Form 10-Q BROADWIND, INC. For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number
BROADWIND, INC.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction | | (I.R.S. Employer |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | The |
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.
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).
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:
| Large accelerated filer ☐ | | 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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of shares of registrant’s common stock, par value $0.001, outstanding as of August 4, 2022:
BROADWIND, INC. AND SUBSIDIARIES
INDEX
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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BROADWIND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Employee retention credit receivable | ||||||||
| Contract assets | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| LONG-TERM ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Line of credit and other notes payable | $ | $ | ||||||
| Current portion of finance lease obligations | ||||||||
| Current portion of operating lease obligations | ||||||||
| Accounts payable | ||||||||
| Accrued liabilities | ||||||||
| Customer deposits | ||||||||
| Total current liabilities | ||||||||
| LONG-TERM LIABILITIES: | ||||||||
| Long-term debt, net of current maturities | ||||||||
| Long-term finance lease obligations, net of current portion | ||||||||
| Long-term operating lease obligations, net of current portion | ||||||||
| Other | ||||||||
| Total long-term liabilities | ||||||||
| COMMITMENTS AND CONTINGENCIES | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued or outstanding | ||||||||
| Common stock, $ par value; shares authorized; and shares issued as of June 30, 2022, and December 31, 2021, respectively | ||||||||
| Treasury stock, at cost, shares as of June 30, 2022 and December 31, 2021 | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
BROADWIND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Intangible amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER (EXPENSE) INCOME, net: | ||||||||||||||||
| Paycheck Protection Program loan forgiveness | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other, net | ||||||||||||||||
| Total other (expense) income, net | ( | ) | ( | ) | ||||||||||||
| Net (loss) income before provision for income taxes | ( | ) | ( | ) | ||||||||||||
| Provision for income taxes | ||||||||||||||||
| NET (LOSS) INCOME | ( | ) | ( | ) | ||||||||||||
| NET (LOSS) INCOME PER COMMON SHARE—BASIC: | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC | ||||||||||||||||
| NET (LOSS) INCOME PER COMMON SHARE—DILUTED: | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
BROADWIND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share data)
| Common Stock | Treasury Stock | Additional | ||||||||||||||||||||||||||
| Shares | Issued | Issued | Paid-in | Accumulated | ||||||||||||||||||||||||
| Issued | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| BALANCE, December 31, 2020 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock issued for restricted stock | ||||||||||||||||||||||||||||
| Stock issued under defined contribution 401(k) retirement savings plan | ||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes in connection with issuance of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Sale of common stock, net | ||||||||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| BALANCE, March 31, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock issued for restricted stock | ||||||||||||||||||||||||||||
| Stock issued under defined contribution 401(k) retirement savings plan | ||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes in connection with issuance of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Sale of common stock, net | ||||||||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||
| BALANCE, June 30, 2021 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| BALANCE, December 31, 2021 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock issued for restricted stock | ||||||||||||||||||||||||||||
| Stock issued under defined contribution 401(k) retirement savings plan | ||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes in connection with issuance of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| BALANCE, March 31, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Stock issued for restricted stock | ||||||||||||||||||||||||||||
| Stock issued under defined contribution 401(k) retirement savings plan | ||||||||||||||||||||||||||||
| Share-based compensation | — | — | ||||||||||||||||||||||||||
| Shares withheld for taxes in connection with issuance of restricted stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Net loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| BALANCE, June 30, 2022 | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
BROADWIND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net (loss) income | $ | ( | ) | $ | ||||
| Adjustments to reconcile net cash used in operating activities: | ||||||||
| Depreciation and amortization expense | ||||||||
| Paycheck Protection Program loan forgiveness | ( | ) | ||||||
| Deferred income taxes | ( | ) | ||||||
| Change in fair value of interest rate swap agreements | ||||||||
| Stock-based compensation | ||||||||
| Allowance for doubtful accounts | ( | ) | ||||||
| Common stock issued under defined contribution 401(k) plan | ||||||||
| Loss (gain) on disposal of assets | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Employee retention credit receivable | ( | ) | ||||||
| Contract assets | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued liabilities | ( | ) | ||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Other non-current assets and liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from disposals of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from line of credit, net | ||||||||
| Proceeds from long-term debt | ||||||||
| Payments on long-term debt | ( | ) | ( | ) | ||||
| Principal payments on finance leases | ( | ) | ( | ) | ||||
| Shares withheld for taxes in connection with issuance of restricted stock | ( | ) | ( | ) | ||||
| Proceeds from sale of common stock, net | ||||||||
| Net cash provided by financing activities | ||||||||
| NET (DECREASE) INCREASE IN CASH | ( | ) | ||||||
| CASH beginning of the period | ||||||||
| CASH end of the period | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
BROADWIND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollars are presented in thousands, except share, per share and per employee data or unless otherwise stated)
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 six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2022, 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, 2021.
The December 31, 2021 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, 2021.
There have been no material changes in the Company’s significant accounting policies during the six months ended June 30, 2022 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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, gearbox repair, heat treatment, assembly, engineering and packaging solutions. The Company’s most significant presence is within the U.S. wind energy industry, which accounted for
Liquidity
The Company typically meets its short term liquidity needs through cash generated from operations, its available cash balances, the 2016 Credit Facility and the 2022 Credit Facility, as applicable (each, as defined in Note 7, “Debt and Credit Agreements,” of these condensed consolidated financial statements below), equipment financing, and access to the public or private debt and/or equity markets, including the option to raise capital from the sale of our securities under the Form S-3 (as discussed below).
See Note 7, “Debt and Credit Agreements,” of these condensed consolidated financial statements for a description of the 2016 Credit Facility, the 2022 Credit Facility and the Company’s other debt.
Total debt and finance lease obligations at June 30, 2022 totaled $
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 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.
On March 9, 2021, the Company entered into a $
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The ERC is available for wages paid through September 30, 2021 and is equal to 70% of qualified wages (which includes employer qualified health plan expenses) paid to employees. The maximum tax credit that could be claimed by an eligible employer in 2021 was $7,000 per employee per calendar quarter. In the first and second quarters of 2021, the Company received ERC benefits of $
The Company also utilizes supply chain financing arrangements as a component of its funding for working capital, which accelerates receivable collections and helps to better manage cash flow. Under these agreements, the Company has agreed to sell certain of its accounts receivable balances to banking institutions who have agreed to advance amounts equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements. The balances under these agreements are accounted for as sales of accounts receivable, as they are sold without recourse. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the Company's consolidated statements of cash flows. Fees incurred in connection with the agreements are recorded as interest expense by the Company.
During the three and six months ended June 30, 2022, the Company sold account receivables totaling $
The Company anticipates that current cash resources, amounts available under the 2022 Credit Facility, cash to be generated from operations and equipment financing, 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.
If assumptions regarding the Company’s production, sales and subsequent collections from certain of the Company’s large customers, as well as receipt of customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, particularly in light of the COVID-19 pandemic, emerging variants 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 its 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.
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, health insurance reserves, and valuation allowances on deferred taxes. 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 the promised goods or services are 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 six months ended June 30, 2022 and 2021:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Heavy Fabrications | $ | $ | $ | $ | ||||||||||||
| Gearing | ||||||||||||||||
| Industrial Solutions | ||||||||||||||||
| Eliminations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Consolidated | $ | $ | $ | $ | ||||||||||||
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 the promised goods or services are physically 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 many 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.
Within the Gearing segment, the Company recognized revenue over time of $
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 six months ended June 30, 2022 and 2021, as follows:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Basic earnings per share calculation: | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Basic net (loss) income per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Diluted earnings per share calculation: | ||||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Common stock equivalents: | ||||||||||||||||
| Non-vested stock awards (1) | ||||||||||||||||
| Weighted average number of common shares outstanding | ||||||||||||||||
| Diluted net (loss) income per share | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| (1) Restricted stock units granted and outstanding of |
NOTE 4 — INVENTORIES
The components of inventories as of June 30, 2022 and December 31, 2021 are summarized as follows:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Less: Reserve for excess and obsolete inventory | ( | ) | ( | ) | ||||
| Net inventories | $ | $ | ||||||
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
As of June 30, 2022 and December 31, 2021, the cost basis, accumulated amortization and net book value of intangible assets were as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||||||||||||||||||
| Remaining | Remaining | |||||||||||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||||||||||
| Accumulated | Net | Average | Accumulated | Net | Average | |||||||||||||||||||||||||||||||||||
| Cost | Accumulated | Impairment | Book | Amortization | Accumulated | Impairment | Book | Amortization | ||||||||||||||||||||||||||||||||
| Basis | Amortization | Charges | Value | Period | Cost | Amortization | Charges | Value | Period | |||||||||||||||||||||||||||||||
| Intangible assets: | ||||||||||||||||||||||||||||||||||||||||
| Noncompete agreements | $ | $ | ( | ) | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||
| Customer relationships | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
| Trade names | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||
As of June 30, 2022, estimated future amortization expense was as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| Total | $ |
NOTE 6 — ACCRUED LIABILITIES
Accrued liabilities as of June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued payroll and benefits | $ | $ | ||||||
| Fair value of interest rate swap | ||||||||
| Accrued property taxes | ||||||||
| Income taxes payable | ||||||||
| Accrued professional fees | ||||||||
| Accrued warranty liability | ||||||||
| Self-insured workers compensation reserve | ||||||||
| Accrued other | ||||||||
| Total accrued liabilities | $ | $ | ||||||
NOTE 7 — DEBT AND CREDIT AGREEMENTS
The Company’s outstanding debt balances as of June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Line of credit | $ | $ | ||||||
| Other notes payable | ||||||||
| Long-term debt | ||||||||
| Less: Current portion | ( | ) | ( | ) | ||||
| Long-term debt, net of current maturities | $ | $ | ||||||
Credit Facility
On October 26, 2016, the Company established a -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 years when the Company and its subsidiaries entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”), with CIBC as administrative agent and sole lead arranger and the other financial institutions party thereto, providing the Company and its subsidiaries with a $
On October 29, 2020, the Company executed the First Amendment to the Amended and Restated Loan Agreement, 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
On February 23, 2021, the Company executed the Second Amendment to the Amended and Restated Loan Agreement, which waived testing of the fixed charge coverage covenant for the quarters ended March 31, 2021 and June 20, 2021, added a new liquidity covenant applicable to the quarter ended March 31, 2021 and new minimum EBITDA covenants applicable to the quarters ended March 31, 2021 and June 30, 2021. As of September 30, 2021, the Company transitioned back to a fixed charge coverage covenant.
On November 8, 2021, the Company executed the Third Amendment to the Amended and Restated Loan Agreement (the “Third Amendment”) which waived the fixed charge coverage ratio default for the quarter ended September 30, 2021, suspended testing of the fixed charge coverage ratio covenant through September 30, 2022, added a minimum EBITDA covenant applicable to the three-month period ending December 31, 2021, the six-month period ending March 31, 2022, the nine-month period ending June 30, 2022 and the twelve-month period ending September 30, 2022 and added a reserve of $
On February 28, 2022, the Company executed the Fourth Amendment to the Amended and Restated Loan Agreement (the “Fourth Amendment”) which reduced the line of credit from $
The 2016 Credit Facility 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 customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications.
In conjunction with the Amended and Restated Loan Agreement, during June 2019, the Company entered into a floating to fixed interest rate swap with CIBC. The swap agreement has a notional amount of $
On August 4, 2022, the Company entered into a credit agreement (the “ Wells Fargo Credit Agreement”) with Wells Fargo Bank, National Association, as lender (“Wells Fargo”), providing the Company and its subsidiaries with a $
The 2022 Credit Facility contains customary covenants limiting the Company’s and its subsidiaries’ ability to, among other things, incur liens, make investments, incur indebtedness, merge or consolidate with others or dispose of assets, change the nature of its business, and enter into transactions with affiliates. In addition, the 2022 Credit Facility contains financial covenants requiring the Company to have a Fixed Charge Coverage Ratio (as defined in the 2022 Credit Facility) (i) as of the twelve-month period ending July 31, 2023 through and including December 31, 2023 of
Borrowings under the 2022 Credit Facility bear interest at the following rates depending on the classification of the borrowing:
• term loan - Daily Simple SOFR (a rate per annum equal to the secured overnight financing rate published by the SOFR administrator on the website of the Federal Reserve Bank of New York or any successor source), plus an applicable margin of and
• revolving credit loan - Daily Simple SOFR, plus an applicable margin of
The 2022 Credit 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, change of control, breaches of representations and warranties, limitation or termination of any guarantee with respect to the 2022 Credit Agreement or unenforceability of documentation related to the 2022 Credit Agreement. The Company is allowed to prepay in whole or in part advances under the 2022 Credit Facility without penalty or premium.
The obligations under the 2022 Credit Agreement are secured by, subject to certain exclusions, (i) a first priority security interest in all accounts, inventory, equipment, general intangibles, intellectual property, money and investment property, and (ii) a deed of trust, assignment of leases and rents and security agreement and fixture filing on the Abilene, Texas facility.
In connection with the 2022 Credit Facility, on August 4, 2022, the Company, its subsidiaries and 5100 Neville Road, LLC (collectively, the “Guarantors”) entered into a guaranty (the “Guaranty”) in favor of Wells Fargo, whereby the Guarantors guaranteed the full payment of all the obligations of the Company and its subsidiaries under the 2022 Credit Facility. Each of the Company’s additional subsidiaries, upon it becoming a direct or indirect subsidiary, will be required to become a party to the Guaranty.
As of June 30, 2022, there was $
Other
In 2016, the Company entered into a $
NOTE 8 — LEASES
The Company leases certain facilities and equipment. The leases are accounted for under Accounting Standard Update 2016-02, Leases (“Topic 842”) and the Company elected to apply each available practical expedient. The discount rates used for the leases 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 six months ended June 30, 2022 and 2021, the Company had additional operating leases that resulted in right-of-use assets obtained in exchange for lease obligations of $
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:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Components of lease cost | ||||||||||||||||
| Finance lease cost components: | ||||||||||||||||
| Amortization of finance lease assets | $ | $ | $ | $ | ||||||||||||
| Interest on finance lease liabilities | ||||||||||||||||
| Total finance lease costs | ||||||||||||||||
| Operating lease cost components: | ||||||||||||||||
| Operating lease cost | ||||||||||||||||
| Short-term lease cost | ||||||||||||||||
| Variable lease cost (1) | ||||||||||||||||
| Sublease income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating lease costs | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
| Supplemental cash flow information related to our operating leases is as follows for the six months ended June 30, 2022 and 2021: | ||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
| Operating cash outflow from operating leases | $ | $ | ||||||||||||||
| Weighted-average remaining lease term-finance leases at end of period (in years) | ||||||||||||||||
| Weighted-average remaining lease term-operating leases at end of period (in years) | ||||||||||||||||
| Weighted-average discount rate-finance leases at end of period | % | % | ||||||||||||||
| Weighted-average discount rate-operating leases at end of period | % | % | ||||||||||||||
| (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 June 30, 2022, future minimum lease payments under finance leases and operating leases were as follows:
| Finance | Operating | |||||||||||
| Leases | Leases | Total | ||||||||||
| 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 and thereafter | ||||||||||||
| Total lease payments | ||||||||||||
| Less—portion representing interest | ( | ) | ( | ) | ( | ) | ||||||
| Present value of lease obligations | ||||||||||||
| Less—current portion of lease obligations | ( | ) | ( | ) | ( | ) | ||||||
| Long-term portion of lease obligations | $ | $ | $ | |||||||||
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 interest rate swap expired in February 2022.
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.
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 June 30, 2022 and December 31, 2021:
| June 30, 2022 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities measured on a recurring basis: | ||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | ||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities measured on a recurring basis: | ||||||||||||||||
| Interest rate swap | $ | $ | $ | $ | ||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
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 June 30, 2022, the Company has a full valuation allowance recorded against deferred tax assets. During the six months ended June 30, 2022, the Company recorded a provision for income taxes of $
The Company files income tax returns in U.S. federal and state jurisdictions. As of June 30, 2022, 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, 2021, the Company had federal and unapportioned state net operating loss (“NOL”) carryforwards of $
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 Section 382 of the IRC 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 Section 382 of the IRC 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 $
In February 2013, the Company adopted a Stockholder Rights Plan, which was amended in February 2016 and approved by the Company’s stockholders (as amended, the “Rights Plan”), designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under Section 382 of the IRC. On February 7, 2019, the Board of Directors (the “Board”) approved an amendment extending the Rights Plan for an additional years, which was subsequently approved by the Company’s stockholders at the 2019 Annual Meeting of Stockholders held on April 23, 2019. On February 3, 2022, the Board approved an amendment which included an extension of the Rights Plan for an additional years, which was subsequently approved at the 2022 Annual Meeting of Stockholders held on April 26, 2022.
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
As of June 30, 2022, the Company had
NOTE 11 — SHARE-BASED COMPENSATION
There was no stock option activity during the six months ended June 30, 2022 and
The following table summarizes the Company’s restricted stock unit and performance award activity during the six months ended June 30, 2022:
| Weighted Average | ||||||||
| Number of | Grant-Date Fair Value | |||||||
| Shares | Per Share | |||||||
| Unvested as of December 31, 2021 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Unvested as of June 30, 2022 | $ | |||||||
Under certain situations, shares are withheld from issuance to cover taxes for the vesting of restricted stock units and performance awards. For the six months ended June 30, 2022,
The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the six months ended June 30, 2022 and 2021, as follows:
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Share-based compensation expense: | ||||||||
| Cost of sales | $ | $ | ||||||
| Selling, general and administrative | ||||||||
| Net effect of share-based compensation expense on net income | $ | $ | ||||||
| Reduction in earnings per share: | ||||||||
| Basic earnings per share | $ | $ | ||||||
| Diluted earnings per share | $ | $ | ||||||
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 concentration, 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 tower 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
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, wind energy, steel, material handling and other infrastructure markets. The Company has manufactured loose gearing, gearboxes and systems, and provided heat treat services for aftermarket and OEM applications for nearly a century. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment and gearbox repair in Neville Island, Pennsylvania.
Industrial Solutions
The Company provides supply chain solutions, light fabrication, inventory management, kitting and assembly services, primarily serving the combined cycle natural gas turbine market, as well as other clean technology markets.
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 six months ended June 30, 2022 and 2021 is as follows:
| Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| For the Three Months Ended June 30, 2022 | ||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||||||||||
| Net revenues | ( | ) | ||||||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| For the Three Months Ended June 30, 2021 | ||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||||||||||
| Net revenues | ( | ) | ||||||||||||||||||||||
| Operating income (loss) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||||||||||
| Net revenues | ( | ) | ||||||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | |||||||||||||||||||
| For the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||
| Revenues from external customers | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Intersegment revenues | ( | ) | ||||||||||||||||||||||
| Net revenues | ( | ) | ||||||||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||
| Capital expenditures | ||||||||||||||||||||||||
| Total Assets as of | ||||||||
| June 30, | December 31, | |||||||
| Segments: | 2022 | 2021 | ||||||
| Heavy Fabrications | $ | $ | ||||||
| Gearing | ||||||||
| Industrial Solutions | ||||||||
| Corporate | ||||||||
| Eliminations | ( | ) | ( | ) | ||||
| $ | $ | |||||||
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.
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 six months ended June 30, 2022 and 2021 consisted of the following:
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Balance at beginning of period | $ | $ | ||||||
| Bad debt expense | ||||||||
| Write-offs | ( | ) | ||||||
| Other adjustments | ( | ) | ( | ) | ||||
| Balance at end of period | $ | $ | ||||||
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 June 30, 2022 or December 31, 2021.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto in Item 1, “Financial Statements,” of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including, but not limited to, those identified in “Cautionary Note Regarding Forward-Looking Statements” at the end of Item 2. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties including those arising as a result of, or amplified by, the COVID-19 pandemic. As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and the “Company” refer to Broadwind, Inc., a Delaware corporation headquartered in Cicero, Illinois, and its subsidiaries, as appropriate.
(Dollars are presented in thousands except share, per share and per employee data or unless otherwise stated)
KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE
In addition to measures of financial performance presented in our consolidated financial statements in accordance with GAAP, we use certain other financial measures to analyze our performance. These non-GAAP financial measures primarily consist of adjusted EBITDA (as defined below) and free cash flow which help us evaluate growth trends, establish budgets, assess operational efficiencies, oversee our overall liquidity, and evaluate our overall financial performance.
Key Financial Measures
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net revenues |
$ | 50,012 | $ | 46,491 | $ | 91,856 | $ | 79,219 | ||||||||
| Net (loss) income |
$ | (2,703 | ) | $ | 10,252 | $ | (5,107 | ) | $ | 9,042 | ||||||
| Adjusted EBITDA (1) |
$ | 372 | $ | 12,800 | $ | 363 | $ | 14,017 | ||||||||
| Capital expenditures |
$ | 1,205 | $ | 153 | $ | 1,697 | $ | 765 | ||||||||
| Free cash flow (2) |
$ | (3,903 | ) | $ | 5,645 | $ | (8,391 | ) | $ | (376 | ) | |||||
| Operating working capital (3) |
$ | 25,692 | $ | 16,999 | $ | 25,692 | $ | 16,999 | ||||||||
| Total debt |
$ | 17,865 | $ | 6,620 | $ | 17,865 | $ | 6,620 | ||||||||
| Total orders |
$ | 26,046 | $ | 26,441 | $ | 78,739 | $ | 60,655 | ||||||||
| Backlog at end of period (4) |
$ | 93,249 | $ | 74,338 | $ | 93,249 | $ | 74,338 | ||||||||
| Book-to-bill (5) |
0.5 | 0.6 | 0.9 | 0.8 | ||||||||||||
| (1) |
We provide non-GAAP adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, share based compensation and other stock payments, restructuring costs, impairment charges, and other non-cash gains and losses) as supplemental information regarding our business performance. Our management uses adjusted EBITDA when they internally evaluate the performance of our business, review financial trends and make operating and strategic decisions. We believe that this non-GAAP financial measure is useful to investors because it provides a better understanding of our past financial performance and future results, and it allows investors to evaluate our performance using the same methodology and information as used by our management. Our definition of adjusted EBITDA may be different from similar non-GAAP financial measures used by other companies and/or analysts. |
| (2) |
We define free cash flow as adjusted EBITDA plus or minus changes in operating working capital less capital expenditures net of any proceeds from disposals of property and equipment. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our business for purposes such as repaying maturing debt and funding future investments. |
| (3) |
We define operating working capital as accounts receivable and inventory net of accounts payable and customer deposits. |
| (4) |
Our backlog at June 30, 2022 and 2021 is net of revenue recognized over time. |
| (5) |
We define the book-to-bill as the ratio of new orders we received, net of cancellations, to revenue during a period. |
The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measure:
| Three Months Ended |
Six Months Ended |
|||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Net (loss) income |
$ | (2,703 | ) | $ | 10,252 | $ | (5,107 | ) | $ | 9,042 | ||||||
| Interest expense |
776 | 318 | 1,121 | 547 | ||||||||||||
| Income tax provision |
15 | 45 | 22 | 77 | ||||||||||||
| Depreciation and amortization |
1,576 | 1,611 | 3,095 | 3,164 | ||||||||||||
| Share-based compensation and other stock payments |
708 | 574 | 1,232 | 1,187 | ||||||||||||
| Adjusted EBITDA |
372 | 12,800 | 363 | 14,017 | ||||||||||||
| Changes in operating working capital |
(3,070 | ) | (5,288 | ) | (7,057 | ) | (11,937 | ) | ||||||||
| Employee retention credit receivable |
— | (1,714 | ) | — | (1,714 | ) | ||||||||||
| Capital expenditures |
(1,205 | ) | (153 | ) | (1,697 | ) | (765 | ) | ||||||||
| Proceeds from disposal of property and equipment |
— | — | — | 23 | ||||||||||||
| Free Cash Flow |
$ | (3,903 | ) | $ | 5,645 | $ | (8,391 | ) | $ | (376 | ) | |||||
OUR BUSINESS
Second Quarter Overview
We booked $26,046 in new orders in the second quarter of 2022, slightly down from $26,441 in the second quarter of 2021. Within our Heavy Fabrications segment, wind tower orders decreased 82% compared to the prior year quarter as wind customers continued to pause and delay orders due to uncertainty regarding the timing and likelihood of potential wind energy incentives provided by the federal government and elevated steel prices. Industrial fabrications product line orders, within the Heavy Fabrications segment, increased 242% primarily due to improved industrial demand and increasing order volume for Pressure Reducing Systems (“PRS”) units. Gearing segment orders increased 14% compared to the prior year quarter primarily due to higher demand from industrial customers partially offset by decreased demand from oil and gas (“O&G”) customers. Orders within our Industrial Solutions segment increased by 8% as compared to the prior year quarter, primarily due to the timing of orders associated with aftermarket projects and projects from other diverse customers partially offset by a decrease in new gas turbine orders.
We recognized revenue of $50,012 in the second quarter of 2022, up 8% compared to the second quarter of 2021, primarily due to a 154% increase in industrial fabrications product line revenue within the Heavy Fabrications segment. The increase in industrial fabrication revenue is attributable to strong recent order intake from industrial and mining customers, in addition to revenue recognized on our PRS units. Overall Heavy Fabrications segment revenues were flat compared to the prior year quarter as the industrial fabrications product line increase was offset by a 47% decrease in tower sections sold. Gearing revenue increased by 37%, primarily driven by strong order intake in recent quarters from O&G and industrial customers, partially offset by a decrease in aftermarket wind revenue. Industrial Solutions segment revenue increased 43% compared to the prior year quarter, primarily due to the timing of new gas turbine and aftermarket projects.
We recorded a net loss of $2,703 or $0.13 per share in the second quarter of 2022, compared to net income of $10,252 or $0.55 per share in the second quarter of 2021 primarily due to the absence of $3,593 of other income related to the employee retention credit recorded under the CARES Act and the $9,151 recognized as a result of forgiveness of the Paycheck Protection Program (“PPP”) loan during the second quarter of 2021.
On March 27, 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including an employee retention credit (“ERC”), which is a refundable tax credit against certain employment taxes. The ERC is available for wages paid through September 30, 2021 and is equal to 70% of qualified wages (which includes employer qualified health plan expenses) paid to employees. The maximum tax credit that could be claimed by an eligible employer in 2021 was $7,000 per employee per calendar quarter. In the first and second quarters of 2021, we received ERC benefits of $3,372 and $3,593, respectively, which were recorded in “Other income (expense), net” in our condensed consolidated statement of operations. We did not qualify for the ERC benefit during the third quarter of 2021 due to relatively higher revenues in 2021 as compared to the third quarter of 2019. The receivable for the remaining uncollected ERC benefit was $497 as of December 31, 2021 and was included in the “Employee retention credit receivable” line item in the Company’s condensed consolidated balance sheet at December 31, 2021. The remaining of $497 for the uncollected ERC benefit was collected during January 2022.
COVID-19 Pandemic
The COVID-19 pandemic has disrupted business, trade, commerce and financial markets in the U.S. and globally. Through June 30, 2022, we experienced an adverse impact to our business, operations and financial results as a result of the COVID-19 pandemic due in part to a decline in order activity levels, manufacturing inefficiencies associated with supply chain disruptions and employee staffing constraints due to the spread of the COVID-19 pandemic. In response to the pandemic, we continue to right-size our workforce and delay certain capital expenditures. In future periods, we may experience weaker customer demand, requests for extended payment terms, customer bankruptcies, additional supply chain disruption, employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact the Company and its business, operations and financial results. As we cannot predict the duration or scope of the pandemic, including in light of the emerging variants, or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material.
We continue to monitor closely the Company’s financial health and liquidity and the impact of the pandemic on the Company, including emerging variants. We have been able to serve the needs of our customers while taking steps to protect the health and safety of our employees, customers, partners, and communities. Among these steps, we follow the guidance provided by the U.S. Centers for Disease Control and Prevention.
RESULTS OF OPERATIONS
Three months ended June 30, 2022, Compared to Three months ended June 30, 2021
The condensed consolidated statement of operations table below should be read in connection with a review of the following discussion of our results of operations for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
| Three Months Ended June 30, |
2022 vs. 2021 |
|||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| 2022 |
Revenue |
2021 |
Revenue |
$ Change |
% Change |
|||||||||||||||||||
| Revenues |
$ | 50,012 | 100.0 | % | $ | 46,491 | 100.0 | % | $ | 3,521 | 7.6 | % | ||||||||||||
| Cost of sales |
47,618 | 95.2 | % | 44,293 | 95.3 | % | 3,325 | 7.5 | % | |||||||||||||||
| Gross profit |
2,394 | 4.8 | % | 2,198 | 4.7 | % | 196 | 8.9 | % | |||||||||||||||
| Operating expenses |
||||||||||||||||||||||||
| Selling, general and administrative expenses |
4,122 | 8.2 | % | 4,325 | 9.3 | % | (203 | ) | (4.7 | )% | ||||||||||||||
| Intangible amortization |
184 | 0.4 | % | 184 | 0.4 | % | — | 0.0 | % | |||||||||||||||
| Total operating expenses |
4,306 | 8.6 | % | 4,509 | 9.7 | % | (203 | ) | (4.5 | )% | ||||||||||||||
| Operating loss |
(1,912 | ) | (3.8 | )% | (2,311 | ) | (5.0 | )% | 399 | 17.3 | % | |||||||||||||
| Other (expense) income, net |
||||||||||||||||||||||||
| Paycheck Protection Program loan forgiveness |
— | 0.0 | % | 9,151 | 19.7 | % | (9,151 | ) | (100.0 | )% | ||||||||||||||
| Interest expense, net |
(776 | ) | (1.6 | )% | (318 | ) | (0.7 | )% | (458 | ) | (144.0 | )% | ||||||||||||
| Other, net |
— | 0.0 | % | 3,775 | 8.1 | % | (3,775 | ) | (100.0 | )% | ||||||||||||||
| Total other (expense) income, net |
(776 | ) | (1.6 | )% | 12,608 | 27.1 | % | (13,384 | ) | (106.2 | )% | |||||||||||||
| Net (loss) income before provision for income taxes |
(2,688 | ) | (5.4 | )% | 10,297 | 22.1 | % | (12,985 | ) | (126.1 | )% | |||||||||||||
| Provision for income taxes |
15 | 0.0 | % | 45 | 0.1 | % | (30 | ) | (66.7 | )% | ||||||||||||||
| Net (loss) income |
$ | (2,703 | ) | (5.4 | )% | $ | 10,252 | 22.1 | % | $ | (12,955 | ) | (126.4 | )% | ||||||||||
Consolidated
Revenues increased by $3,521 versus the prior year quarter. This increase was primarily due to a 154% increase in industrial fabrications product line revenue within the Heavy Fabrications segment. The increase in industrial fabrication revenue is attributable to strong recent order intake from industrial and mining customers, in addition to revenue recognized on our PRS units. Overall the Heavy Fabrications segment revenues were flat compared to the prior year quarter as the industrial fabrications product line increase was offset by a 47% decrease in tower sections sold. Gearing segment revenue was up 37% from the second quarter of 2021, primarily driven by higher recent order intake from O&G and industrial customers, partially offset by a decrease in aftermarket wind revenue. Industrial Solutions segment revenue increased by 43%, primarily due to the timing of new gas turbine customer and aftermarket projects.
Gross profit increased marginally by $196 when compared to the prior year quarter as higher sales volumes within the Gearing and Industrial Solutions segments were largely offset by lower sales volumes in the Heavy Fabrications segment.
Due to higher revenue levels, lower legal expenses, and reduced salaries and benefits, operating expenses as a percentage of sales decreased to 8.6% in the current-year quarter from 9.7% in the prior year quarter.
Net loss was $2,703 during the three months ended June 30, 2022, compared to net income of $10,252 during the three months ended June 30, 2021 primarily due to the factors described above, the absence of the $3,593 ERC benefit, and the $9,151 PPP loan forgiveness recorded in the prior year quarter.
Heavy Fabrications Segment
| Three Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 12,989 | $ | 14,760 | ||||
| Tower sections sold |
160 | 302 | ||||||
| Revenues |
35,575 | 35,830 | ||||||
| Operating income |
78 | 271 | ||||||
| Operating margin |
0.2 | % | 0.8 | % | ||||
Wind tower orders decreased 82% versus the prior year quarter as wind customers continue to pause and delay orders due to uncertainty regarding the timing and likelihood of potential wind energy incentives provided by the federal government and elevated steel prices. Industrial fabrications product line orders, also within the Heavy Fabrications segment, increased 242% from the prior year quarter primarily due to improved industrial demand and increasing order volume for PRS units. Heavy Fabrications segment revenues were flat compared to the prior year as a 154% increase in industrial fabrication line revenues was offset by a 47% decrease in tower sections sold.
Heavy Fabrications segment operating income decreased by $193 compared to the prior year quarter. The quarter-over-quarter decrease in operating performance is primarily a result of lower sales volumes and costs associated with transitioning the workforce to support growth in the industrial fabrications product line. Operating margin was 0.2% during the three months ended June 30, 2022, a decrease from 0.8% during the three months ended June 30, 2021.
Gearing Segment
| Three Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 8,941 | $ | 7,858 | ||||
| Revenues |
10,115 | 7,404 | ||||||
| Operating loss |
(585 | ) | (882 | ) | ||||
| Operating margin |
(5.8 | )% | (11.9 | )% | ||||
Gearing segment orders increased 14% from the prior year period primarily due to increased demand from industrial customers, partially offset by reduced demand from O&G customers. Gearing revenue was up 37% relative to the comparable prior year period due to higher order intake in recent quarters from O&G and industrial customers, partially offset by a decrease in aftermarket wind revenue.
Gearing segment operating loss decreased $297 from the prior year period. This was primarily attributable to higher sales partially offset by higher material costs, ramp-up costs, and increased fixed costs to support volumes. Operating margin was (5.8%) during the three months ended June 30, 2022, an improvement from (11.9)% during the three months ended June 30, 2021, driven primarily by the items identified above.
Industrial Solutions Segment
| Three Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 4,116 | $ | 3,823 | ||||
| Revenues |
5,049 | 3,541 | ||||||
| Operating income (loss) |
32 | (47 | ) | |||||
| Operating margin |
0.6 | % | (1.3 | )% | ||||
Industrial Solutions segment orders increased by 8% from the prior year period primarily due to the timing of orders associated with aftermarket projects and projects from other diverse customers, partially offset by a decrease in new gas turbine orders. Segment revenue increased by 43% from the prior year period primarily due to the timing of new gas turbine and aftermarket projects. The improved operating income versus the prior-year quarter was primarily a result of a higher sales, partially offset by increased variable expenses such as freight costs.
Corporate and Other
Corporate and Other expenses during the three months ended June 30, 2022 decreased from the prior year period primarily due to lower salaries and benefits.
Six months ended June 30, 2022, Compared to Six months ended June 30, 2021
The condensed consolidated statement of operations table below should be read in connection with a review of the following discussion of our results of operations for the six months ended June 30, 2022, compared to the six months ended June 30, 2021.
| Six Months Ended June 30, |
2022 vs. 2021 |
|||||||||||||||||||||||
| % of Total |
% of Total |
|||||||||||||||||||||||
| 2022 |
Revenue |
2021 |
Revenue |
$ Change |
% Change |
|||||||||||||||||||
| Revenues |
$ | 91,856 | 100.0 | % | $ | 79,219 | 100.0 | % | $ | 12,637 | 16.0 | % | ||||||||||||
| Cost of sales |
87,450 | 95.2 | % | 76,739 | 96.9 | % | 10,711 | 14.0 | % | |||||||||||||||
| Gross profit |
4,406 | 4.8 | % | 2,480 | 3.1 | % | 1,926 | 77.7 | % | |||||||||||||||
| Operating expenses |
||||||||||||||||||||||||
| Selling, general and administrative expenses |
8,024 | 8.7 | % | 8,735 | 11.0 | % | (711 | ) | (8.1 | )% | ||||||||||||||
| Intangible amortization |
367 | 0.4 | % | 367 | 0.5 | % | — | — | % | |||||||||||||||
| Total operating expenses |
8,391 | 9.1 | % | 9,102 | 11.5 | % | (711 | ) | (7.8 | )% | ||||||||||||||
| Operating loss |
(3,985 | ) | (4.3 | )% | (6,622 | ) | (8.4 | )% | 2,637 | 39.8 | % | |||||||||||||
| Other (expense) income, net |
||||||||||||||||||||||||
| Paycheck Protection Program loan forgiveness |
— | — | % | 9,151 | 11.6 | % | (9,151 | ) | (100.0 | )% | ||||||||||||||
| Interest expense, net |
(1,121 | ) | (1.2 | )% | (547 | ) | (0.7 | )% | (574 | ) | (104.9 | )% | ||||||||||||
| Other, net |
21 | 0.0 | % | 7,137 | 9.0 | % | (7,116 | ) | (99.7 | )% | ||||||||||||||
| Total other (expense) income, net |
(1,100 | ) | (1.2 | )% | 15,741 | 19.9 | % | (16,841 | ) | (107.0 | )% | |||||||||||||
| Net (loss) income before provision for income taxes |
(5,085 | ) | (5.5 | )% | 9,119 | 11.5 | % | (14,204 | ) | (155.8 | )% | |||||||||||||
| Provision for income taxes |
22 | 0.0 | % | 77 | 0.1 | % | (55 | ) | (71.4 | )% | ||||||||||||||
| Net (loss) income |
$ | (5,107 | ) | (5.6 | )% | $ | 9,042 | 11.4 | % | $ | (14,149 | ) | (156.5 | )% | ||||||||||
Consolidated
Revenues increased by $12,637 versus the prior year. Gearing segment revenue was up 62% from the first half of 2021, primarily driven by strong recent order intake from O&G and mining customers, partially offset by a decrease in aftermarket wind revenue. Heavy Fabrications segment revenues increased by 7% as lower tower demand was more than offset by a 105% increase in industrial fabrications product line revenue attributable to higher recent order intake from industrial customers and revenue recognized on our PRS units. Industrial Solutions segment revenue increased by 12%, primarily due to the timing of new gas turbine customer and aftermarket projects.
Gross profit increased by $1,926 when compared to the prior year primarily due to higher sales volumes in the Gearing segment, partially offset by higher material costs, ramp-up costs, and increased fixed costs to support volumes. As a result, gross margin increased to 4.8% during the six months ended June 30, 2022, from 3.1% during the six months ended June 30, 2021.
Due to higher revenue levels, lower legal expenses, and reduced salaries and benefits, operating expenses as a percentage of sales decreased to 9.1% in the current-year from 11.5% in the prior year.
Net loss was $5,107 during the six months ended June 30, 2022, compared to net income of $9,042 during the six months ended June 30, 2021 primarily due to the factors described above and the absence of the $6,965 ERC benefit and the $9,151 PPP loan forgiveness recorded in the prior year quarter.
Heavy Fabrications Segment
| Six Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 47,149 | $ | 35,557 | ||||
| Tower sections sold |
329 | 471 | ||||||
| Revenues |
62,847 | 58,607 | ||||||
| Operating loss |
(383 | ) | (1,429 | ) | ||||
| Operating margin |
(0.6 | )% | (2.4 | )% | ||||
Wind tower orders increased 25% versus the prior year as tower customers secured 2022 production capacity to support ongoing wind turbine tower installation projects. Industrial fabrications product line orders, also within the Heavy Fabrications segment, increased 54% from the prior year primarily due to strong demand for PRS units and strong industrial demand, partially offset by a reduction in mining demand. Heavy Fabrications segment revenues increased 7% primarily due to a 105% increase in industrial fabrication revenues primarily due to higher recent order intake from industrial customers and revenue recognized from our PRS units in the current year.
Heavy Fabrications segment operating loss decreased by $1,046 compared to the prior year. The improvement in operating performance is primarily a result of higher sales in the current year and the absence of one-time events that occurred during the prior year such as the weather-related event and a customer driven project delay, partially offset by increased variable costs associated with growth in the industrial fabrications product line. Operating margin was (0.6)% during the six months ended June 30, 2022, an increase from (2.4%) during the six months ended June 30, 2021.
Gearing Segment
| Six Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 23,003 | $ | 17,778 | ||||
| Revenues |
20,700 | 12,753 | ||||||
| Operating loss |
(697 | ) | (1,871 | ) | ||||
| Operating margin |
(3.4 | )% | (14.7 | )% | ||||
Gearing segment orders increased 29% from the prior year period primarily due to increased demand from O&G and industrial customers. Gearing revenue was up 62% relative to the comparable prior year period due to higher order intake in recent quarters from O&G and mining customers, partially offset by a decrease in aftermarket wind revenue.
Gearing segment operating loss decreased $1,174 from the prior year period. This was primarily attributable to higher sales partially offset by higher material costs, ramp-up costs, and increased fixed costs to support higher volumes. Operating margin was (3.4%) during the six months ended June 30, 2022, an improvement from (14.7)% during the six months ended June 30, 2021, driven primarily by the items identified above.
Industrial Solutions Segment
| Six Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Orders |
$ | 8,587 | $ | 7,320 | ||||
| Revenues |
9,121 | 8,145 | ||||||
| Operating loss |
(177 | ) | (61 | ) | ||||
| Operating margin |
(1.9 | )% | (0.7 | )% | ||||
Industrial Solutions segment orders increased by 17% from the prior year period primarily due to the timing of orders associated with aftermarket projects. Segment revenue increased by 12% from the prior year period primarily due to the timing of new gas turbine and aftermarket projects. The increased operating loss versus the prior year was primarily a result of higher variable expenses including freight costs.
Corporate and Other
Corporate and Other expenses during the six months ended June 30, 2022 decreased from the prior year period primarily due to lower salaries and benefits.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
As of June 30, 2022, cash totaled $49, a decrease of $803 from December 31, 2021. Cash balances remain limited in the second quarter as operating receipts and disbursements flowed through our 2016 Credit Facility (as defined in Note 7, “Debt and Credit Agreements,” in the notes to our condensed consolidated financial statements), which was in a drawn position as of June 30, 2022. Debt and finance lease obligations at June 30, 2022 totaled $22,975. As of June 30, 2022, we had the ability to borrow up to an additional $10,178 under the 2016 Credit Facility. In addition to the Credit Facility, we also utilize supply chain financing arrangements as a component of our funding for working capital, which accelerates receivable collections and helps to better manage cash flow. Under these agreements, we have agreed to sell certain of our accounts receivable balances to banking institutions who have agreed to advance amounts equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements. The balances under these agreements are accounted for as sales of accounts receivable, as they are sold without recourse. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the consolidated statements of cash flows. Fees incurred in connection with the agreements are recorded as interest expense.
On March 9, 2021, we entered into a $10,000 Equity Distribution Agreement (the “Equity Distribution Agreement”) with Craig-Hallum Capital Group, LLC (the “Manager”). Pursuant to the terms of the Equity Distribution Agreement, we issued 1,897,697 shares of the Company's common stock thereunder during the first two quarters of 2021. The net proceeds (before upfront costs) to the Company from the sales of such shares were approximately $9,725 after deducting commissions paid of approximately $275 and before deducting other expense of $411.
On February 28, 2022, we executed the Fourth Amendment to the Amended and Restated Loan Agreement (the “Fourth Amendment”) which reduced the line of credit from $35,000 to $30,000, extended the maturity date until January 31, 2024, waived the minimum EBITDA covenant for the three-month period ended December 31, 2021, revised the fixed charge coverage ratio covenant as of December 31, 2022 for the trailing nine-month period after March 31, 2022, revised the minimum EBITDA covenant applicable to the three-month period ending March 31, 2022, the six-month period ending June 30, 2022 and the nine-month period ending September 30, 2022, revised the existing liquidity reserve to $2,500 and amended certain other provisions in connection with the discontinuation of LIBOR and replacement with the forward-looking term Secured Overnight Financing Rate (Term SOFR) administered by CME Group, Inc.
On August 4, 2022, we executed the Wells Fargo Credit Agreement (as defined in Note 7, “Debt and Credit Agreements” in the notes to our condensed consolidated financial statements) with Wells Fargo Bank, National Association, as lender (“Wells Fargo”), providing us with a $35,000 senior secured revolving credit facility (which may be further increased by up to an additional $10,000 upon our request and at the sole discretion of Wells Fargo) and a $7,578 senior secured term loan (collectively, the “2022 Credit Facility”). The proceeds of the 2022 Credit Facility are available for general corporate purposes, including strategic growth opportunities. The 2022 Credit Facility replaces the 2016 Credit Facility. All obligations outstanding under the 2016 Credit Facility were refinanced by the 2022 Credit Facility on August 5, 2022. For more information on the 2022 Credit Facility, please see Note 7, “Debt and Credit Agreement” in the notes to our condensed consolidated financial statements.
We anticipate that current cash resources, amounts available under the 2022 Credit Facility, cash to be generated from operations and equipment financing, and any potential proceeds from the sale of further securities under the Form S-3 will be adequate to meet our liquidity needs for at least the next twelve months.
If assumptions regarding our production, sales and subsequent collections from certain of our large customers, as well as receipt of 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 emerging variants, and its effects on domestic and global economies, we may encounter cash flow and liquidity issues.
If our operational performance deteriorates, we may be unable to comply with existing financial covenants, and could lose access to the 2022 Credit Facility. This could limit our operational flexibility, require a delay in making planned investments and/or require us to seek additional equity or debt financing. Any attempt to raise equity through the public markets could have a negative effect on our stock price, making an equity raise more difficult or more dilutive. Any additional equity financing or equity linked financing, if available, will be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other operating and financial restrictions on us. While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and debt covenants, there can be no assurances that our operations will generate sufficient cash or that existing or new credit facilities or equity or equity linked financings will be available in an amount sufficient to enable us to meet these financial obligations.
Sources and Uses of Cash
The following table summarizes our cash flows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021:
| Six Months Ended |
||||||||
| June 30, |
||||||||
| 2022 |
2021 |
|||||||
| Total cash (used in) provided by: |
||||||||
| Operating activities |
$ | (8,264 | ) | $ | (9,987 | ) | ||
| Investing activities |
(1,697 | ) | (742 | ) | ||||
| Financing activities |
9,158 | 12,114 | ||||||
| Net (decrease) increase in cash |
$ | (803 | ) | $ | 1,385 | |||
Operating Cash Flows
During the six months ended June 30, 2022, net cash used in operating activities totaled $8,264 compared to net cash used in operating activities of $9,987 during the prior year period. The decrease in net cash used was primarily due to improved operating performance in the current year and less operating working capital build, partially offset by the ERC benefits which were recognized in the prior year period.
Investing Cash Flows
During the six months ended June 30, 2022, net cash used in investing activities totaled $1,697, compared to net cash used in investing activities of $742 during the prior year period. The increase in net cash used in investing activities as compared to the prior-year period was primarily due to an increase in net purchases of property and equipment.
Financing Cash Flows
During the six months ended June 30, 2022, net cash provided by financing activities totaled $9,158, compared to net cash provided by financing activities of $12,114 during the prior year period. The decrease was primarily due to the absence of proceeds from the sale of securities under the Equity Distribution Agreement in the current year, partially offset by increased net borrowings under our 2016 Credit Facility in the current year.
In 2016, we entered into a $570 loan agreement with the Development Corporation of Abilene which is included in the “Long-term debt, net of current maturities” line item of our condensed consolidated financial statements as of June 30, 2022 and December 31, 2021. The loan is forgivable upon the Company meeting and maintaining specific employment thresholds. During each of the years 2021, 2020, 2019 and 2018, $114 of the loan was forgiven. As of June 30, 2022, the loan balance was $114. In addition, we have outstanding notes payable for capital expenditures in the amount of $714 and $363 as of June 30, 2022 and December 31, 2021, respectively, with $27 and $186 included in the “Line of Credit and other notes payable” line item of our condensed consolidated financial statements as of June 30, 2022 and December 31, 2021. The notes payable have monthly payments that range from $3 to $16 and an interest rate of approximately 4%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable mature in September 2028.
The CARES Act provided for the ERC, which is a refundable tax credit against certain employment taxes. The ERC is available for wages paid through September 30, 2021 and is equal to 70% of qualified wages (which includes employer qualified health plan expenses) paid to employees. The maximum tax credit that could be claimed by an eligible employer in 2021 was $7,000 per employee per calendar quarter. In the first and second quarters of 2021, we received ERC benefits of $3,372 and $3,593, respectively, which were recorded in “Other income (expense), net” in our condensed consolidated statement of operations. We did not qualify for the ERC benefit during the third quarter of 2021 due to relatively higher revenues in 2021 as compared to the third quarter of 2019. The receivable for the remaining uncollected ERC benefit is $497 as of December 31, 2021 and is included in the “Employee retention credit receivable” line item in our condensed consolidated balance sheet at December 31, 2021. The remaining of $497 for the uncollected ERC benefit was collected during January 2022.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The preceding discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021. Portions of this Quarterly Report on Form 10-Q, including the discussion and analysis in this Part I, Item 2, contain “forward looking statements”, 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, many of which are, and will be, amplified by the COVID-19 pandemic: (i) the impact of global health concerns, including the impact of the current COVID-19 pandemic on the economies and financial markets and the demand for our products; (ii) 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 as well as new or continuing tariffs on steel or other products imported into the United States; (iii) 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; (iv) the economic and operational stability of our significant customers and suppliers, including their respective supply chains, and the ability to source alternative suppliers as necessary, in light of the COVID-19 pandemic; (v) our ability to continue to grow our business organically and through acquisitions, and the impairment thereto by the impact of the COVID-19 pandemic; (vi) the production, sales, collections, customer deposits and revenues generated by new customer orders and our ability to realize the resulting cash flows; (vii) information technology failures, network disruptions, cybersecurity attacks or breaches in data security, including with respect to any remote work arrangements implemented in response to the COVID-19 pandemic; (viii) the sufficiency of our liquidity and alternate sources of funding, if necessary; (ix) our ability to realize revenue from customer orders and backlog; (x) our ability to operate our business efficiently, comply with our debt obligations, manage capital expenditures and costs effectively, and generate cash flow; (xi) the economy, including its stability in light of the COVID-19 pandemic, and the potential impact it may have on our business, including our customers; (xii) 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; (xiii) the effects of market disruptions and regular market volatility, including fluctuations in the price of oil, gas and other commodities; (xiv) competition from new or existing industry participants including, in particular, increased competition from foreign tower manufacturers; (xv) the effects of the change of administrations in the U.S. federal government; (xvi) our ability to successfully integrate and operate acquired companies and to identify, negotiate and execute future acquisitions; (xvii) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended; (xviii) our ability to utilize various relief options enabled by the CARES Act; (xix) the limited trading market for our securities and the volatility of market price for our securities; and (xx) 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 including, but not limited to, those set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021. 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are a smaller reporting company as defined by Item 10(f)(1) of Regulation S-K under the Securities Act and as such are not required to provide information under this Item pursuant to Item 305I of Regulation S-K.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We seek to maintain disclosure controls and procedures (as defined in Rules 13a-15I and 15d-15I 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 quarter reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Legal Proceedings |
The information required by this item is incorporated herein by reference to Note 12, “Legal Proceedings” of the condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.
| Risk Factors |
The Risk Factors identified in our Annual Report on Form 10-K for the year ended December 31, 2021 continue to represent the most significant risks to the Company’s future results of operations and financial conditions, without further modification or amendment.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Defaults Upon Senior Securities |
None.
| Mine Safety Disclosures |
Not Applicable.
| Other Information |
None.
| Exhibits |
The exhibits listed on the Exhibit Index are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
BROADWIND, INC.
FORM 10-Q FOR THE QUARTER ENDED June 30, 2022
| Exhibit Number |
Exhibit |
| 3.1 |
|
| 3.2 |
|
| 3.3 |
|
| 3.4 |
|
| 31.1 |
Rule 13a-14(a) Certification of Chief Executive Officer* |
| 32.1 |
|
| 101 |
The following financial information from this Form 10-Q of Broadwind, Inc. for the quarter ended June 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text. |
| 101.INS* | Inline XBRL Instance |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition |
| 101.LAB* | Inline XBRL Taxonomy Extension Labels |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
| * |
Filed herewith. |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
BROADWIND, INC. |
|
| |
|
|
| |
|
|
| August 9, 2022 | By: |
/s/ Eric B. Blashford |
| |
|
Eric B. Blashford |
| |
|
President, Chief Executive Officer, and Interim Chief Financial Officer |
| |
|
(Principal Executive Officer and Principal Financial Officer) |
EXHIBIT 31.1
CERTIFICATION
I, Eric B. Blashford, certify that:
|
1. |
I have reviewed this quarterly report on Form 10-Q of Broadwind, Inc.; |
|
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
|
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d- 15(f)) for the registrant and have: |
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
|
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions): |
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
|
August 9, 2022 |
|
|
/s/ Eric B. Blashford |
|
|
Eric B. Blashford |
|
|
President, Chief Executive Officer, and Interim Chief Financial Officer |
|
|
(Principal Executive Officer and Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report on Form 10-Q of Broadwind, Inc. (the “Company”) for the period ended June 30, 2022, as filed with the Securities and Exchange Commission (the “Commission”) on the date hereof (the “Report”), I, Eric B. Blashford, President, Chief Executive Officer, and Interim Chief Financial Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (“Section 906”), that:
(i) the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”); and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| August 9, 2022 | |
|
/s/ Eric B. Blashford |
|
|
Eric B. Blashford |
|
|
President, Chief Executive Officer, and Interim Chief Financial Officer |
|
|
(Principal Executive Officer and Principal Financial Officer) |
This certification accompanies the Report pursuant to Section 906 and shall not be deemed filed by the Company for purposes of Section 18 of the Exchange Act.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Commission or its staff upon request.
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