Broadwind, Inc.: Form 10-Q for the period ended Sep 30, 2023

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, 2022. 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. 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, proxy contest-related expenses, and other non-cash gains and losses) as supplemental information regarding our business performance. Our management uses adjusted EBITDA when it internally evaluates the performance of our business, reviews financial trends and makes 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 September 30, 2023 and 2022 is net of revenue recognized over time. Backlog is subject to adjustment based on the shift in timing of orders under the supply agreement referenced in Note 1, “Basis of Presentation,” of the Company’s condensed consolidated financial statements.

(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

Third Quarter Overview

We received $15,890 in new orders in the third quarter of 2023, down from $84,457 in the third quarter of 2022. Within our Heavy Fabrications segment, wind tower orders decreased compared to the prior year quarter primarily due to the timing of tower orders as a major wind tower customer secured relatively longer-term capacity during the fourth quarter of 2022 instead of ordering in more regular intervals as was the case during the first three quarters of 2022. Partially offsetting this decrease was a 47% increase in industrial fabrication orders primarily due to improved demand from mining customers. Gearing segment orders decreased 81% from the prior year period primarily due to reduced demand from oil and gas (“O&G”) mining, and industrial customers. Orders within our Industrial Solutions segment decreased by 20% as compared to the prior year quarter primarily due to reduced demand for new gas turbine content, partially offset by improved aftermarket demand.

We recognized revenue of $57,163 in the third quarter of 2023, up 27% compared to the third quarter of 2022. Within the Heavy Fabrications segment wind tower revenue increased 40% primarily due to a 31% increase in tower sections sold and increased steel content, which is generally a pass-through to customers. Gearing segment revenue increased 12% relative to the comparable prior year period primarily due to higher order intake in recent quarters from industrial and steel customers. Industrial Solutions segment revenue increased by 85% from the prior year period primarily due to the timing of shipments of new gas turbine content in addition to revenue recognized from international customers.

We recorded net income of $4,394 or $0.21 per share in the third quarter of 2023, compared to a net loss $1,772 or $0.09 per share in the third quarter of 2022. This increase in net income was primarily due to higher sales and $4,488 of AMP credits (discussed below) recognized in the current year quarter.

During the third quarter of 2023, we recognized advanced manufacturing tax credits (“AMP credits”) of $4,488 within the Heavy Fabrications segment. The AMP credits were a part of the Inflation Reduction Act (“IRA”) which was enacted on August 16, 2022. The IRA includes advanced manufacturing tax credits for manufacturers of eligible components, including wind and solar components. Manufacturers qualify for the AMP credits based on the total rated capacity, expressed on a per watt basis, of the completed wind turbine for which such component is designed. The credit is applicable for each component produced and sold in the U.S. beginning in 2023 through 2032. Wind towers within our Heavy Fabrications segment were eligible for credits of $0.03 per watt for each wind tower produced.

RESULTS OF OPERATIONS

Three months ended September 30, 2023, Compared to Three months ended September 30, 2022

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 September 30, 2023, compared to the three months ended September 30, 2022.

Consolidated

Revenues increased by $12,320 as compared to the prior year quarter primarily due to a 40% increase in wind tower revenue primarily due to a 31% increase in tower sections sold and increased steel content, which is generally a pass-through to customers. Industrial Solutions segment revenue increased 85% from the prior year period primarily due to the timing of shipments of new gas turbine content in addition to revenue recognized from international customers. Additionally, Gearing segment revenue increased 12% relative to the comparable prior year period primarily due to higher order intake in recent quarters from industrial and steel customers.

Gross profit increased by $6,419 when compared to the prior year quarter, primarily due to the higher sales volumes and $4,488 of AMP credits recognized in the current year quarter.

Operating expenses increased $532 compared to the prior year quarter primarily due to higher medical costs and increased incentive compensation. Operating expenses as a percentage of sales decreased to 8.4% in the current-year quarter compared to 9.5% in the prior year quarter primarily due to higher sales.

Net income was $4,394 during the three months ended September 30, 2023, compared to a net loss of $1,772 during the three months ended September 30, 2022. This increase in net income was primarily due to the factors described above.

Heavy Fabrications Segment

Within our Heavy Fabrications segment, wind tower orders decreased $57,264 compared to the prior year quarter primarily due to the timing of tower orders as a major wind tower customer secured relatively longer-term capacity during the fourth quarter of 2022 instead of ordering in more regular intervals as was the case during the first three quarters of 2022. Partially offsetting this decrease in orders was a 47% increase in industrial fabrication orders primarily due to improved demand from mining customers.

Segment revenues increased by 25% during the three months ended September 30, 2023 primarily due to a 40% increase in wind tower revenue as tower sections sold increased by 31% and increased steel content, which is generally a pass-through to customers.

Heavy Fabrications segment operating results improved by $5,419 as compared to the prior year quarter. The improvement in operating performance was primarily a result of reduced wind tower costs as a result of $4,488 of AMP credits recognized in the current year quarter. Operating profit margin was 15.1% during the three months ended September 30, 2023 compared to 1.2% during the three months ended September 30, 2022.

Gearing Segment

Gearing segment orders decreased 81% from the prior year period primarily due to reduced demand from O&G, mining, and industrial customers. Gearing revenue was up 12% relative to the comparable prior year period primarily due to higher order intake in recent quarters from industrial and steel customers.

Gearing segment operating income decreased by $359 from the prior year period. This reduction was primarily attributable to a less profitable mix of product sold as well as increased overhead costs. Operating margin was 2.3% during the three months ended September 30, 2023, a decrease from 6.1% during the three months ended September 30, 2022, driven primarily by the items identified above.

Industrial Solutions Segment

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Industrial Solutions segment orders decreased 20% from the prior year period primarily due to reduced demand for new gas turbine content, partially offset by increased demand for aftermarket gas turbine content. Revenues increased 85% from the prior year period primarily due to the timing of shipments of new gas turbine content in addition to revenue recognized from international customers. Operating income increased versus the prior-year quarter primarily as a result of higher sales and a more profitable mix of product sold.

Corporate and Other

Corporate and Other expenses during the three months ended September 30, 2023 increased from the prior year period primarily due to higher medical costs.

Nine months ended September 30, 2023, Compared to Nine months ended September 30, 2022

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 nine months ended September 30, 2023, compared to the nine months ended September 30, 2022.

Consolidated

Revenues increased by $20,180 as compared to the prior year period primarily due to higher sales in all segments. Wind tower revenue increased 13% from the prior year period primarily as a result of less customer supplied materials in the current year and increased steel content, which is generally a pass-through to customers. Additionally, industrial fabrication revenues increased primarily due to higher shipments of our Pressure Reducing Systems ( “PRS”) units in the current year. Industrial Solutions segment revenue increased 46% from the prior year period primarily due to the timing shipments of new and aftermarket gas turbine content in addition to revenue recognized from international customers. Gearing segment revenue increased 11% relative to the comparable prior year period primarily due to higher order intake in recent quarters from industrial customers, partially offset by a decrease in revenue from mining customers.

Gross profit increased by $17,322 when compared to the prior year period, primarily due to the higher sales volumes within all segments and the $11,217 recognized from the AMP credits.

Due primarily to proxy-contest related expenses and higher medical costs, operating expenses as a percentage of sales increased to 10.6% in the current year period from 9.3% in the prior year period.

Net income was $6,578 during the nine months ended September 30, 2023, compared to a net loss of $6,879 during the nine months ended September 30, 2022. This increase in net income was primarily due to the factors described above.

Heavy Fabrications Segment

Within our Heavy Fabrications segment, wind tower orders decreased 87% compared to the prior year period primarily due to the timing of tower orders as a major wind tower customer secured relatively longer-term capacity during the fourth quarter of 2022 instead of ordering in more regular intervals as was the case during the first three quarters of 2022. Partially offsetting this decrease in wind tower orders was a 42% increase in industrial fabrication orders primarily due to improved demand for our PRS units and higher demand from mining customers. Segment revenues increased by 11% during the nine months ended September 30, 2023 primarily due to a 13% increase in wind tower revenue primarily as a result of less customer supplied materials in the current year and increased steel content, which is generally a pass-through to customers. Additionally, industrial fabrication revenues increased primarily due to higher shipments of our PRS units in the current year.

Heavy Fabrications segment operating results improved by $12,459 as compared to the prior year period. The improvement in operating performance was primarily a result of reduced wind tower costs as a result of the AMP credits recognized of $11,217 in the current year. Operating profit margin was 12.0% during the nine months ended September 30, 2023 compared to 0.0% during the nine months ended September 30, 2022 primarily due to the factors described above.

Gearing Segment

Gearing segment orders decreased 45% from the prior year period primarily due to reduced demand from O&G and mining customers. Gearing revenue was up 11% relative to the comparable prior year period primarily due to higher order intake in recent quarters from industrial customers, partially offset by a decrease in mining revenue.

Gearing segment operating income improved by $1,267 from the prior year period. This improvement was primarily attributable to higher sales, improved operational efficiencies, a more profitable product mix sold, and the absence of ramp-up costs incurred in the prior year. Operating margin was 3.5% during the nine months ended September 30, 2023, an improvement from (0.2)% during the nine months ended September 30, 2022, driven primarily by the items identified above.

Industrial Solutions Segment

22

Industrial Solutions segment orders increased from the prior year period primarily due to improved demand for aftermarket gas turbine content. Segment revenues increased from the prior year period primarily due to the timing of shipments to new and aftermarket gas turbine customers, in addition to revenue recognized from international customers. Operating income increased versus the prior-year primarily as a result of higher sales and a more profitable mix of product sold.

Corporate and Other

Corporate and Other expenses during the nine months ended September 30, 2023 increased from the prior year period primarily due to higher medical costs and increased professional fees associated with the contested proxy election.

LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES

On August 4, 2022, we entered into a credit agreement (the “2022 Credit Agreement”) with Wells Fargo Bank, National Association, as lender (“Wells Fargo”), providing the Company and its subsidiaries with a $35,000 senior secured revolving credit facility (which may be further increased by up to an additional $10,000 upon the request of the Company 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. As of September 30, 2023, cash totaled $1,740, a decrease of $10,992 from December 31, 2022. Debt and finance lease obligations at September 30, 2023 totaled $31,564. As of September 30, 2023, we had the ability to borrow up to an additional $11,906 under the 2022 Credit Facility.

In addition to the 2022 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.

We also have outstanding notes payable for capital expenditures in the amount of $1,401 and $1,094 as of September 30, 2023 and December 31, 2022, respectively, with $161 and $88 included in the “Line of Credit and current portion of long-term debt” line item of our condensed consolidated financial statements as of September 30, 2023 and December 31, 2022, respectively. The notes payable have monthly payments that range from $3 to $15 and an interest rate of approximately 6%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable mature in September 2028.

On September 22, 2023, 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 12, 2023 (the “Form S-3”), replacing a prior shelf registration statement which expired on October 12, 2023. This shelf registration statement, which includes a base prospectus, allows us 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, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes.

On September 12, 2022, we entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC and HC Wainwright & Co., LLC (collectively, the “Agents”). Pursuant to the terms of the Sales Agreement, we may sell from time to time through the Agents shares of our common stock with an aggregate sales price of up to $12,000. We will pay a commission to the Agents of 2.75% of the gross proceeds of the sale of the shares sold under the Sales Agreement and reimburse the Agents for the expenses incident to the performance of their obligations under the Sales Agreement. During the year ended December 31, 2022, we issued 100,379 shares of our common stock under the Sales Agreement and the net proceeds (before upfront costs) to us from the sale of our common stock were approximately $323 after deducting commissions paid of approximately $9. No shares of the Company’s common stock were issued under the Sales Agreement during the nine months ended September 30, 2023. As of September 30, 2023, shares of our common stock having a value of approximately $11,667 remained available for issuance under the Sales Agreement. Any additional shares offered and sold under the Sales Agreement are to be issued pursuant to the Form S-3 and a 424(b) prospectus supplement.

In January 2023, we announced that the Company had entered into a supply agreement for wind tower purchases valued at approximately $175 million with a leading global wind turbine manufacturer. Under the terms of the supply agreement, order fulfillment is to occur beginning in 2023 through year-end 2024. In early November 2023, the parties discussed their joint intent to shift approximately half of the contracted tower section orders initially planned for 2024 into 2025, while maintaining the total number of tower sections stipulated under the supply agreement.

We anticipate that current cash resources, amounts available under the 2022 Credit Facility, cash to be generated from operations and equipment financing, potential proceeds from the sale of securities under the Sales Agreement 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, our ability to finalize the terms of the remaining obligations under a supply agreement with a leading global wind turbine manufacturer, as well as receipt of customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, we may in the future 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 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 nine months ended September 30, 2023 and 2022:

Operating Cash Flows

During the nine months ended September 30, 2023, net cash used in operating activities totaled $22,593 compared to net cash used in operating activities of $10,271 during the prior year period. The increase in net cash used in operating activities during the current year period was primarily attributable to a significant increase in accounts receivable during the current year due to a change in payment terms with a major customer.

Investing Cash Flows

During the nine months ended September 30, 2023, net cash used in investing activities totaled $5,300, compared to net cash used in investing activities of $2,757 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 a net increase in purchases of property and equipment.

Financing Cash Flows

During the nine months ended September 30, 2023, net cash provided by financing activities totaled $16,901, compared to net cash provided by financing activities of $13,685 during the prior year period. The increase was primarily due to increased net borrowings under the 2022 Credit Facility in the current year period.

CRITICAL ACCOUNTING ESTIMATES

There have been no material changes in our critical accounting estimates during the nine months ended September 30, 2023 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the year ended December 31, 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, 2022. 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: (i) the impact of global health concerns 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, including the advanced manufacturing tax credits (which remain subject to further technical guidance and regulations), 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; (v) our ability to continue to grow our business organically and through acquisitions; (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; (viii) the sufficiency of our liquidity and alternate sources of funding, if necessary; (ix) our ability to realize revenue from customer orders and backlog (including our ability to finalize the terms of the remaining obligations under a supply agreement with a leading global wind turbine manufacturer); (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 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, including the availability of tax credits, 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) the limited trading market for our securities and the volatility of market price for our securities; and (xix) 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, 2022, as supplemented by the risk factors set forth under the caption “Risk Factors” in Part II, Item IA of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. 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 September 30, 2023.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended September 30, 2023 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, 2022 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 continue to represent the most significant risks to the Company’s future results of operations and financial conditions.