi-year extension of the federal Production Tax Credit (the “PTC”) and the Investment Tax Credit (“ITC”) for new wind energy development projects have helped stabilize wind energy markets for the medium term. Within the U.S. wind energy industry, we provide products primarily to wind turbine manufacturers. We also provide precision gearing and heavy fabrications to a broad range of industrial customers for oil and gas (“O&G”), mining, steel and other industrial applications.

On February 1, 2017, we acquired Red Wolf Company, LLC (“Red Wolf”), a Sanford, North Carolina-based, privately held fabricator, kitter and assembler of industrial systems primarily supporting the global natural gas turbine market, for approximately $18,983. Red Wolf is being operated as a wholly-owned subsidiary, as more fully described in Note 21, “Business Combinations” in the notes to our consolidated financial statements.  The Red Wolf acquisition enables us to expand our market reach, competencies, capabilities and customer relationships.  The Red Wolf acquisition aligns with our growth strategy focused on expanding and diversifying our business through organic growth and strategic bolt-on acquisitions.  Red Wolf’s operations are reported in the “Process Systems” segment.    

In December of 2015, we substantially completed the divestiture of our Services segment. Consequently, this segment has been reported as a discontinued operation. All current and prior period financial results have been revised to reflect these changes. As a result of the 2017 Red Wolf acquisition and the divestiture of the Services segment, we revised our segment presentation to include three reportable operating segments: Towers and Weldments, Gearing, and Process Systems. See Note 16 “Segment Reporting” in the notes to our consolidated financial statements for further discussion of our segments. In the fourth quarter 2017, the Towers and Heavy Fabrications segment changed its name from “Towers and Weldments” to “Towers and Heavy Fabrications” to more accurately reflect the nature of the segment’s activities.

In 2018,  49% of our sales were linked to new wind energy installations, representing a reduction in concentration from 72% in 2017, as we diversified our sales across end markets and experienced lower demand for towers. The market for new U.S. wind energy installations is affected by a number of factors, including: (i) economic growth and the associated demand for new electricity generation; (ii) the cost of competing energy sources, primarily natural gas and solar power; (iii) federal and state‑level renewable energy development incentives; (iv) available transmission infrastructure and the proliferation of smart grid technology; (v) improvements in wind energy cost competitiveness resulting from the maturation of technologies and services within the wind energy industry; and (vi) state and federal government actions relating to regulation of carbon emissions.

The highest impact development incentive has been the PTC for new wind energy projects. Legislative support for the PTC has been intermittent since its introduction in 1992, which has caused volatility in the demand for new wind energy projects.  The PTC extension in 2015 for a five-year period phases-out the amount of the credit allowed over time based on the year when construction of the wind project is started. The phase-out schedule provides for: 100% extension of the credit for projects commenced before the end of 2016, 80% for projects commenced in 2017, 60% in 2018 and 40% in 2019. Qualifying projects must either be completed within three years from their commencement or the developer must demonstrate that they are in continuous construction between commencement and completion.  

The market for wind towers is closely correlated to the demand for new wind turbines. However, demand for our towers is also reflective of the level of market competition, the strength of our customer relationships and the proximity of our plants to wind farm development sites, the economics and availability of imported towers, as well as other factors. In 2016, orders for our wind towers were strong, driven by a multi-year baseload order received in response to the PTC extension. Our orders have declined since, and in 2017, were impacted by the consolidation of our two largest customers, and their decision to reduce inventories of towers and other turbine components globally.  In 2018,  we were also adversely impacted by steel plate availability and pricing issues primarily attributable to steel tariffs introduced in early 2018.  

Outside of the market for wind energy installations, we serve a number of other industrial markets, including O&G development and extraction, mining, gas-fired turbines, and steel production. The market for O&G equipment and mining equipment rebounded early in 2017 as prices recovered significantly in response to changes in the supply and demand balance. Due to the rebound in the market conditions, we have raised production in order to meet our customers’ demand. Outside of towers manufactured to support the wind energy market, our products include gearboxes (both new and rebuilt), loose gearing, heavy fabrications and components for gas turbines. The following table details the percentage of our revenue generated in each sector for the past two years:

Business and Operating Strategy

We intend to capitalize on the markets for wind energy, gas turbines, O&G, mining, and other industrial verticals in North America by leveraging our core competencies in welding, manufacturing, assembling and kitting. Our strategic objectives include the following:

COMPANY HISTORY

We were incorporated in 1996 in Nevada as Blackfoot Enterprises, Inc., and through a series of subsequent transactions, became Broadwind Energy, Inc., a Delaware corporation, in 2008. Through acquisitions in 2007 and 2008, we focused on expanding upon our core platform as a wind tower component manufacturer, established our Gearing segment, and developed our Heavy Fabrications capabilities. In early 2017, we acquired Red Wolf, a kitter and assembler of industrial components primarily supporting the global gas turbine market.

SALES AND MARKETING

We market our towers, gearing, kitting and heavy fabrications products through a direct sales force and independent sales agents. Our sales and marketing strategy is to develop and maintain long‑term relationships with our energy and infrastructure sector customers. Within the wind energy industry, our customer base consists primarily of wind turbine manufacturers who supply end‑users and wind farm operators with wind turbines and wind farm operators who use our replacement gears in their installed turbines. Within the O&G and mining industries, our customer base consists of manufacturers of hydraulic fracturing and mud pumps, drilling and production equipment, mining equipment, and off‑highway vehicles. Within the gas turbine industry, our customers supply end-users with natural gas turbines and after-market replacement and efficiency upgrade packages. To support the efforts of our sales force, we utilize a number of

marketing tactics to build our brand and position and promote our products. Our efforts include participation in industry conferences, media relations, use of social media and other channels and use of our website to connect with customers.

COMPETITION

Each of our businesses faces competition from both domestic and international companies. The December 2015 extension of the PTC attracted additional investment and competition for wind towers.  The industrial gearing industry has experienced consolidation of producers and acquisitions by strategic buyers in response to strong international competition, although recent tariff and trade uncertainties have caused buyers to shift more of their purchases to domestic gear manufacturers.

For our Towers and Heavy Fabrications segment, the largest North American based competitor is Arcosa Inc., which was formerly a Trinity Industries company. Other competitors include Vestas Wind Systems, which has periodically produced towers for third party customers in addition to meeting its own captive tower requirements, and Marmen Industries, a Canadian company that also has a production facility in the U.S. We also face competition from imported towers, although imports from China and Vietnam have substantially ceased following a determination by the U.S. International Trade Commission (“USITC”) in 2013 that wind towers from those countries were being sold in the U.S. at less than fair value. As a result of the determination, the U.S. Department of Commerce (“USDOC”) issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam, which are currently under review for a five-year extension. In May 2018, the U.S. Court of Appeals affirmed the decision from the U.S. Court of International Trade resulting in CS Wind Vietnam being excluded from the antidumping order. U.S. tariffs have been imposed on imported steel, but have not been applied to fabricated wind towers, which has increased competition from other international competitors.  We continue to monitor wind tower imports.

In our Gearing segment, which is focused on the O&G, wind energy, mining and steel markets, our key competitors in a fragmented market include Overton Chicago Gear, Cincinnati Gearing Systems, Merit Gear, Milwaukee Gear and Horsburgh & Scott. In addition, we compete with the internal gear manufacturing capacity of relevant equipment manufacturers and face competition from foreign competitors.

In our Process Systems segment, which is primarily focused on the gas turbine market, our key competitors include Gexpro and other small independent companies.

ENVIRONMENTAL REGULATION AND COMPLIANCE

Our operations are subject to numerous federal, state and local environmental laws and regulations. Although it is our objective to maintain compliance with these laws and regulations, it may not be possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities.

BACKLOG

We sell our towers under either supply agreements or individual purchase orders (“POs”), depending on the size and duration of the purchase commitment. Under the supply agreements, we typically receive a purchase commitment for towers to be delivered in future fiscal quarters, then receive POs on a periodic basis depending upon the customer’s forecast of production volume requirements within the contract terms. For our Gearing and Process Systems segments, sales are generally based on individual POs. As of December 31, 2018, the dollar amount of our backlog believed to be firm under our supply agreements and POs awarded was approximately $96 million. This represents a 30% decrease from the backlog at December 31, 2017,  which is due in part to the run-off of a three-year tower framework agreement in mid-2016, against which we are still delivering. The reduction in tower backlog has been partially offset by higher gearing orders due to strong demand from mining and wind customers, and an increase in heavy fabrication orders due to strong mining and industrial demand.

SEASONALITY

The majority of our business is not affected by seasonality.

EMPLOYEES

We had 425 employees at December 31, 2018, of which 378 were in manufacturing related functions and 47 were in administrative functions. As of December 31, 2018, approximately 23% of our employees were covered by collective bargaining agreements with local unions in our Cicero, Illinois and Neville Island, Pennsylvania locations. The five-year collective bargaining agreement with the Neville Island union was renegotiated in November 2017, and is expected to remain in effect through October 2022. A  new four-year collective bargaining agreement with the Cicero union was negotiated in the third quarter of 2018 and is expected to remain in effect through February 2022. We believe that our relationship with our employees is generally positive.

RAW MATERIALS

The primary raw material used in the construction of wind towers and gearing products is steel in the form of plate, bar stock, forgings or castings. The market for tower steel has become increasingly globalized. Although we are generally responsible for procurement of the raw materials, our global tower customers often negotiate the prices and terms for steel purchases, and, through a “directed buy”, we purchase under these agreements. We then pass the steel cost through to our end customer plus a conversion margin.

Outside of these directed buys, we operate a multiple supplier sourcing strategy and source our raw materials through various suppliers located throughout the U.S. and abroad. We generally do not have long‑term supply agreements with our raw materials suppliers, and closely match terms with those of our customers to limit our exposure to commodity price fluctuations. We believe that we will be able to obtain an adequate supply of steel and other raw materials in 2019 to meet our manufacturing requirements, although from time to time we have faced shortages of specific grades of steel. Our business has been impacted by steel plate availability and pricing issues primarily attributable to steel tariffs introduced in early 2018. We have made modifications to our supply chain management practices to deal more effectively with potential disruptions arising from these purchasing practices.

QUALITY CONTROL

We have a long‑standing focus on processes for ensuring the manufacture of high‑quality products. To achieve high standards of production and operational quality, we implement strict and extensive quality control and inspections throughout our production processes. We maintain internal quality controls over all core manufacturing processes and carry out quality assurance inspections at the completion of each major manufacturing step to ensure the quality of our products. The manufacturing process at our Gearing segment, for example, involves transforming forged steel into precision gears through cutting, heat treating, testing and finishing. We inspect and test raw materials before they enter the assembly process, re‑test the raw materials after rough machining, test the functioning of gear teeth and cores after thermal treatment and accuracy test final outputs for compliance with product specifications. We believe our investment in industry‑leading heat treatment, high precision machining, specialized grinding technologies and cutting‑edge welding has contributed to our high product reliability and the consistent performance of our products under varying operating conditions. All of our core operating facilities are ISO 9001:2015 certified.

CUSTOMERS

We manufacture products for a variety of customers in the wind energy, O&G, mining and other infrastructure industries. The majority of our wind energy industry customer base consists of wind turbine manufacturers who supply wind farm operators and wind farm developers with completed wind turbines. In the other industrial sectors, we sell our products through our trained sales force or through manufacturers’ representatives to a wide variety of customers. The wind turbine market is very concentrated. According to Wood Mackenzie Power & Renewables 2018 industry data, the top four wind turbine manufacturers constituted approximately 98% of the U.S. market. As a result, although we have historically produced towers for most of these global wind turbine manufacturers, in any given year a limited number of customers have accounted for the majority of our revenues. Sales to Siemens Gamesa Renewable Energy (“SGRE”) and Gardner Denver represented greater than 10% of our consolidated revenues for the year ended December 31, 2018. Sales to SGRE represented greater than 10% of our consolidated revenues for the year ended December 31, 2017. The loss of one of these customers could have a material adverse effect on our business, results of operation or financial condition. As a result, we are seeking to diversify our customer base.

WORKING CAPITAL

Our primary customers are wind turbine manufacturers and various other industrial customers. In general, we produce to order rather than to stock. For wind towers, the industry has historically used customized contracts with varying terms and conditions between suppliers and customers, depending on the specific objectives of each party. Our practices mirror this historical industry practice of negotiating agreements on a case‑by‑case basis. As a result, working capital needs, including levels of accounts receivable (“A/R”), customer deposits and inventory, can vary significantly from quarter to quarter based on the contractual terms associated with each quarter’s sales, such as whether and when we are required to purchase and supply steel pursuant to such sales.

In analyzing our liquidity, an important short-term factor is our use of operating working capital (“OWC”) in relationship to revenue. OWC is comprised of A/R and inventories, net of accounts payable (“A/P”) and customer deposits. Our OWC at December 31, 2018 was $5,000 or 5% of trailing three months of sales annualized. This is a decrease of $6,376 from December 31, 2017, when OWC was $11,376, or 16% of trailing three months of sales annualized.  The decrease in total OWC was driven by increased customer deposits received in late 2018, due to higher scheduled production levels in our Towers and Heavy Fabrications segment for 2019.

CORPORATE INFORMATION

Our principal executive office is located at 3240 South Central Avenue, Cicero, IL 60804. Our phone number is (708) 780‑4800 and our website address is www.bwen.com.

OTHER INFORMATION

On our website at www.bwen.com, we make available under the “Investors” menu selection, free of charge, our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Also, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

ITEM 1A.  RISK FACTORS

Our financial and operating performance is subject to certain factors out of our control, including the state of the wind energy market in North America.

 

As a supplier of products to wind turbine manufacturers, our results of operations (like those of our customers) are subject to general economic conditions, and specifically to the state of the wind energy market. In addition to the state and federal government policies supporting renewable energy described above, the growth and development of the larger wind energy market in North America is subject to a number of factors, including, among other things:

 

 

 

 

 

 

 

 

 

 

 

 

In addition, while some of the factors listed above may only affect individual wind energy project developments or portions of the market, in the aggregate they may have a significant effect on the successful development of the wind energy market as a whole, and thus affect our operating and financial results.

 

We may have difficulty maintaining our current financing arrangements or obtaining additional financing when needed or on acceptable terms, and there can be no assurance that our operations will generate cash flows in an amount sufficient to enable us to pay our indebtedness.

 

We rely on banks and capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations or asset sales. We have experienced operating losses for most periods during which we have operated, and our committed sources of liquidity may be inadequate to satisfy our operational needs. There can be no assurances that even if we were to achieve in part any or all of our strategic objectives that we would be successful in obtaining and improving profitability. If we are not able to access capital at competitive rates, the ability to implement our business plans may be adversely affected. In the absence of access to capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations at times when the prices for such assets or operations are depressed. In such event, we may not be able to consummate those dispositions. Furthermore, the proceeds of any such dispositions may not be adequate to meet our debt service obligations when due.

Our ability to comply with the restrictive covenants contained in our debt instruments, to make scheduled payments on our existing or future debt obligations, and to fund our operations will depend on our future financial and operating performance.  Such performance is, to a significant extent, subject to general economic, financial, competitive and other factors that are beyond our control.  If assumptions regarding our production, sales and subsequent collections from certain of our large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with actual results, or any future restructuring efforts are not successful, we may encounter cash flow and liquidity issues.  Additionally, new or existing customers may request acceleration of production or we may accept new orders or modify existing orders to purchase steel opportunistically or to build products with deposits, which will reduce our liquidity. There can be no assurances that our operations will generate sufficient cash flows to enable us to maintain compliance with the restrictive covenants contained in our debt instruments, pay our remaining indebtedness or to fund our other liquidity needs. If we cannot make scheduled payments on our debt, we will be in default and, as a result, among other things, our debt holders could declare all outstanding principal and interest to be due and payable which could force us to liquidate certain assets or alter our business operations or debt obligations, and we could be forced into a restructuring, bankruptcy or liquidation.  We cannot assure you that we will be able to do any of the foregoing on commercially reasonable terms or at all, or on terms that would be advantageous to our stockholders. In addition, raising capital in the equity capital markets could result in limitations on our ability to use our net operating loss carryforwards. 

 

Borrowings under our Credit Facility and other variable rate indebtedness may use the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the applicable interest rate. LIBOR is the subject of recent regulatory guidance and proposals for reform, which may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted, but could result in an increase in the cost of our variable rate indebtedness causing a negative impact on our financial position and operating results. 

 

We are substantially dependent on a few significant customers.

 

Historically, the majority of our revenues are highly concentrated with a limited number of customers. In 2018, two customers, Siemens Gamesa Renewable Energy (“SGRE”) and Gardner Denver, accounted for more than 10% of our consolidated revenues, and our five largest customers accounted for 78% of our consolidated revenues. Certain of our customers periodically have expressed their intent to scale back, delay or restructure existing customer agreements, which has led to reduced revenues from these customers. It is possible that this may occur again in the future. As a result, our operating profits and gross margins have historically been negatively affected by significant variability in production levels, which has created production volume inefficiencies in our operations and cost structures.

 

The U.S. wind energy industry is significantly impacted by tax and other economic incentives and political and governmental policies. A significant change in these incentives and policies could significantly impact our results of operations and growth.  

 

We sell towers to wind turbine manufacturers who supply wind energy generation facilities. The U.S. wind energy industry is significantly impacted by federal tax incentives and state Renewable Portfolio Standards (“RPS’s”). Despite recent reductions in the cost of wind energy, due to variability in wind quality and consistency, and other regional differences, wind energy may not be economically viable in certain parts of the country absent such incentives. These programs have provided material incentives to develop wind energy generation facilities and thereby impact the demand for our products. The increased demand for our products that generally results from the credits and incentives could be impacted by the expiration or curtailment of these programs.

 

One such federal government program, the PTC, provides economic incentives to the owners of wind energy facilities in the form of a tax credit. The PTC has been extended several times since its initial introduction in 1992. The FY16 Omnibus Appropriations Bill, passed on December 18, 2015, included a five-year extension and phase-down of the PTC, as well as providing the option to elect the ITC for wind energy projects. As a result, the PTC has been extended at full value for projects commenced by the end of 2016, was reduced to 80% of full value for projects commenced in 2017, 60% for projects commended in 2018, and 40% for projects commenced in 2019. Similarly, for the ITC election, projects that started construction in 2015 and 2016 are eligible for a full 30% ITC, and projects that start construction in 2017, 2018 and 2019 are eligible for an ITC of 24%, 18% and 12%, respectively. As before, the rules allow wind energy projects to qualify so long as construction is started before the end of the respective period and either completed within three years, or under continuous construction between the start date and completion. The PTC tax benefits are available for the first ten years of operation of a wind energy facility, and also applies to significant redevelopment of existing wind energy facilities.  

RPSs generally require or encourage state regulated electric utilities to supply a certain proportion of electricity from renewable energy sources or to devote a certain portion of their plant capacity to renewable energy generation. Typically, utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. Under many state standards, these renewable energy credits can be unbundled from their associated energy and traded in a market system, allowing generators with insufficient credits to meet their applicable state mandate. These standards have spurred significant growth in the wind energy industry and a corresponding increase in the demand for our products. Currently, the majority of states have RPS’s in place and certain states have voluntary utility commitments to supply a specific percentage of their electricity from renewable sources. The enactment of RPS’s in additional states or any changes to existing RPS’s (including changes due to the failure to extend or renew the federal incentives described above), or the enactment of a federal RPS or imposition of other greenhouse gas regulations, may impact the demand for our products. We cannot assure that government support for renewable energy will continue. The elimination of, or reduction in, state or federal government policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance and future development efforts. 

 

New tariffs have resulted in increased prices and could adversely affect our consolidated results of operations, financial position and cash flows. The Trump Administration imposed Section 232 tariffs on certain steel products imported into the U.S. which have increased the prices of these inputs. Increased prices for imported steel products have lead domestic sellers to respond with market-based increases to prices for such inputs as well. Additional tariffs have been announced that may be imposed on goods imported from China in the future. The new tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S. or other countries, could result in further increased prices and a decreased available supply of steel as well as additional imported components and inputs. We may not be able to pass price increases on to our customers and may not be able to secure adequate alternative sources of steel on a timely basis. While retaliatory tariffs imposed by other countries on U.S. goods have not yet had a significant impact, we cannot predict further developments.

 

U.S. tariffs have been imposed on imported steel, but have not been applied to fabricated wind towers, which has adversely impacted our cost structure and competitiveness relative to imported towers. This has contributed to a general decrease in tower margins, which has reduced the profitability of our business.

 

The existence of government subsidies available to our competitors in certain countries may affect our ability to compete on a price basis. 

 

In 2013, the U.S. International Trade Commission (“USITC”) determined that wind towers from China and Vietnam were being sold in the U.S. at less than fair value. As a result of that determination, the U.S. Department of Commerce (“USDOC”) issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam. Since that time, imports of wind towers from those countries have substantially ceased. Those orders expired in 2018 and are currently under review for a five-year extension. There can be no assurance that they will be renewed or extended. Additionally, producers in other countries not subject to those orders may benefit from government subsidies (particularly with respect to the price of steel, the primary raw material used in the production of wind towers) which could lead to increased competition from those producers in the U.S. market, causing us to lose market share and/or reducing our margins. 

 

Our customers may be significantly affected by disruptions and volatility in the economy and in the wind energy market.

 

Market disruptions and regular market volatility, including decreases in oil and commodity prices, may adversely impact our customers’ ability to pay amounts due to us and could cause related increases in our working capital or borrowing needs. In addition, our customers have in the past attempted and may attempt in the future to renegotiate the terms of contracts or reduce the size of orders with us as a result of disruptions and volatility in the markets. We cannot predict with certainty the amount of our backlog that we will ultimately ship to our customers.

 

Market disruptions and regular market volatility may also result in an increased likelihood of our customers asserting warranty or remediation claims in connection with our products that they would not ordinarily assert in a more stable economic environment. In the event of such a claim, we may incur costs if we decide to compensate the affected customer or to engage in litigation with the affected customer regarding the claim. We maintain product liability insurance, but there can be no guarantee that such insurance will be available or adequate to protect against such claims. A successful claim against us could have a material adverse effect on our business.

 

Consolidation among wind turbine manufacturers could increase our customer concentration and/or disrupt our supply chain relationships.

 

Wind turbine manufacturers are among our primary customers. There has been consolidation among these manufacturers, and more consolidation may occur in the future. For example, both Siemens and Gamesa were customers for our tower business until their business combination in early 2017, at which time SGRE became our largest customer. Customer consolidation may result in pricing pressures, to which we are subject, leading to downward pressure on our margins and profits, and may also disrupt our supply chain relationships.

 

We face competition from industry participants who may have greater resources than we do.

 

Our businesses are subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Certain of our competitors and potential competitors may have substantially greater financial resources, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, location and available capacity. We cannot be sure that we will have the resources or expertise to compete successfully in the future. We also cannot be sure that we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition.

 

We face significant risks associated with uncertainties resulting from changes to policies and laws with the periodic changes in the U.S. administration as well as risks associated with changes in our relationship with our significant customers.  

 

Changes of administration in the U.S. federal government may affect our business in a manner that currently cannot be reliably predicted, especially given the potentially significant changes to various laws and regulations that affect us. These uncertainties may include changes in laws and policies in areas such as corporate taxation, taxation on imports of internationally-sourced products, international trade including trade treaties such as the North American Free Trade Agreement, environmental protection and workplace safety laws, labor and employment law, immigration and health care, which individually or in the aggregate could materially and adversely affect our business, results of operations or financial condition.

 

Additionally, if our relationships with significant customers should change materially, it could be difficult for us to immediately and profitably replace lost sales in a market with such concentration, which could have a material adverse effect on our operating and financial results. We could be adversely impacted by decreased customer demand for our products due to (i) the impact of current or future economic conditions on our customers, (ii) our customers’ loss of market share to their competitors that do not use our products, and (iii) our loss of market share with our customers. We could lose market share with our customers to our competitors or to our customers themselves, should they decide to become more vertically integrated and produce the products that we currently provide.

 

In addition, even if our customers continue to do business with us, we could be adversely affected by a number of other potential developments with our customers. For example:

 

 

 

 

 

Our plans for growth, diversification, and restructuring may not be successful, and could result in poor financial performance.

 

The Company continues to strategically diversify, restructure and grow the business to improve operational efficiency and meet customer demand. Our diversification efforts further into the natural gas turbine (“NGT”) power generation, O&G, mining and other industries, particularly within our gearing and Heavy Fabrications businesses and through our 2017 acquisition of Red Wolf, may require additional investments in personnel, equipment and operational infrastructure. Moreover, although we have historically participated in most of these lines of business, there is no assurance that we will be able to grow our presence in these markets at a rate sufficient to compensate for a potentially weaker wind energy market. If we are unable to further penetrate these markets, our plans to diversify our operations may not be successful and our anticipated future growth may be adversely affected.

 

Our restructuring efforts, including the 2018 restructuring plan, may involve occasionally opening or closing facilities to rationalize facility capacity and management structure, and consolidating and increasing efficiencies in certain operations. If the Company is unable to generate anticipated costs savings or successfully implement its strategies, the Company’s financial results could suffer. These efforts and strategies could also have a negative impact on the Company’s relationships, including those with its employees or customers, which could also adversely affect the Company’s financial results.

 

Our growth efforts through increased production levels at existing facilities, acquisitions and continuous improvement activities such as the proper coordination and integration of the supply chain, the consistent use of systems with respect to production activities, the Advanced Product Quality Processes (APQP) to support the introduction of new products, and the hiring of continuous improvement experts to optimize our production processes, will require coordinated efforts across the Company and continued enhancements to our current operating infrastructure. If the cost of making these changes increases or if our efforts are unsuccessful, the Company may not realize anticipated benefits and our future earnings may be adversely affected.

 

If our projections regarding the future market demand for our products are inaccurate, our operating results and our overall business may be adversely affected.

 

We have previously made significant capital investments in anticipation of rapid growth in the U.S. wind energy market. However, the growth in the U.S. wind energy market has not kept pace with our expectations when some of these capital investments were made, and there can be no assurance that the U.S. wind energy market will grow and develop in a manner consistent with our expectations, or that we will be able to fill our capacity through the further diversification of our operations. Our internal manufacturing capabilities have required significant upfront fixed costs. If market demand for our products does not increase at the pace we have anticipated and align with our manufacturing capacity, we may be unable to offset these costs and achieve economies of scale, and our operating results may continue to be adversely affected by high fixed costs, reduced margins and underutilization of capacity which may cause us to continue to incur significant losses and may prevent us from achieving or maintaining profitability. In light of these considerations, we may be forced to reduce our labor force and production to minimum levels, as was done at certain operating locations in both 2017 and 2018, temporarily idle existing capacity or sell to third parties manufacturing capacity that we cannot utilize in the near term, in addition to the steps that we have already taken to adjust our capacity more closely to demand. Alternatively, if we experience rapid increased demand for our products in excess of our estimates, or we reduce our manufacturing capacity, our installed capital equipment and existing workforce may be insufficient to support higher production volumes, which could adversely affect our customer relationships and overall reputation. In addition, we may not be able to expand our workforce and operations in a timely manner, procure adequate resources or locate suitable third party suppliers to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our business could be adversely affected. Our ability to meet such excess customer demand could also depend on our ability to raise additional capital and effectively scale our manufacturing operations.

 

 

 

 

Our growth strategies could be ineffective due to the risks of acquisitions and risks relating to integration.

 

Our growth strategy has included acquiring complementary businesses, such as Red Wolf, as more fully described in Note 21, “Business Combinations” in the notes to our consolidated financial statements. In regards to Red Wolf, or any other future acquisitions, we could fail to identify, finance or complete suitable acquisitions on acceptable terms and prices. Acquisitions and the related integration processes could increase a number of risks, including diversion of operations personnel, financial personnel and management’s attention, difficulties in integrating systems and operations, potential loss of key employees and customers of the acquired companies and exposure to unanticipated liabilities. The price we pay for a business may exceed the value realized and we cannot provide any assurance that we will realize the expected synergies and benefits of any acquisition, including Red Wolf. Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or after closing with regard to the timely discovery of breaches of representations or warranties, could materially harm our business. Our failure to meet the challenges involved in integrating a new business to realize the anticipated benefits of an acquisition could cause an interruption or loss of momentum in our existing activities and could adversely affect our profitability. Acquisitions also may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial position and operating results.

 

Our diversification outside of the wind energy market exposes us to business risks associated with the gas turbine, oil and gas, and mining industries, among others, which may slow our growth or penetration in these markets.

 

Although we have experience in the gas turbine, oil and gas and mining industry markets, these markets have not historically been our primary focus. In further diversifying our business to serve these markets, we face competitors who may have more resources, longer operating histories and more well established relationships than we do, and we may not be able to successfully or profitably generate additional business opportunities in these industries. Moreover, if we are able to successfully diversify into these markets, our businesses may be exposed to risks associated with these industries, which could adversely affect our future earnings and growth. These risks include, among other things:

 

 

 

 

 

 

 

 

 

We have substantially generated net losses since our inception.

 

We have experienced operating losses since inception, except that we were profitable in 2016. We have incurred significant costs in connection with the development of our businesses, and because we have operated at low capacity utilization in certain facilities, there is no assurance that we will generate sufficient revenues to offset anticipated operating costs. Although we anticipate deriving revenues from the sale of our products, no assurance can be given that these products can be sold on a profitable basis. We cannot give any assurance that we will be able to sustain or increase profitability on a quarterly or annual basis in the future.

 

We may continue to incur significant losses in the future for a number of reasons, including other risks described in this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors. 

 

Current or future litigation and regulatory actions could have a material adverse impact on us.

 

From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business. No assurance can be given that the results of these matters will be favorable to us. An adverse resolution of lawsuits, investigations or arbitrations could have a material adverse effect on our business, financial condition and results of operations. Defending ourselves in these matters may be time consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives. Additionally, any amount that we may be required to pay to satisfy a judgment or settlement may not be covered by insurance. Under our charter and the indemnification agreements that we have entered into with our officers, directors and certain third parties, we are required to indemnify and advance expenses to them in connection with their participation in certain proceedings. There can be no assurance that any of these payments will not be material.

 

We may need to hire additional qualified personnel, including management personnel, and the loss of our key personnel could adversely affect our business.

 

Our future success will depend largely on the skills, efforts and motivation of our executive officers and other key personnel. Our success also depends, in large part, upon our ability to attract and retain highly qualified management and other key personnel throughout our organization. We face competition in the attraction and retention of personnel who possess the skill sets we seek. In addition, key personnel may leave us and subsequently compete against us. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business, results of operations or financial condition.

 

We rely on unionized labor, the loss of which could adversely affect our future success.

 

We depend on the services of unionized labor and have collective bargaining agreements with certain of our operations workforce at our Cicero, Illinois and Neville Island, Pennsylvania Gearing facilities. The loss of the services of these and other personnel, whether through terminations, attrition, labor strike or otherwise, or a material change in our collective bargaining agreements, could have a material adverse impact on us and our future profitability. In November 2017, a five-year collective bargaining agreement was ratified by the collective bargaining union in our Neville Island facility and is expected to remain in effect through October 2022. A  new four-year collective bargaining agreement with the Cicero union was negotiated in the third quarter of 2018 and is expected to remain in effect through February 2022. As of December 31, 2018, these collective bargaining units represented approximately 23% of our workforce. 

We could incur substantial costs to comply with environmental, health and safety (“EHS”) laws and regulations and to address violations of or liabilities under these requirements.

 

Our operations are subject to a variety of EHS laws and regulations in the jurisdictions in which we operate and sell products governing, among other things, health, safety, pollution and protection of the environment and natural resources, including the use, handling, transportation and disposal of non-hazardous and hazardous materials and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil, product content, performance and packaging. We cannot guarantee that we have been, or will at all times be in compliance with such laws and regulations. Changes in existing EHS laws and regulations, or their application, could cause us to incur additional or unexpected costs to achieve or maintain compliance. Failure to comply with these laws and regulations, obtain the necessary permits to operate our business, or comply with the terms and conditions of such permits may subject us to a variety of administrative, civil and criminal enforcement measures, including the imposition of civil and criminal sanctions, monetary fines and penalties, remedial obligations, and the issuance of compliance requirements limiting or preventing some or all of our operations. The assertion of claims relating to regulatory compliance, on or off site contamination, natural resource damage, the discovery of previously unknown environmental liabilities, the imposition of criminal or civil fines or penalties and/or other sanctions, or the obligation to undertake investigation, remediation or monitoring activities could result in potentially significant costs and expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations. Under certain circumstances, violation of such EHS laws and regulations could result in us being disqualified from eligibility to receive federal government contracts or subcontracts under the federal government’s debarment and suspension system.

 

We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of currently and formerly owned, leased or operated properties, or properties to which hazardous substances or wastes were sent by current or former operators at our current or former facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities. The presence of contamination from hazardous substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing. We also could be held liable under third party claims for property damage, natural resource damage or personal injury and for penalties and other damages under such environmental laws and regulations, which could have a material adverse effect on our business, financial condition and results of operations.

 

Our ability to comply with regulatory requirements is critical to our future success, and there can be no guarantee that our businesses are in full compliance with all such requirements.

 

As a manufacturer and distributor of wind and other energy industry products we are subject to the requirements of federal, state, local and foreign regulatory authorities. In addition, we are subject to a number of industry standard setting authorities, such as the American Gear Manufacturers Association and the American Welding Society. Changes in the standards and requirements imposed by such authorities could have a material adverse effect on us. In the event we are unable to meet any such standards when adopted, our businesses could be adversely affected. We may not be able to obtain all regulatory approvals, licenses and permits that may be required in the future, or any necessary modifications to existing regulatory approvals, licenses and permits, or maintain all required regulatory approvals, licenses and permits. There can be no guarantee that our businesses are fully compliant with such standards and requirements.

 

We may be unable to keep pace with rapidly changing technology in wind turbine and other industrial component manufacturing.

 

The global market for wind turbines, as well as for our other manufactured industrial components, is rapidly evolving technologically. Our component manufacturing equipment and technology may not be suited for future generations of products being developed by wind turbine companies. As turbines grow in size, tower manufacturing becomes more complicated and may require investments in new manufacturing equipment. For example, some wind turbine manufacturers are using wind turbine towers made partially or fully from concrete instead of steel. To maintain a successful business in our field, we must keep pace with technological developments and the changing standards of our customers and potential customers and meet their constantly evolving demands. If we fail to adequately respond to the technological changes in our industry, or are not suited to provide components for new types of wind turbines, our business, financial condition and operating results may be adversely affected.

 

Disruptions in the supply of parts and raw materials, or changes in supplier relations, may negatively impact our operating results.

 

We are dependent upon the supply of certain raw materials used in our production process, and these raw materials are exposed to price fluctuations on the open market. Raw material costs for materials such as steel, our primary raw material, have fluctuated significantly and may continue to fluctuate. To reduce price risk caused by market fluctuations, we have generally tried to match raw material purchases to our sales contracts or incorporated price adjustment clauses in our contracts. However, limitations on availability of raw materials or increases in the cost of raw materials (including steel), energy, transportation and other necessary services may impact our operating results if our manufacturing businesses are not able to fully pass on the costs associated with such increases to their respective customers. Alternatively, we will not realize material improvements from any decline in steel prices as the terms of our contracts generally require that we pass these cost savings through to our customers. In addition, we may encounter supplier constraints, be unable to maintain favorable supplier arrangements and relations or be affected by disruptions in the supply chain caused by events such as natural disasters, shipping delays, power outages and labor strikes. Additionally, our supply chain has become more global in nature and, thus, more complex from a shipping and logistics perspective. In the event of limitations on availability of raw materials or significant changes in the cost of raw materials, particularly steel, our margins and profitability could be negatively impacted.

 

If our estimates for warranty expenses differ materially from actual claims made, or if we are unable to reasonably estimate future warranty expense for our products, our business and financial results could be adversely affected.

 

We provide warranty terms generally ranging between one and five years to our customers depending upon the specific product and terms of the customer agreement. We reserve for warranty claims based on prior experience and estimates made by management based upon a percentage of our sales revenues related to such products. From time to time, customers have submitted warranty claims to us. However, we have a limited history on which to base our warranty estimates for certain of our manufactured products. Our assumptions could materially differ from the actual performance of our products in the future and could exceed the levels against which we have reserved. In some instances our customers have interpreted the scope and coverage of certain of our warranty provisions differently from our interpretation of such provisions. The expenses associated with remediation activities in the wind energy industry can be substantial, and if we are required to pay such costs in connection with a customer’s warranty claim, we could be subject to additional unplanned cash expenditures. If our estimates prove materially incorrect, or if we are required to cover remediation expenses in addition to our regular warranty coverage, we could be required to incur additional expenses and could face a material unplanned cash expenditure, which could adversely affect our business, financial condition and results of operations.

 

If we are unable to produce, maintain and disseminate relevant and/or reliable data and information pertaining to our business in an efficient, cost-effective, secure and well-controlled fashion and avoid security breaches affecting our information technology systems, such inability may have significant negative impacts on our confidentiality obligations, and proprietary needs and therefore on our future operations, profitability and competitive position. 

 

Management relies on information technology infrastructure and architecture, including hardware, network, software, people and processes, to provide useful and confidential information to conduct our business in the ordinary course, including correspondence and commercial data and information interchange with customers, suppliers, consultants, advisors and governmental agencies, and to support assessments and conclusions about future plans and initiatives pertaining to market demands, operating performance and competitive positioning.  

 

There has been an increase in global cybersecurity threats, computer viruses and more sophisticated and targeted cyber-related attacks as well as cybersecurity failures resulting from human and technological errors. While we attempt to mitigate these risks, including through the use of protective systems, monitoring and testing and employee training, any material failure, interruption of service, compromised data security, computer virus or cybersecurity threat or attack could adversely affect our relations with suppliers and customers, place us in violation of confidentiality and data protection laws, rules and regulations, and result in negative impacts to our reputation, market share, operations and profitability. Despite our use of measures to protect our systems and confidential information, security breaches, human or technological error or other failures in our information technology could result in theft, destruction, loss, misappropriation or release of confidential data or intellectual property which could materially and adversely impact our future results.

 

 

Future sales of our common stock or securities convertible into our common stock may depress our stock price.

 

Sales of a substantial number of shares of our common stock or securities convertible into our common stock in the public market, or the perception that these sales might occur, may reduce the prevailing market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities and may make it more difficult for our stockholders to sell their common stock at a time and price that they deem appropriate.

 

On August 11, 2017, we filed a registration statement on Form S-3 (File No. 333-219931), which was declared effective by the SEC on October 10, 2017, to register securities that we may choose to issue in the future (the “Broadwind Form S-3”).  Under the registration statement, we have the option to offer and sell up to $50,000 in the aggregate of securities in one or more offerings. On July 31, 2018, we entered into a $10,000 At Market Issuance Sales Agreement (the “ATM Agreement”) with Roth Capital Partners, LLC. During 2018, the Company issued 15,112 shares of the Company’s common stock under the ATM Agreement and the net proceeds (before upfront costs) to the Company from the sale of the Company’s common stock were approximately $33 after deducting commissions paid of approximately $1. As of December 31, 2018, approximately $9,967 remained available for issuance with respect to the ATM Agreement.

 

There is a limited trading market for our securities and the market price of our securities is subject to volatility.

 

Our common stock trades on the Nasdaq Capital Market. The absence of an active trading market increases price volatility and reduces the liquidity of our common stock. The market price and level of trading of our common stock could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, actual or anticipated variations in our operating results and cash flow, the nature and content of our earnings releases, announcements or events that impact our business and the general state of the securities market, as well as general economic, political and market conditions and other factors that may affect our future results.  In 2018, the price of our common stock varied from a high of $3.15 per share to a low of $1.20 per share. Stockholders may have incurred substantial losses with regard to any investment in our common stock adversely affecting stockholder confidence.

 

Limitations on our ability to utilize our net operating losses (“NOLs”) may negatively affect our financial results.

 

We may not be able to utilize all of our NOLs. For financial statement presentation, all benefits associated with the NOL carryforwards have been reserved; therefore, this potential asset is not reflected on our balance sheet. To the extent available, we will use any NOL carryforwards to reduce the U.S. corporate income tax liability associated with our operations. However, if we do not achieve profitability prior to their expiration, we will not be able to fully utilize our NOLs to offset income. Section 382 of the IRC (“Section 382”) generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. Our ability to utilize NOL carryforwards and built in losses may be limited, under Section 382 or otherwise, by our issuance of common stock or by other changes in ownership of our stock. After analyzing Section 382 in 2010 we determined that aggregate changes in our stock ownership had triggered an annual limitation of NOL carryforwards and built in losses available for utilization to $14,284 per annum. Although this event limited the amount of pre ownership change date NOLs and built in losses we can utilize annually, it does not preclude us from fully utilizing our current NOL carryforwards prior to their expiration. However, subsequent changes in our stock ownership could further limit our ability to use our NOL carryforwards and our income could be subject to taxation earlier than it would if we were able to use NOL carryforwards and built in losses without an annual limitation, which could result in lower profits. To address these concerns, in February 2013 we adopted a Section 382 Stockholder Rights Plan, which was subsequently approved by our stockholders and extended in 2016 for an additional three-year period (as amended, the “Rights Plan”), designed to preserve our substantial tax assets associated with NOL carryforwards under Section 382. The Rights Plan is intended to deter any person or group from being or becoming the beneficial owner of 4.9% or more of our common stock and thereby triggering a further limitation of our available NOL carryforwards. On February 7, 2019, the Board of Directors (the “Board”)  approved an amendment extending the Rights Plan for an additional three years. The amendment is subject to approval by our stockholders at our 2019 Annual Meeting of Stockholders. See Note 14, “Income Taxes” of our consolidated financial statements for further discussion of our Rights Plan. There can be no assurance that our stockholders will ratify the extension of the Rights Plan or that the Rights Plan will be effective in protecting our NOL carryforwards.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2.  PROPERTIES

Our corporate headquarters is located in Cicero, Illinois, a suburb located west of Chicago, Illinois. In addition, the Subsidiaries own or lease operating facilities, which are presented by operating segment as follows (information below is as of December 31, 2018).

We consider our active facilities to be in good condition and adequate for our present and future needs.

ITEM 3.  LEGAL PROCEEDINGS

We are party to a variety of legal proceedings that arise in the ordinary course of our business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations, financial condition or cash flows. 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 our results of operations, financial condition or cash flows. It is possible that if one or more of such matters were decided against us, the effects could be material to our results of operations in the period in which we would be required to record or adjust the related liability and could also be material to our financial condition and cash flows in the period in which we would be required to pay such liability.

ITEM 4.  MINE SAFETY DISCLOSURES

Not Applicable.

 

 

PART II

(Dollar amounts are presented in thousands, except per share data and unless otherwise stated)

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “BWEN.” The following table sets forth the high and low bid prices of our common stock traded on the NASDAQ.

 

The closing price for our common stock as of February 22, 2019 was $1.30. As of February 22, 2019, there were 47 holders of record of our common stock.

Dividends

We have never paid cash dividends on our common stock and have no current plan to do so in the foreseeable future. The declaration and payment of dividends on our common stock are subject to the discretion of our Board and are further limited by our credit agreement and other contractual agreements we may have in place from time to time. The decision of our Board to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition, and other factors our Board may consider relevant. The current policy of our Board is to reinvest cash generated in our operations to promote future growth and to fund potential investments.

Repurchases

There were no repurchases of our equity securities under our repurchase program made during the years ended December 31, 2018 and 2017.  

Unregistered Sales of Equity Securities

There were no unregistered sales of equity securities for the years ended December 31, 2018 or 2017.

Securities Authorized for Issuance Under Equity Compensation Plans

See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report for information as of December 31, 2018 with respect to shares of our common stock that may be issued under our existing share‑based compensation plans.

ITEM 6.  SELECTED FINANCIAL DATA

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.

 

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As used in this Annual Report, the terms “we,” “us,” “our,” “Broadwind,” and the “Company” refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Cicero, Illinois, and its Subsidiaries.

(Dollar amounts are presented in thousands, except per share data and unless otherwise stated)

We booked $83,241 in net new orders in 2018, down from $87,562 in 2017.  This decrease in orders was driven primarily by lower orders  for towers as planned production shifted into 2019 due to steel plate unavailability and increased foreign competition primarily attributable to steel tariffs.  Partially offsetting the impact of the decrease in towers orders was an increase in heavy fabrications orders primarily due to strong mining demand and increased Gearing orders associated with strong demand from aftermarket wind and mining customers.  Gearing orders increased by $4,648 in 2018 to $41,576. Our Process Systems segment had $18,154 in orders in 2018, an increase of $2,393 over 2017 primarily due to higher demand from mining and other industrial customers.

We recognized revenue of $125,380 in 2018, down from revenue of $146,785 in 2017.  The Towers and Heavy Fabrications segment revenues decrease was primarily due to a 34% decrease in tower sections sold and a lower average sales price on the product mix sold, partially offset by an increase in heavy fabrication sales.  Partially offsetting the Towers

and Heavy Fabrications decrease was an increase in Gearing segment revenues of $12,370 or 48%, primarily as a result of the recovery in the oil and gas (“O&G”) and industrial markets and improved plant efficiencies. The Process Systems segment recognized revenue of $18,319 in 2018 as compared to $17,390 in 2017 due primarily to increased sales within mining and industrial markets. At December 31, 2018, total backlog was $96,456, down 30% from $138,198 at December 31, 2017, which is due in part to the winding down of a three-year tower framework agreement in mid-2016, against which we are still delivering.

We reported a net loss of $24,146, or $1.56 per share in 2018, compared to a net loss of $3,641 or $0.24 per share in 2017.  The change in earnings was primarily due to a $7,592 intangible asset impairment charge recognized during the fourth quarter of 2018,  a  $4,993 goodwill impairment charge recognized during the second quarter of 2018, lower tower margin reflecting reduced production volumes and a less favorable product mix and start-up costs associated with restoring production levels as we ramped up activity during the first quarter of 2018 following a near shutdown in late 2017.  Partially offsetting these factors were improvements in Gearing plant utilization and efficiencies and a $2,249 gain recognized upon extinguishment of the New Markets Tax Credit (NMTC) loan.  

During the first quarter of 2018, we conducted a review of our business strategies and product plans given the outlook of the industries we serve and our business environment. As a result, we executed a restructuring plan to rationalize our facility capacity and management structure, and to consolidate and increase the efficiencies in our Abilene facility operations. We exited the market for natural gas compression units and transferred remaining operations from a leased facility in Abilene, TX into other production locations. We vacated the leased Abilene facility in 2018 (following the expiration of the New Markets Tax Credit Transaction compliance period) and incurred costs totaling $668 for the year ended December 31, 2018. In conjunction with this initiative, all costs associated with this vacated facility were recorded as restructuring expenses within the Process Systems segment. We expect any remaining restructuring costs associated with the restructuring plan to be immaterial. We anticipate future annual cost savings of approximately $575 in facility expenses related to the restructuring.

 

We use our credit facility to fund working capital requirements and believe that our credit facility, together with the operating cash generated by our businesses, and any potential proceeds from access to the public or private debt or equity markets, are sufficient to meet all cash obligations over the next twelve months.  For a further discussion of our capital resources and liquidity, including a description of recent amendments and waivers under our credit facility, please see the discussion under “Liquidity, Financial Position and Capital Resources”.

RESULTS OF OPERATIONS

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

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 year ended December 31, 2018 compared to the year ended December 31, 2017.

Consolidated

Revenues decreased by $21,405 from $146,785 for the year ended December 31, 2017,  to $125,380 for the year ended December 31, 2018.  Lower sales in our Towers and Heavy Fabrications segment of $34,574 were partially offset by higher sales in the Gearing segment of $12,370 and higher sales in the Process Systems segment of $929. The Towers and Heavy Fabrications segment revenue decrease was primarily due to a 34% decrease in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the towers revenue decrease was an increase in the volume of heavy fabrications primarily due to the recovery in mining and other industrial markets and the expansion of our machining capabilities. Gearing segment revenues increased primarily due to improved order intake beginning in the second half of 2017, primarily resulting from the recovery in demand from O&G and mining customers due to expanding our customer base.

Gross profit decreased by $5,094, from $8,159 for the year ended December 31, 2017, to $3,065, for the year ended December 31, 2018.  The decrease in gross profit was primarily attributable to lower capacity utilization in the tower plants early in 2018 following a near shutdown at year end 2017 as our major customer rebalanced inventories. This decrease was partially offset by a $3,571 improvement in gross profit in our Gearing segment due to improved plant utilization and manufacturing efficiencies.  As a result, our gross margin decreased from 5.6% for the year ended December 31, 2017,  to 2.4% for the year ended December 31, 2018.

Operating expenses increased from $15,592 during the year ended December 31, 2017, to $28,131 during the year ended December 31,  2018.  The increase was primarily attributable to a $7,592 intangible asset impairment charge recognized during the fourth quarter of 2018 and a $4,993 goodwill impairment charge recognized during the second quarter of 2018.  As a result, operating expenses as a percentage of sales increased from 10.6% in 2017 to 22.4% in 2018. 

Loss from continuing operations increased from a loss of $3,183 for the year ended December 31, 2017 to a loss of $24,002 for the year ended December 31, 2018, primarily as a result of the factors described above, partially offset by a $2,249 gain recognized on the NMTC Transaction during the current year.

The Company had a net loss of $3,641 for the year ended December 31, 2017, compared to a net loss of $24,146 for the year ended December 31, 2018, primarily as a result of the factors described above, in addition to the absence of a

$5,034 benefit from income taxes in the prior year due to the release of a portion of the tax provision related to the acquisition of Red Wolf.

Towers and Heavy Fabrications Segment

The following table summarizes the Towers and Heavy Fabrications segment operating results for the years ended December 31, 2018 and 2017:

Towers orders decreased from $34,873 for the year ended December 31, 2017 to $23,511 for the year ended December 31, 2018. Lower demand for towers was partially offset by increased heavy fabrication orders for the year ended December 31, 2018 primarily due to the recovery in mining demand, and in response to a strategic focus on broadening our manufacturing capabilities and diversifying the customer base in this segment. Towers and Heavy Fabrications segment revenues decreased by $34,574, from $103,389 during the year ended December 31, 2017 to $68,815 during the year ended December 31, 2018 primarily due to a 34% reduction in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers revenue was an increase in heavy fabrications due primarily to the recovery in mining activity.

Towers and Heavy Fabrications segment operating income decreased by $7,013, from income of $2,667 during the year ended December 31, 2017, to a loss of $4,346 during the year ended December 31, 2018.  This reduction was primarily attributable to lower capacity utilization, a lower margin product mix and start-up costs associated with restoring production levels as we ramped up activity during the first quarter following a near shutdown in late 2017. These factors were partially offset by increased sales and margins on the heavy fabrications product line, a reduction in manufacturing overhead and productivity improvements. The operating margin decreased from 2.6% during the year ended December 31, 2017, to a loss of 6.3% during the year ended December 31, 2018.

Gearing Segment

The following table summarizes the Gearing segment operating results for the years ended December 31, 2018 and 2017:

Gearing segment orders rose 13% from the year ended December 31, 2017, primarily due to strong demand from wind and mining customers. As a result of the recovery in order intake that began in the prior year, revenue increased from $26,006 during the year ended December 31, 2017, to $38,376 during the year ended December 31, 2018.  

The Gearing segment had operating income of $51 during the year ended December 31, 2018, an improvement from a loss of $2,632 during the year ended December 31, 2017. The operating income improvement was primarily due to improved plant utilization and manufacturing efficiencies, and higher labor productivity. Partially offsetting this was the absence of the $727 environmental reserve reversal that occurred in the prior year,  as well as increased commissions and overhead costs to support higher production levels. The operating margin improved based on the above items from (10.1%) during the year  ended December 31, 2017, to 0.1% during the year ended December 31, 2018.

Process Systems Segment

The following table summarizes the Process Systems segment operating results for the years ended December 31, 2018 and 2017.

 

 

 

Process Systems segment orders increased $2,393 from $15,761 during the year ended December 31, 2017, to $18,154 during the year ended December 31, 2018 primarily due to higher demand from mining and industrial customers, partially offset by weaker natural gas turbine component demand. Process Systems segment revenues increased by $929, from $17,390 during the  year ended December 31, 2017, to $18,319 during the year ended December 31, 2018 primarily due to the recovery in mining and other industrial markets and the full year impact of the Red Wolf acquisition which closed in February of 2017.

The Process Systems segment operating loss increased by $14,173, from $2,269 during the year ended December 31, 2017, to $16,442 during the year ended December 31, 2018 primarily due to a  $7,592 intangible asset impairment charge recognized during the fourth quarter of 2018,  a $4,993 impairment charge resulting from the write-off of goodwill and $668 of restructuring costs related to the exit of a leased production facility in Abilene, TX. The operating margin decreased from a loss of 13.0% during the year ended December 30, 2017, to a loss of 89.8% during the year ended December 31, 2018.

Corporate and Other

Corporate and Other expenses decreased by $870, from $5,199 for the year ended December 31, 2017, to $4,329 for the year ended December 31, 2018.  The decrease was primarily attributable to lower salaries and benefits expense of $811, partially offset by the $254 reduction in the Red Wolf earn-out release in the current period compared to the prior year.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.

We have identified the accounting policies listed below to be critical to obtain an understanding of our consolidated financial statements. This section should also be read in conjunction with Note 1, “Description of Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements for further discussion of these and other significant accounting policies.

Revenue Recognition

We recognize revenue when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Customer deposits and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers, like those made for liquidated damages, are presumed to be classified as reductions of revenue in our statement of operations.

In many instances within our Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition due to our customers’ preference to ship towers in batches to support efficient construction of wind farms. We recognize revenue under these arrangements when there is a substantive reason for the arrangement (i.e. the buyer requests the arrangement), the ordered goods are segregated from inventory and not available to fill other orders, the goods are currently ready for physical transfer to the customer, and we do not have the ability to use the product or to direct it to another customer. Assuming these required

revenue recognition criteria are met, revenue is recognized upon completion of product manufacture and customer acceptance.

We adopted the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, for the fiscal year beginning January 1, 2018 and elected the modified retrospective approach. Through our assessment of the ASC 606, we determined minimal changes to the assumptions utilized for the year ending December 31, 2017 and the adoption of the guidance did not result in a material impact on our consolidated financial statements.

Warranty Liability

We provide warranty terms that generally range from one to five years for various products relating to workmanship and materials supplied by us. In certain contracts, we have recourse provisions for items that would enable us to seek recovery from third parties for amounts paid to customers under warranty provisions. We estimate the warranty accrual based on various factors, including historical warranty costs, current trends, product mix and sales.

Inventories

Inventories consist of raw materials, work-in-process and finished goods. Raw materials consist of components and parts for general production use. Work-in-process consists of labor and overhead, processing costs, purchased subcomponents, and materials purchased for specific customer orders. Finished goods consist of components purchased from third parties as well as components manufactured by us.

Inventories are stated at the lower of cost or market and net realizable value. We have recorded a reserve for the excess of cost over market value in our inventory allowance. Market value of inventory, and management’s judgment concerning the need for reserves, encompasses consideration of other business factors including physical condition, inventory holding period, contract terms and usefulness. Inventories are valued based either on actual cost or using a first‑in, first out method.

Long-Lived Assets

We review property and equipment and other long-lived assets (“long-lived assets”) for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. In evaluating the recoverability of long-lived assets, we utilize a fair value technique accepted by ASC 820, Fair Value Measurement, which is the asset accumulation approach.  If the fair value of the asset group is less than the carrying amount, we recognize an impairment loss.

Due to the Gearing segment’s operating losses in 2017 combined with its history of operating losses, we continue to evaluate the recoverability of certain of the long-lived assets associated with the Gearing segment. Based on third-party appraisals and other estimates of the fair value of the Gearing asset group, we determined the fair value of the asset group is in excess of carrying amounts under ASC 360 testing, and no impairment was indicated as of December 31, 2018 or 2017. The appraised value of the assets was determined primarily through the use of market value third-party appraisals. To the extent assumptions used in our evaluations are not achieved, there may be a negative effect on the valuation of these assets.

During the second quarter of 2018, we identified triggering events associated with the release of Red Wolf’s final earn-out reserve, Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, we evaluated the recoverability of the Red Wolf asset group. In accordance with GAAP, we compared the carrying value of the Red Wolf asset group to the forecast undiscounted cash flows associated with this asset group. Based on the analysis performed, the forecast undiscounted cash flows exceeded the carrying value and no impairment of this group was indicated or recorded.

 

Next we compared the carrying value of the Red Wolf reporting unit to the fair value of the Red Wolf reporting unit. The fair value was determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The two main assumptions utilized in the forecast discounted cash flow analysis were the cash flows from operations and the weighted average cost of capital of 18.6%. Based on the analysis performed, we determined that the carrying amount of the reporting unit exceeded the fair value and recorded a $4,993 goodwill impairment charge in the second quarter of 2018. We utilized a third-party appraisal to validate the results of the analysis.

 

During the fourth quarter of 2018, we identified triggering events associated with Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented.  As a result, we tested the long‑lived assets associated with Red Wolf for impairment.  The carrying value of the asset group was

found to exceed both its undiscounted cash flows and its fair value determined using the asset accumulation approach. We relied upon a third-party valuation and determined that the customer relationship intangible asset was impaired, and recorded a corresponding $7,592 impairment charge during the fourth quarter of 2018. The two main assumptions utilized in the valuation were the cash flows from operations and the weighted average cost of capital of 18.5%.

Income Taxes

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

In connection with the preparation of our consolidated financial statements, we are required to estimate our income tax liability for each of the tax jurisdictions in which we operate. This process involves estimating our actual current income tax expense and assessing temporary differences resulting from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. We also recognize the expected future income tax benefits of NOL carryforwards as deferred income tax assets. In evaluating the realizability of deferred income tax assets associated with NOL carryforwards, we consider, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.

 

We also account for the uncertainty in income taxes related to the recognition and measurement of a tax position taken or expected to be taken in an income tax return. We follow the applicable pronouncement guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to the uncertainty in these income tax positions.

Workers’ Compensation Reserves

At the beginning of the third quarter of 2013, we began to self‑insure for our workers’ compensation liability, and began establishing 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. Although we entered into a guaranteed cost program at the beginning of the third quarter of 2016, we maintain a liability for the trailing claims associated with the self-insured policy years.

Health Insurance Reserves

At the beginning of the first quarter of 2014, we began to self‑insure for our health insurance liabilities, including establishing 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 health insurance reserves. We take into account claims incurred but not reported when determining our health insurance reserves. Health insurance 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.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of December 31, 2018, cash and cash equivalents totaled $1,177, an increase of $1,099 from December 31,

2017. Debt and capital lease obligations at December 31, 2018 totaled $14,876, and we had the ability to borrow up to $10,319 under our Credit Facility (as defined in Note 10, “Debt and Credit Agreement” in the notes to our consolidated financial statements). 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 twelve months primarily through cash generated from operations, available cash balances, our Credit Facility, additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital under the Form S-3.

On January 29, 2018, we executed the Third Amendment to Loan and Security Agreement (the “Third Amendment”), which waived the Fixed Charge Coverage Ratio Covenant as of December 31, 2017 and added new minimum EBITDA and capital expenditure covenants through June 30, 2018. Among other changes, the Third Amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated for future periods commencing with the quarter ending June 30, 2018.

On May 3, 2018, we executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), which waived our non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amended the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusted the definition of EBITDA to add back certain restructuring expenses.

On October 26, 2018, we executed the Fifth Amendment to Loan and Security Agreement which, among other changes, removed the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018 and added minimum EBITDA covenants through June 30, 2019.

On January 16, 2019, we executed the Sixth Amendment to Loan and Security Agreement which increased our capability to issue letters of credit.

On February, 25, 2019, we executed an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) which expanded our Credit Facility to $35,000 and extended the term to February 25, 2022. The Amended and Restated Loan Agreement includes minimum EBITDA covenants through September 30, 2019 and introduces a Fixed Charge Coverage Ratio thereafter. For a more detailed description of the Amended and Restated Loan Agreement refer to Item 9B of this Form 10-K.

While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and amended debt covenants, there can be no assurance 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 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 year ended December 31, 2018 net cash provided by operations was $2,045 compared to net cash used in operating activities of $9,350 for the year ended December 31, 2017.  The operating cash flow improved versus the prior year due to a significant increase in customer deposits associated with higher scheduled Tower production levels in 2019.  Partially offsetting this increase was a greater use of cash for accounts receivable and inventory that supported higher production levels in the current year as compared to the prior year when our largest tower customer reduced orders to correct inventories.

Investing Cash Flows

During the year ended December 31, 2018, net cash used in investing activities was $1,648 compared to net cash used in investing activities of $19,894 for the year ended December 31, 2017.  The decrease in net cash used in investing activities as compared to the prior-year period was primarily due to the $16,449 cash paid for the Red Wolf acquisition in February 2017. In addition, we realized a $4,968 decrease in net purchases of property and equipment, primarily driven by the completion of our Abilene, TX tower plant upgrade and expansion project in the prior year, partially offset by the $3,171 liquidation of available-for-sale securities in 2017.

Financing Cash Flows

During the year ended December 31, 2018, net cash provided by financing activities totaled $807 compared to net cash provided by financing activities of $10,660 for the year ended December 31, 2017.   The decrease in net cash provided by financing activities as compared to the prior-year period was primarily due to the increased usage of our Credit Facility in 2017, which subsequently flattened in 2018 partially offset by an increase of $842 in net proceeds on long-term debt.

Other

The $2,600 liability associated with the NMTC transaction described further in Note 18, “New Markets Tax Credit Transaction” in the notes to our consolidated financial statements is included in the line of credit, NMTC and other notes payable line item of our consolidated financial statements as of December 31, 2017. During the third quarter of 2018, the NMTC loan was extinguished and we recorded a gain of $2,249 in other income, net of transaction expenses.

Separately in 2016, we entered into a $570 loan agreement with the Development Corporation of Abilene which is included in long-term debt, less current maturities. The loan is forgivable upon us meeting and maintaining specific employment thresholds. During 2018, $114 of the loan was forgiven. In addition, we have outstanding notes payable for capital expenditures in the amount of $1,882 and $1,146 as of December 31, 2018 and 2017, respectively, with $930 and $804 included in the “Line of credit, NMTC and other notes payable” line item of our consolidated financial statements as of December 31, 2018 and 2017, respectively. The notes payable have monthly payments that range from $3 to $36 and an interest rate of 5%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from April 2020 to May 2021.

Contractual Obligations

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.

 

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial information required by Item 8 is contained in Part IV, Item 15 “EXHIBITS AND FINANCIAL STATEMENT SCHEDULES” of this Annual Report.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.  CONTROLS AND PROCEDURES

(a)Evaluation of Disclosure Controls and Procedures

We seek to 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 (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal year reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective as of December 31, 2018.

(b)Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c)Report of Management on Internal Control Over Financial Reporting

Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2018. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that our internal control over financial reporting was effective as of December 31, 2018.  

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.

ITEM 9B.  OTHER INFORMATION

On February, 25, 2019, the Company and its subsidiaries Brad Foote Gear Works, Inc. (“Brad Foote”), Broadwind Towers, Inc. (“Broadwind Towers”), Broadwind Services, LLC (“Broadwind Services”), and Red Wolf (each individually, a “Subsidiary” and collectively, the “Subsidiaries”), entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”), with CIBC Bank USA, formerly known as The PrivateBank and Trust Company (“CIBC”), as administrative agent and sole lead arranger and the other financial institutions party thereto (the “Lenders”), providing the Company and its Subsidiaries with a $35 million secured credit facility (the “Credit Facility”).

Under the terms of the Amended and Restated Loan Agreement, the Credit Facility is a three-year asset-based revolving credit facility, pursuant to which the Lenders will advance funds against a borrowing base consisting of approximately (a) 85% of the face value of eligible receivables of the Company and the Subsidiaries, plus  (b) the lesser of (i) 50% of the lower of cost or market value of eligible inventory of the Company, (ii) 85% of the orderly liquidation value of eligible inventory and (iii) $12.5 million, plus (c) the lesser of (i) the sum of (A) 75% of the appraised net orderly liquidation value of the Company’s eligible machinery and equipment plus (B) 50% of the fair market value of the Company’s mortgaged property and (ii) $12 million. Subject to certain borrowing base conditions, the aggregate Credit Facility limit under the Amended and Restated Loan Agreement is $35 million with a sublimit for letters of credit of $10 million.   Borrowings under the Credit Facility bear interest at a per annum rate equal to, at the option of the Company, the one, two or three-month LIBOR rate or the base rate, plus a margin.  The applicable margin is 5.50% for LIBOR rate loans and 3.50% for base rates loans. Upon certain pay downs, a pricing grid based on the Company’s trailing twelve month fixed charge coverage ratio may become effective under which applicable margins would range from 2.25% to 2.75% for LIBOR rate loans and 0.00% to 0.75% for base rate loans.  Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin under the pricing grid, plus other customary fees.  The Company must also pay an unused facility fee equal to 0.50% per annum on the unused portion of the Credit Facility along with other standard fees.  The initial term of the Amended and Restated Loan Agreement ends on February 25, 2022. 

The Company is allowed to prepay in whole or in part advances under the Credit Facility without penalty or premium other than customary “breakage” costs with respect to LIBOR loans.

The Amended and Restated Loan Agreement contains customary representations and warranties applicable to the Company and the Subsidiaries.  It also contains a requirement that the Company, on a consolidated basis, maintain minimum quarterly EBITDA levels through September 30, 2019 and a minimum quarterly fixed charge coverage ratio thereafter, along with other customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications.  These restrictive covenants include limitations on the ability of the Company and the Subsidiaries to, among other things, form or acquire subsidiaries, incur indebtedness, create liens, enter into a merger, consolidation, reorganization or recapitalization, dispose of assets, pay dividends, cause or permit a change of control, make investments or enter into affiliate transactions.

The Amended and Restated Loan Agreement also contains customary events of default including, without limitation, non-payment of obligations, non-performance of covenants and obligations, material judgments, bankruptcy or insolvency, default on other material debt, change of control, breaches of representations and warranties, limitation or termination of any guarantee with respect to the Amended and Restated Loan Agreement, impairment of security or invalidity or unenforceability of documentation or liens related to the Amended and Restated Loan Agreement.  The occurrence of an event of default could, among other things, result in the acceleration of the obligations under the Amended and Restated Loan Agreement.

The obligations under the Amended and Restated Loan Agreement are secured by, subject to certain exclusions, (i) a first priority security interest in all of the accounts, inventory, equipment, chattel paper, payment intangibles, cash and cash equivalents and other personal property and stock or other equity interest in subsidiaries of the Company and the Subsidiaries and (ii) a first priority mortgage of the real property of Abilene, Texas and Pittsburgh, Pennsylvania.

The Company and the Subsidiaries may use the proceeds from the Credit Facility for working capital purposes, to refinance the debt of the Company and its Subsidiaries and for other business purposes.

The foregoing description of the Amended and Restated Loan Agreement is not intended to be complete and is qualified in its entirety by reference to the Amended and Restated Loan Agreement, which is attached hereto as Exhibit 10-25 to this Annual Report on Form 10-K and is incorporated herein by reference. 

PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

With the exception of the description of our Code of Ethics and Business Conduct below, the information required by this item is incorporated herein by reference from the discussion under the headings “Directors and Director Compensation,” “Corporate Governance,” “Executive Officers” and “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with our 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”).

Code of Ethics

We have adopted a Code of Ethics and Business Conduct (the “Code”) that applies to all of our directors, executive officers and senior financial officers (including our principal executive officer, principal financial officer, principal accounting officer, controller, and any person performing similar functions). The Code is available on our website at www.bwen.com under the caption “Investors” and is available in print, free of charge, to any stockholder who sends a request for a paper copy to Broadwind Energy, Inc., Attn: Investor Relations, 3240 South Central Avenue, Cicero, IL 60804. We intend to include on our website any amendment to, or waiver from, a provision of the Code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S‑K.

ITEM 11.  EXECUTIVE COMPENSATION

Information regarding director and executive compensation is incorporated by reference from the discussion under the headings “Directors and Director Compensation” and “Executive Officers and Executive Compensation” in the 2019 Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Certain of the information required by this item is incorporated herein by reference from the discussion under the heading “Security Ownership of Certain Beneficial Holders and Management” in the 2019 Proxy Statement.

The following table provides information as of December 31, 2018, with respect to shares of our common stock that may be issued under our existing equity compensation plans:

EQUITY COMPENSATION PLAN INFORMATION

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is incorporated herein by reference from the discussion under the headings “Certain Transactions and Business Relationships” and “Corporate Governance” in the 2019 Proxy Statement.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference from the discussion under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the 2019 Proxy Statement.

 

 

PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

1.  Financial Statements

The financial statements listed on the Index to Financial Statements (page 34) are filed as part of this Annual Report.

2.  Financial Statement Schedules

These schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they are not applicable or not required.

3.  Exhibits

The exhibits listed on the Index to Exhibits (pages 70 through 72) are filed as part of this Annual Report.

ITEM 16.  FORM 10-K SUMMARY

None. 

INDEX TO FINANCIAL STATEMENTS

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of Broadwind Energy, Inc.

   

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Broadwind Energy, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ RSM US LLP

 

We have served as the Company's auditor since 2016.

 

Chicago, Illinois

February 26, 2019

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

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

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

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

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

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