BROADWIND, INC. - Quarter Report: 2020 September (Form 10-Q)

 

 

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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⌧

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

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For the quarterly period ended September 30, 2020

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OR

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☐

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

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For the transition period from                   to

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Commission file number 001-34278

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BROADWIND, INC.

(Exact name of registrant as specified in its charter)

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Delaware	​	88-0409160
(State or other jurisdiction of incorporation or organization)	​	(I.R.S. Employer Identification No.)

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3240 S. Central Avenue, Cicero, IL 60804

(Address of principal executive offices)

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(708) 780-4800

(Registrant’s telephone number, including area code)

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Not applicable

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

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Securities registered pursuant to Section 12(b) of the Act:

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Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value	BWEN	The NASDAQ Capital Market

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

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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 twelve months (or for such shorter period that the registrant was required to submit such files).  Yes  ⌧  No  ◻

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

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Large accelerated filer ◻	​	Accelerated filer ◻
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Non-accelerated filer ⌧	​	Smaller reporting company ⌧​
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. ◻

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

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Number of shares of registrant’s common stock, par value $0.001, outstanding as of October 30, 2020: 16,937,561.

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BROADWIND, INC. AND SUBSIDIARIES

 

INDEX

 

​	​	Page No.
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PART I. FINANCIAL INFORMATION
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Item 1.	Financial Statements	1
​	Condensed Consolidated Balance Sheets	1
​	Condensed Consolidated Statements of Operations	2
​	Condensed Consolidated Statements of Stockholders’ Equity	3
​	Condensed Consolidated Statements of Cash Flows	4
​	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signatures	​	31

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		September 30,				December 31,
		2020				2019
ASSETS
CURRENT ASSETS:
Cash		$	2,541			$	2,416
Accounts receivable, net			24,161				18,310
Contract assets			1,475				—
Inventories, net			25,480				31,863
Prepaid expenses and other current assets			2,463				2,124
Total current assets			56,120				54,713
LONG-TERM ASSETS:
Property and equipment, net			46,101				46,940
Operating lease right-of-use assets			19,067				15,980
Intangible assets, net			4,369				4,919
Other assets			399				314
TOTAL ASSETS		$	126,056			$	122,866
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Line of credit and other notes payable		$	8,176			$	12,917
Current portion of finance lease obligations			1,174				546
Current portion of operating lease obligations			1,588				1,326
Accounts payable			17,631				21,876
Accrued liabilities			5,750				4,911
Customer deposits			18,524				22,717
Total current liabilities			52,843				64,293
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities			9,497				505
Long-term finance lease obligations, net of current portion			1,856				673
Long-term operating lease obligations, net of current portion			19,529				16,591
Other			96				44
Total long-term liabilities			30,978				17,813
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.001 par value; 30,000,000 shares authorized; 17,211,498 and 16,830,930 shares issued as of September 30, 2020, and December 31, 2019, respectively			17				17
Treasury stock, at cost, 273,937 shares as of September 30, 2020 and December 31, 2019			(1,842	)			(1,842	)
Additional paid-in capital			384,356				383,361
Accumulated deficit			(340,296	)			(340,776	)
Total stockholders’ equity			42,235				40,760
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	126,056			$	122,866

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
Revenues		$	54,614			$	46,138			$	158,174			$	128,967
Cost of sales			50,876				42,144				142,847				117,532
Restructuring			—				—				—				12
Gross profit			3,738				3,994				15,327				11,423
OPERATING EXPENSES:
Selling, general and administrative			4,030				4,049				12,537				11,772
Intangible amortization			183				203				550				609
Total operating expenses			4,213				4,252				13,087				12,381
Operating (loss) income			(475	)			(258	)			2,240				(958	)
OTHER EXPENSE, net:
Interest expense, net			(507	)			(610	)			(1,654	)			(1,919	)
Other, net			(1	)			(2	)			(3	)			(19	)
Total other expense, net			(508	)			(612	)			(1,657	)			(1,938	)
Net (loss) income before provision for income taxes			(983	)			(870	)			583				(2,896	)
Provision for income taxes			20				28				103				62
NET (LOSS) INCOME			(1,003	)			(898	)			480				(2,958	)
NET (LOSS) INCOME PER COMMON SHARE—BASIC:
Net (loss) income		$	(0.06	)		$	(0.06	)		$	0.03			$	(0.18	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC			16,866				16,236				16,741				16,024
NET (LOSS) INCOME PER COMMON SHARE—DILUTED:
Net (loss) income		$	(0.06	)		$	(0.06	)		$	0.03			$	(0.18	)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED			16,866				16,236				17,278				16,024

 

		Common Stock								Treasury Stock								Additional
		Shares				Issued								Issued				Paid-in				Accumulated
		Issued				Amount				Shares				Amount				Capital				Deficit				Total
BALANCE, Balance at December 31, 2018			15,982,622			$	16				(273,937	)		$	(1,842	)		$	381,441			$	(336,253	)		$	43,362
Stock issued for restricted stock			141,384				—				—				—				—				—				—
Stock issued under defined contribution 401(k) retirement savings plan			135,636				—				—				—				187				—				187
Share-based compensation			—				—				—				—				255				—				255
Net loss			—				—				—				—				—				(1,042	)			(1,042	)
BALANCE, March 31, 2019			16,259,642			$	16				(273,937	)		$	(1,842	)		$	381,883			$	(337,295	)		$	42,762
Stock issued for restricted stock			53,740				—				—				—				—				—				—
Stock issued under defined contribution 401(k) retirement savings plan			123,727				—				—				—				205				—				205
Share-based compensation			—				—				—				—				255				—				255
Net loss			—				—				—				—				—				(1,018	)			(1,018	)
BALANCE, June 30, 2019			16,437,109			$	16				(273,937	)		$	(1,842	)		$	382,343			$	(338,313	)		$	42,204
Stock issued for restricted stock			19,436				—				—				—				—								—
Stock issued under defined contribution 401(k) retirement savings plan			169,944				—				—				—				277								277
Share-based compensation			—				—				—				—				255								255
Net loss			—				—				—				—				—				(898	)			(898	)
BALANCE, September 30, 2019			16,626,489			$	16				(273,937	)		$	(1,842	)		$	382,875			$	(339,211	)		$	41,838
BALANCE, December 31, 2019			16,830,930			$	17				(273,937	)		$	(1,842	)		$	383,361			$	(340,776	)		$	40,760
Stock issued for restricted stock			83,050				—				—				—				—				—				—
Share-based compensation			—				—				—				—				308				—				308
Net income			—				—				—				—				—				954				954
BALANCE, March 31, 2020			16,913,980			$	17				(273,937	)		$	(1,842	)		$	383,669			$	(339,822	)		$	42,022
Stock issued for restricted stock			199,636				—				—				—				—				—				—
Share-based compensation			—				—				—				—				248				—				248
Net income			—				—				—				—				—				529				529
BALANCE, June 30, 2020			17,113,616			$	17				(273,937	)		$	(1,842	)		$	383,917			$	(339,293	)		$	42,799
Stock issued for restricted stock			6,401				—				—				—				—				—				—
Share-based compensation			—				—				—				—				207				—				207
Sale of common stock, net			91,481				—				—				—				232				—				232
Net loss			—				—				—				—				—				(1,003	)			(1,003	)
BALANCE, September 30, 2020			17,211,498			$	17				(273,937	)		$	(1,842	)		$	384,356			$	(340,296	)		$	42,235

 

		Nine Months Ended September 30,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	480			$	(2,958	)
Adjustments to reconcile net cash (used in) provided by operating activities:
Depreciation and amortization expense			4,761				5,006
Deferred income taxes			12				(11	)
Change in fair value of interest rate swap agreements			161				50
Stock-based compensation			763				765
Allowance for doubtful accounts			47				(30	)
Common stock issued under defined contribution 401(k) plan			—				669
Gain on disposal of assets			—				(1	)
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable			(5,898	)			(5,377	)
Contract assets			(1,475	)			—
Inventories			6,383				(8,580	)
Prepaid expenses and other current assets			(303	)			(737	)
Accounts payable			(3,900	)			6,046
Accrued liabilities			678				1,632
Customer deposits			(4,193	)			7,557
Other non-current assets and liabilities			9				303
Net cash (used in) provided by operating activities			(2,475	)			4,334
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(1,597	)			(1,776	)
Proceeds from disposals of property and equipment			—				1
Net cash used in investing activities			(1,597	)			(1,775	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit			142,348				131,865
Payments on line of credit			(146,216	)			(134,136	)
Proceeds from long-term debt			9,530				—
Payments on long-term debt			(1,003	)			(698	)
Principal payments on finance leases			(694	)			(752	)
Proceeds from sale of common stock, net			232				—
Net cash provided by (used in) financing activities			4,197				(3,721	)
NET INCREASE (DECREASE) IN CASH			125				(1,162	)
CASH beginning of the period			2,416				1,177
CASH end of the period		$	2,541			$	15

 

NOTE 1 — BASIS OF PRESENTATION 

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind, Inc. (the “Company”) and its wholly-owned subsidiaries Broadwind Heavy Fabrications, Inc. (“Broadwind Heavy Fabrications”), Brad Foote Gear Works, Inc. (“Brad Foote”) and Broadwind Industrial Solutions, LLC (“Broadwind Industrial Solutions”). All intercompany transactions and balances have been eliminated. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included.

 

Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2020, or any other interim period, which may differ materially due to, among other things, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019, as supplemented by the risk factor set forth on our Current Report on Form 8-K filed April 17, 2020 and the risk factors set forth in Part II, Item 1A, “Risk Factors,” of this Quarterly Report, particularly in light of the novel coronavirus (COVID-19) pandemic and its effects on domestic and global economies. To limit the spread of COVID-19, governments have imposed, and may continue to impose, among other things, travel and business operation restrictions and stay-at-home orders and social distancing guidelines, causing some businesses to adjust, reduce or suspend operating activities. These disruptions and restrictions have, and may continue in the future to, adversely affect our operating results due to, among other things, reduced demand as a result of our customers having to adjust, reduce or suspend operating activities. For more information, refer to the statements included in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Quarterly Report under the caption “COVID-19 Pandemic.”

 

The December 31, 2019 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. 

 

There have been no material changes in the Company’s significant accounting policies during the nine months ended September 30, 2020 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

Company Description  

 

Through its subsidiaries, the Company is a precision manufacturer of structures, equipment and components for clean technology and other specialized applications. The Company provides technologically advanced high value products to customers with complex systems and stringent quality standards that operate in energy, mining and infrastructure sectors, primarily in the United States of America (the “U.S.”). The Company’s capabilities include, but are not limited to the following: heavy fabrications, welding, metal rolling, coatings, gear cutting and shaping, heat treatment, assembly, engineering and packaging solutions. The Company’s most significant presence is within the U.S. wind energy industry, which accounted for 72% of the Company’s revenue during the first nine months of 2020. 

 

Liquidity

 

The Company meets its short term liquidity needs through cash generated from operations, its available cash balances, the Credit Facility (as defined below), equipment financing, and access to the public or private debt and equity markets and has the option to raise capital under the Company’s Form S-3 (as discussed below).

 

See Note 7, “Debt and Credit Agreements,” of these condensed consolidated financial statements for a complete description of the Credit Facility and the Company’s other debt.

 

Total debt and finance lease obligations at September 30, 2020 totaled $20,703, which includes current outstanding debt and finance leases totaling $9,350. The current outstanding debt includes $7,649 outstanding under the Company’s revolving line of credit.

 

 

On August 18, 2020, the Company filed a “shelf” registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission (the “SEC”) on October 13, 2020 (the “Form S-3”) and expires on October 12, 2023. This shelf registration statement, which includes a base prospectus, allows the Company at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the base prospectus, the Company would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes. The Company's registration statement on Form S-3 filed on August 11, 2017, which was declared effective by the SEC on October 10, 2017 expired on October 10, 2020.

 

On July 31, 2018, the Company entered into an At Market Issuance Sales Agreement (the “ATM Agreement”) with Roth Capital Partners, LLC (the “Agent”). Pursuant to the terms of the ATM Agreement, the Company may sell from time to time through the Agent shares of the Company’s common stock, par value $0.001 per share with an aggregate sales price of up to $10,000. The Company will pay a commission to the Agent of 3% of the gross proceeds of the sale of the shares sold under the ATM Agreement and reimburse the Agent for the expenses of its counsel. The Company did not issue any shares of its common stock under the ATM Agreement in 2019. During the quarter ended September 30, 2020, the Company reinstated the ATM Agreement and issued 91,481 shares of the Company’s common stock thereunder. The net proceeds (before upfront costs) to the Company from the sale of such shares were approximately $321 after deducting commissions paid of approximately $10. The ATM Agreement was terminated in accordance with its terms on October 12, 2020.

 

In April 2020, the Company received $9,530 in funds under the U.S. Paycheck Protection Program (“PPP”) and made repayments of $379 on May 13, 2020. Refer to Note 7, “Debt and Credit Agreements,” of these condensed consolidated financial statements for more information, including information regarding potential forgiveness of the PPP Loans. 

 

The Company anticipates that current cash resources (which includes proceeds from the PPP Loans), amounts available under the Credit Facility, cash to be generated from operations and any potential proceeds from the sale of further Company securities under the Form S-3 will be adequate to meet the Company’s liquidity needs for at least the next twelve months.

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If assumptions regarding the Company’s production, sales and subsequent collections from certain of the Company’s large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, particularly in light of the COVID-19 pandemic and its effects on domestic and global economies, the Company may in the future encounter cash flow and liquidity issues. If the Company’s operational performance deteriorates significantly, it may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit the Company’s operational flexibility, require a delay in making planned investments and/or require the Company to seek additional equity or debt financing. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other restrictions on the Company. While the Company believes that it will continue to have sufficient cash available to operate its businesses and to meet its financial obligations and debt covenants, there can be no assurances that its operations will generate sufficient cash, or that credit facilities will be available in an amount sufficient to enable the Company to meet these financial obligations.

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Management’s Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the reported period. Significant estimates, among others, include revenue recognition, future cash flows, inventory reserves, warranty reserves, impairment of long-lived assets, allowance for doubtful accounts and health insurance reserves. Although these estimates are based upon management’s best knowledge of current events and actions that the Company may undertake in the future, actual results could differ from these estimates, particularly in light of the COVID-19 pandemic.

 

 

NOTE 2 — REVENUES

 

Revenues are recognized 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.

 

The following table presents the Company’s revenues disaggregated by revenue source for the three and nine months ended September 30, 2020 and 2019:

 

 

 

Revenue within the Company’s Gearing and Industrial Solutions segments, as well as industrial fabrication product line revenues within the Heavy Fabrications segment, are generally recognized at a point in time, typically when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The Company measures revenue based on the consideration specified in the purchase order and revenue is recognized when the performance obligations are satisfied. If applicable, the transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.

 

For tower sales within the Company’s Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition. The Company recognizes revenue under these arrangements only when there is a substantive reason for the agreement, the ordered goods are identified separately as belonging to the customer and not available to fill other orders, the goods are currently ready for physical transfer to the customer, and the Company does 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.

 

During the three months ended September 30, 2020, the Company recognized $1,475 of revenue from one customer within the Gearing segment over time as the products had no alternative use to the Company and the Company had an enforceable right to payment, including profit, upon termination of the contract. The Company uses labor hours as the input measure of progress for the contract. Contract assets are recorded when performance obligations are satisfied but the Company is not yet entitled to payment. The Company recognized $1,475 of contract assets associated with this revenue which represents the Company's rights to consideration for work completed but not billed at the end of the period. The Company did not recognize any revenue over time during the three or nine months ended September 30, 2019.

 

The Company generally expenses sales commissions when incurred. These costs are recorded within selling, general and administrative expenses. Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in the Company’s statement of operations.

 

The Company does not disclose the value of the unsatisfied performance obligations for contracts with an original expected length of one year or less.

 

 

NOTE 3 — EARNINGS PER SHARE 

 

The following table presents a reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019, as follows: 

 

 

(1)

Stock options and restricted stock units granted and outstanding of 1,323,217 and 1,502,196 as of September 30, 2020 and September 30, 2019, respectively, are excluded from the computation of diluted earnings due to the anti-dilutive effect as a result of the Company’s net loss for the three months ended September 30, 2020 and the three and nine months ended September 30, 2019.

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NOTE 4 — INVENTORIES 

 

The components of inventories as of September 30, 2020 and December 31, 2019 are summarized as follows:

 

 

 

NOTE 5 — INTANGIBLE ASSETS

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships as part of the Company’s acquisition of Brad Foote completed in 2007 as well as the noncompetition agreements, trade names and customer relationships that were part of the Company’s acquisition of Red Wolf Company, LLC completed in 2017. Intangible assets are amortized on a straight-line basis over their estimated useful lives, with a remaining life range from 2 to 7 years.

 

As of September 30, 2020 and December 31, 2019, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

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As of September 30, 2020, estimated future amortization expense is as follows:

 

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NOTE 6 — ACCRUED LIABILITIES

 

Accrued liabilities as of September 30, 2020 and December 31, 2019 consisted of the following: 

 

 

 

 

NOTE 7 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of September 30, 2020 and December 31, 2019 consisted of the following:

 

 

Credit Facility

 

On October 26, 2016, the Company established a three-year secured revolving line of credit with CIBC Bank USA (“CIBC”). This line of credit has been amended from time to time. On February 25, 2019, the line of credit was expanded and extended for three years when the Company and its subsidiaries entered into an Amended and Restated Loan and Security Agreement (the “2016 Amended and Restated Loan Agreement”), with 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 $35,000 secured credit facility (the “Credit Facility”). 

 

The Credit Facility is an asset-based revolving credit facility, pursuant to which the Lenders advance funds against a borrowing base consisting of approximately (a) 85% of the face value of eligible receivables of the Company and its 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 2016 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 initial applicable margin was 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 has become effective under which applicable margins would now range from 2.25% to 2.75% for LIBOR rate loans and 0.00% to 0.75% for base rate loans. 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 2016 Amended and Restated Loan Agreement ends on February 25, 2022. With the exception of the balance impacted by the interest rate swap (as defined below), 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 2016 Amended and Restated Loan Agreement contains customary representations and warranties applicable to the Company and its subsidiaries. It also contains a requirement that the Company, on a consolidated basis, maintain a minimum quarterly fixed charge coverage ratio along with other customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications. The Company was in compliance with all financial covenants as of September 30, 2020.

 

The obligations under the Credit Facility are secured by, subject to certain exclusions, (i) a first priority security interest in all accounts receivable, inventory, equipment, cash and investment property, and (ii) a mortgage on the Abilene, Texas tower and Pittsburgh, Pennsylvania gearing facilities. The Company was in compliance with all financial covenants as of September 30, 2020.

 

In June 2019, in conjunction with the 2016 Amended and Restated Loan Agreement, the Company entered into a floating to fixed interest rate swap with CIBC. The swap agreement has a notional amount of $6,000 and a schedule matching that of the underlying loan that synthetically fixes the interest rate on LIBOR borrowings for the entire term of the Credit Facility at 2.13%, before considering the Company’s risk premium. The interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, which may subject the Company’s results of operations to non-cash volatility. The interest rate swap liability is included in the “Accrued liabilities” line item of the Company’s condensed consolidated financial statements as of September 30, 2020 and December 31, 2019.

 

As of September 30, 2020, there was $7,649 of outstanding indebtedness under the Credit Facility, with the ability to borrow an additional $19,214, under the Credit Facility.

 

On October 29, 2020, the Company executed the First Amendment to the 2016 Amended and Restated Loan Agreement (the “First Amendment”), implementing a payoff of a syndicated lender and a pricing grid based on the Company's trailing twelve month EBITDA under which applicable margins range from 2.25% to 2.75% for LIBOR rate loans and 0.00% and 0.75% for base rate loans, and extending the term of the Credit Facility to July 31, 2023.

 

 

 

Other 

 

In 2016, the Company entered into a $570 loan agreement with the Development Corporation of Abilene which is included in the “Long-term debt, less current maturities” line item of our condensed consolidated financial statements as of September 30, 2020 and December 31, 2019. The loan is forgivable upon the Company meeting and maintaining specific employment thresholds. During each of the years 2019 and 2018, $114 of the loan was forgiven. As of September 30, 2020, the loan balance was $342. In addition, the Company has outstanding notes payable for capital expenditures in the amount of $531 and $1,563 as of September 30, 2020 and December 31, 2019, respectively, with $527 and $1,400 included in the “Line of credit and other notes payable” line item of the Company’s condensed consolidated financial statements as of September 30, 2020 and December 31, 2019, respectively. The notes payable have monthly payments that range from $1 to $36 and an interest rate of approximately 5%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from February 2021 to August 2022.

​

On April 15, 2020, the Company received funds under notes and related documents (“PPP Loans”) with CIBC, under the Paycheck Protection Program (the “PPP”) which was established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) enacted on March 27, 2020 in response to the COVID-19 pandemic and is administered by the U.S. Small Business Administration (the “SBA”). The Company received total proceeds of $9,530 from the PPP loans and made repayments of $379 on May 13, 2020. Under the terms of the CARES Act, as amended by the Paycheck Protection Program Flexibility Act of 2020 enacted on June 5, 2020 (the “Flexibility Act”), the PPP Loans, and accrued interest and fees may be forgiven following a period of twenty-four weeks after PPP Loan proceeds are received (the “covered period”) if they are used for qualifying expenses as described in the CARES Act including payroll costs and benefits (which must equal or exceed 60% of the amount requested to be forgiven), rent, mortgage interest, and utilities, which are subject to certain reductions based on the number of full time equivalent employees and the level of compensation for employees during such covered period. The amount of loan forgiveness will be reduced if the borrower terminates employees or significantly reduces salaries during such period, subject to certain exceptions. Subject to the terms and conditions applicable to loans administered by the SBA under the PPP, as amended by the Flexibility Act, the unforgiven portion of a PPP Loan is payable over a two year period at an interest rate of 1.00%, with a deferral of payments of principal, interest and fees until the date on which the SBA remits the loan forgiveness amount to the lender (or notifies the lender that no loan forgiveness is allowed), provided that the borrower applies for forgiveness within 10 months after the last day of the covered period (and if not, payment of principal and interest shall commence 10 months after the last day of the covered period). The Company used at least 60% of the amount of the PPP Loans proceeds to pay for payroll costs and the balance on other eligible qualifying expenses that the Company believes to be consistent with the terms of the PPP and plans to submit its forgiveness applications to CIBC during the fourth quarter of 2020. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the PPP Loans, the Company cannot provide assurance that it has not taken and will not take actions that could cause the Company to be ineligible for forgiveness of the PPP Loans, in whole or in part.

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NOTE 8 — LEASES

 

The Company leases certain facilities and equipment. On January 1, 2019, the Company adopted ASU 2016-02, Leases (“Topic 842”) and ASU 2018-11 using the cumulative effect method and has elected to apply each available practical expedient. The adoption of Topic 842 resulted in the Company recognizing operating lease liabilities totaling $19,508 with a corresponding right-of-use (“ROU”) asset of $17,613 based on the present value of the minimum rental payments of such leases. The variance between the ROU asset balance and the lease liability is a deferred rent liability that existed prior to the adoption of Topic 842 and was offset against the ROU asset balance during the adoption. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s lease portfolio.

 

The Company has elected to apply the short-term lease exception to all leases of one year or less. During the nine months ended September 30, 2020, the Company had an additional operating lease that resulted in right-of-use assets obtained in exchange for lease obligations of $4,380. Additionally, during the three and nine months ended September 30, 2020, the Company had additional finance leases that resulted in property, plant, and equipment obtained in exchange for lease obligations of $473 and $2,253, respectively.

 

Some of the Company’s facility leases include options to renew. The exercise of the renewal options is typically at the Company’s discretion. The Company regularly evaluates the renewal options and includes them in the lease term when the Company is reasonably certain to exercise them.

 

 

Quantitative information regarding the Company’s leases is as follows:

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(1)

Variable lease costs consist primarily of taxes, insurance, utilities, and common area or other maintenance costs for the Company’s leased facilities and equipment.

​

As of September 30, 2020, future minimum lease payments under finance leases and operating leases were as follows:

​

​ 

 

NOTE 9 — FAIR VALUE MEASUREMENTS 

 

Fair Value of Financial Instruments 

 

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

 

 

The Company entered into an interest rate swap in June 2019 to mitigate the exposure to the variability of LIBOR for its floating rate debt described in Note 7, “Debt and Credit Agreements,” of these condensed consolidated financial statements. The fair value of the interest rate swap is reported in “Accrued liabilities” and the change in fair value is reported in “Interest expense, net” of these condensed consolidated financial statements. The fair value of the interest rate swap is estimated as the net present value of projected cash flows based on forward interest rates at the balance sheet date.

 

The Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. Financial instruments are assessed quarterly to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications are made based upon the nature and type of the observable inputs. The fair value hierarchy is defined as follows:

 

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

 

Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. For the Company’s corporate and municipal bonds, although quoted prices are available and used to value said assets, they are traded less frequently.

 

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

 

The following tables represent the fair values of the Company’s financial liabilities as of September 30, 2020 and December 31, 2019:

 

 

 

 

NOTE 10 — INCOME TAXES 

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in the Company’s valuation allowance, permanent differences and provisions for state and local income taxes. As of September 30, 2020, the Company has a full valuation allowance recorded against deferred tax assets. During the nine months ended September 30, 2020, the Company recorded a provision for income taxes of $103, compared to a provision for income taxes of $62 during the nine months ended September 30, 2019. 

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of September 30, 2020, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. As of December 31, 2019, the Company had federal and unapportioned state net operating loss (“NOL”) carryforwards of $258,834 of which $227,781 will generally begin to expire in 2026. The majority of the NOL carryforwards will expire in various years from 2028 through 2037. NOLs generated after January 1, 2018 will not expire.

 

Since the Company has no unrecognized tax benefits, they will not have an impact on the condensed consolidated financial statements as a result of the expiration of the applicable statues of limitations within the next twelve months. In addition, Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), generally imposes an annual limitation on the amount of NOL carryforwards and associated built-in losses that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. The Company’s ability to utilize NOL carryforwards and built-in losses may be limited, under IRC Section 382 or otherwise, by the Company’s issuance of common stock or by other changes in stock ownership. Upon completion of the Company’s analysis of IRC Section 382 in 2010, the Company determined that aggregate changes in stock ownership have triggered an annual limitation on NOL carryforwards and built-in losses available for utilization, thereby currently limiting annual NOL usage to $14,284 per year. Further limitations may occur, depending on additional future changes in stock ownership. To the extent the Company’s use of NOL carryforwards and associated built-in losses is significantly limited in the future, the Company’s income could be subject to U.S. corporate income tax earlier than it would be if the Company were able to use NOL carryforwards and built-in losses without such limitation, which could result in lower profits and the loss of benefits from these attributes. 

 

 

In February 2013, the Company adopted a Stockholder Rights Plan, which was amended and extended in February 2016 and again in February 2019 (as amended, the “Rights Plan”). The Rights Plan is designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under IRC Section 382. The amendment to the Rights Plan was most recently approved by the Company’s stockholders at the Company’s 2019 Annual Meeting of Stockholders and has a term of three years.

 

The Rights Plan is intended to act as a deterrent to any person or group, together with its affiliates and associates, becoming the beneficial owner of 4.9% or more of the Company’s common stock and thereby triggering a further limitation of the Company’s available NOL carryforwards. In connection with the adoption of the Rights Plan, the Board declared a non-taxable dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of the close of business on February 22, 2013. Each Right entitles its holder to purchase from the Company one one-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at an exercise price of $4.25 per Right, subject to adjustment. As a result of the Rights Plan, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group. Stockholders who owned 4.9% or more of the outstanding shares of the Company’s common stock as of February 12, 2013 will not trigger the preferred share purchase rights unless they acquire additional shares after that date. 

 

As of September 30, 2020, the Company had no unrecognized tax benefits. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company had no accrued interest and penalties as of September 30, 2020.

 

 

NOTE 11 — SHARE-BASED COMPENSATION 

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The following table summarizes stock option activity during the nine months ended September 30, 2020: 

 

 

The following table summarizes the Company’s restricted stock unit and performance award activity during the nine months ended September 30, 2020: 

 

 

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the nine months ended September 30, 2020 and 2019, as follows: 

 

 

 

 

NOTE 12 — LEGAL PROCEEDINGS

 

The Company is party to a variety of legal proceedings that arise in the normal course of its 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 the Company’s 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 the Company’s results of operations, financial condition or cash flows. It is possible that if one or more of such matters were decided against the Company, the effects could be material to the Company’s results of operations in the period in which the Company would be required to record or adjust the related liability and could also be material to the Company’s financial condition and cash flows in the periods the Company would be required to pay such liability.

 

 

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS 

 

The Company reviews new accounting standards as issued. Although some of the accounting standards issued or effective in the current fiscal year may be applicable to it, the Company believes that none of the new standards have a significant impact on its condensed consolidated financial statements.

 

 

NOTE 14— SEGMENT REPORTING 

 

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

 

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

 

Heavy Fabrications

 

The Company provides large, complex and precision fabrications to customers in a broad range of industrial markets. The Company’s most significant presence is within the U.S. wind energy industry, although it has diversified into other industrial markets in order to improve capacity utilization, reduce customer concentrations, and reduce exposure to uncertainty related to governmental policies currently impacting the U.S. wind energy industry. Within the U.S. wind energy industry, the Company provides steel towers and adapters primarily to wind turbine manufacturers. Production facilities, located in Manitowoc, Wisconsin and Abilene, Texas, are situated in close proximity to the primary U.S. domestic wind energy and equipment manufacturing hubs. The two facilities have a combined annual tower production capacity of up to approximately 550 towers (1,650 tower sections), sufficient to support turbines generating more than 1,100 megawatts of power. The Company has expanded production capabilities and leveraged manufacturing competencies, including welding, lifting capacity and stringent quality practices, into aftermarket and original equipment manufacturer (“OEM”) components utilized in surface and underground mining, construction, material handling, oil and gas (“O&G”) and other infrastructure markets.

 

Gearing 

 

The Company provides gearing and gearboxes to a broad set of customers in diverse markets including; onshore and offshore O&G fracking and drilling, surface and underground mining, defense, wind energy, steel, material handling and other infrastructure markets. For nearly a century, the Company has manufactured loose gearing, gearboxes and systems, and provided heat treatment services for aftermarket and OEM applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment in Neville Island, Pennsylvania.

 

Industrial Solutions 

 

The Company provides supply chain solutions, inventory management, kitting and assembly services, primarily serving the combined cycle natural gas turbine market.

 

 

Corporate

 

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

 

The accounting policies of the reportable segments are the same as those referenced in Note 1, “Basis of Presentation” of these condensed consolidated financial statements. Summary financial information by reportable segment for the three and nine months ended September 30, 2020 and 2019 is as follows:

 

 

 

 

 

 

 

 

 

 

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES 

 

Environmental Compliance and Remediation Liabilities 

 

The Company’s operations and products are subject to a variety of environmental laws and regulations in the jurisdictions in which the Company operates and sells products governing, among other things, air emissions, wastewater discharges, the use, handling and disposal of hazardous materials, soil and groundwater contamination, employee health and safety, and product content, performance and packaging. Certain environmental laws may impose the entire cost or a portion of the cost of investigating and cleaning up a contaminated site, regardless of fault, upon any one or more of a number of parties, including the current or previous owners or operators of the site. These environmental laws also impose liability on any person who arranges for the disposal or treatment of hazardous substances at a contaminated site. Third parties may also make claims against owners or operators of sites and users of disposal sites for personal injuries and property damage associated with releases of hazardous substances from those sites. 

 

Warranty Liability 

 

The Company warrants its products for terms that range from one to five years. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for amounts paid to customers under warranty provisions. As of September 30, 2020 and 2019, estimated product warranty liability was $42 and $183, respectively, and is recorded within accrued liabilities in the Company’s condensed consolidated balance sheets. 

 

The changes in the carrying amount of the Company’s total product warranty liability for the nine months ended September 30, 2020 and 2019 were as follows: 

 

 

 

Allowance for Doubtful Accounts 

 

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

 

 

The Company monitors its collections and write-off experience to assess whether or not adjustments to its allowance estimates are necessary. Changes in trends in any of the factors that the Company believes may impact the collectability of its accounts receivable, as noted above, or modifications to its credit standards, collection practices and other related policies may impact the Company’s allowance for doubtful accounts and its financial results. The activity in the accounts receivable allowance liability for the nine months ended September 30, 2020 and 2019 consisted of the following: 

 

 

Collateral 

 

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

 

Liquidated Damages 

 

In certain customer contracts, the Company has agreed to pay liquidated damages in the event of qualifying delivery or production delays. These damages are typically limited to a specific percentage of the value of the product in question and/or are dependent on actual losses sustained by the customer. The Company does not believe that this potential exposure will have a material adverse effect on the Company’s consolidated financial position or results of operations. There was no reserve for liquidated damages as of September 30, 2020 or December 31, 2019