Broadwind, Inc.: Form 10-Q for the period ended Mar 31, 2022

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

(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 March 31, 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:

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OUR BUSINESS

First Quarter Overview

We booked $52,693 in new orders in the first quarter of 2022, up from $34,214 in the first quarter of 2021. Within our Heavy Fabrications segment, wind tower orders increased 112% compared to the prior year quarter 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, decreased 36% primarily due to weaker mining demand, which is largely driven by the timing of projects. Gearing segment orders increased 42% compared to the prior year quarter primarily due to higher demand from oil and gas (“O&G”) and mining customers, partially offset by reduced demand from steel customers. Orders within our Industrial Solutions segment increased by 28% as compared to the prior year quarter, primarily due to the timing of orders associated with aftermarket projects partially offset by a decrease in new gas turbine orders.

We recognized revenue of $41,844 in the first quarter of 2022, up 28% compared to the first quarter of 2021, primarily due to a 98% increase in Gearing revenue. Gearing revenue was driven higher by strong order intake in recent quarters from O&G and mining customers, partially offset by a decrease in aftermarket wind revenue. Heavy Fabrications segment revenues increased by 20% from the prior year quarter primarily due an increase in revenue associated with wind repowering projects in the current year combined with the absence of one-time adverse events that occurred during the prior year quarter such as the temporary shut-down of our Abilene, Texas plant due to a weather-related event and a customer driven project delay. Additionally, the industrial fabrications product line revenue within the Heavy Fabrications segment, increased 57% from the prior year quarter primarily due to higher recent order intake from industrial customers and revenue recognized on our Pressure Reducing Systems (“PRS”) units. Partially offsetting this was a decrease in revenue within our Industrial Solutions segment of $531, representing a 12% decrease compared to the prior year quarter, primarily due to the timing of new gas turbine and aftermarket projects.

We recorded a net loss of $2,404 or $0.12 per share in the first quarter of 2022, compared to a net loss of $1,210 or $0.07 per share in the first quarter of 2021 primarily due to the absence of $3,372 of other income related to the employee retention credit recorded during the first quarter of 2021 under the CARES Act, partially offset by the higher sales volumes discussed above.

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 March 31, 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 March 31, 2022, Compared to Three months ended March 31, 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 March 31, 2022, compared to the three months ended March 31, 2021.

Consolidated

Revenues increased by $9,116 versus the prior year quarter. Gearing segment revenue was up $5,235 from the first quarter of 2021, primarily driven by higher recent order intake from O&G and mining customers, partially offset by a decrease in aftermarket wind revenue. Heavy Fabrications segment revenues increased by 20% primarily due to an increase in revenue associated with wind repowering projects in the current year combined with the absence of one-time adverse events that occurred during the prior year quarter such as the temporary shut-down of our Abilene, Texas plant due to a weather-related event and a customer driven project delay. Additionally, the industrial fabrications product line revenue within the Heavy Fabrications segment increased 57% from the prior year quarter primarily due to higher recent order intake from industrial customers and revenue recognized on our PRS units. Industrial Solutions segment revenue decreased by 12%, primarily due to the timing of new gas turbine customer and aftermarket projects.

Gross profit increased by $1,730 when compared to the prior year quarter primarily due to higher sales volumes and the absence of one-time events that occurred in the prior year quarter in the Heavy Fabrications segment. This was partially offset by higher material and ramp-up costs in the Gearing segment and supply chain disruptions in the Heavy Fabrications segment. As a result, gross margin increased to 4.8% during the three months ended March 31, 2022, from 0.9% during the three months ended March 31, 2021.

Due to higher revenue levels, lower legal expenses, and reduced salaries and benefits, operating expenses as a percentage of sales decreased to 9.8% in the current-year quarter from 14.0% in the prior year quarter.

Net loss was $2,404 during the three months ended March 31, 2022, compared to $1,210 during the three months ended March 31, 2021 primarily due to the factors described above and the absence of the $3,372 ERC benefit recorded in the prior year quarter.

Heavy Fabrications Segment

Wind tower orders, which are within the Heavy Fabrications segment, increased 112% versus the prior year quarter 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, decreased 36% from the prior year quarter primarily due to weaker mining demand, which is largely driven by the timing of projects. Heavy Fabrications segment revenues increased 20% primarily due to an increase in revenue associated with wind repowering projects in the current year combined with the absence of one-time adverse events that occurred during the prior year quarter such as the temporary shut-down of our Abilene, Texas plant due to a weather-related event and a customer driven project delay. Additionally, industrial fabrication revenues increased 57% from the first quarter of 2021 primarily due to higher recent order intake from industrial customers and revenue recognized from our PRS units in the current year quarter.

Heavy Fabrications segment operating loss decreased by $1,239 compared to the prior year quarter. The quarter-over-quarter improvement in operating performance is primarily a result of higher sales in the current year quarter, and the absence of one-time events that occurred during the prior year quarter such as the weather-related event and a customer driven project delay, partially offset by ongoing supply chain disruptions. Operating margin was (1.7)% during the three months ended March 31, 2022, a decrease from (7.5%) during the three months ended March 31, 2021.

Gearing Segment

Gearing segment orders increased 42% from the prior year period primarily due to increased demand from O&G and mining customers, partially offset by reduced demand from steel customers. Gearing revenue was up 98% 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 $877 from the prior year period. This was primarily attributable to higher sales partially offset by increased material and ramp-up costs. Operating margin was (1.1%) during the three months ended March 31, 2022, an improvement from (18.5)% during the three months ended March 31, 2021, driven primarily by the items identified above.

Industrial Solutions Segment

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Industrial Solutions segment orders increased by 28% from the prior year period primarily due to the timing of orders associated with aftermarket projects. Segment revenue decreased 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 quarter was primarily a result of a lower margin sales mix sold.

Corporate and Other

Corporate and Other expenses during the three months ended March 31, 2022 decreased from the prior year period primarily due to lower salaries and benefits.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

As of March 31, 2022, cash totaled $773, a decrease of $79 from December 31, 2021. Cash balances remain limited as operating receipts and disbursements flow through our Credit Facility (as defined in Note 7, “Debt and Credit Agreements,” in the notes to our condensed consolidated financial statements), which is in a drawn position. Debt and finance lease obligations at March 31, 2022 totaled $19,988. As of March 31, 2022, we had the ability to borrow up to an additional $13,944 under the Credit Facility.

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.

We anticipate that current cash resources, amounts available under the 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 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 three months ended March 31, 2022 and 2021:

Operating Cash Flows

During the three months ended March 31, 2022, net cash used in operating activities totaled $6,005 compared to net cash used in operating activities of $8,437 during the prior year period. The decrease in net cash used was primarily due to our operating performance and less operating working capital build, partially offset by the absence of ERC benefits recognized in the prior year period.

Investing Cash Flows

During the three months ended March 31, 2022, net cash used in investing activities totaled $492, compared to net cash used in investing activities of $589 during the prior year period. The decrease in net cash used in investing activities as compared to the prior-year period was primarily due to a decrease in net purchases of property and equipment.

Financing Cash Flows

During the three months ended March 31, 2022, net cash provided by financing activities totaled $6,418, compared to net cash provided by financing activities of $8,583 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 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 March 31, 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 March 31, 2022, the loan balance was $114. In addition, we have outstanding notes payable for capital expenditures in the amount of $355 and $363 as of March 31, 2022 and December 31, 2021, respectively, with $185 and $186 included in the “Line of Credit and other notes payable” line item of our condensed consolidated financial statements as of March 31, 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.

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.

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 March 31, 2022.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting, including but not limited to changes resulting from the COVID-19 pandemic, during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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.