UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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(Mark One) | |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, | |
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 001-34278 |
BROADWIND ENERGY,, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 88-0409160 | |
3240 S. Central Avenue | 60804 | |
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Securities registered pursuant to Section | Registrant’s telephone number, including area code: (708) 780-4800 |
Title of Class | Trading Symbol | Name of Exchange on which Registered |
Common Stock, $0.001 par value | BWEN | The Nasdaq Capital Market |
Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting |
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the Registrant is a shell company, as defined in Rule 12b‑212b-2 of the Exchange Act. Yes ☐ No ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
As of June 30, 20172022 the aggregate market value of the Registrant’s voting common stock held by non‑affiliatesnon-affiliates of the Registrant was approximately $50,551,000,$29,365,000, based upon the $5.04$1.64 per share closing sale price of the Registrant’s common stock as reported on the NASDAQ Capital Market. For purposes of this calculation, the Registrant’s directors and executive officers and holders of 5% or more of the Registrant’s outstanding shares of voting common stock have been assumed to be affiliates, with such affiliates holding an aggregate of 5,006,0002,565,000 shares of the Registrant’s voting common stock on June 30, 2017.2022.
The number of shares of the Registrant’s common stock, par value $0.001, outstanding as of February 22, 2018,March 6, 2023, was 15,206,362.20,853,193.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Registrant’s 20182023 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
BROADWIND ENERGY, INC.
FORM 10‑K10-K
TABLE OF CONTENTS
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Cautionary Note Regarding This Annual Report on Form (Dollar amounts are presented in thousands, except per share data and unless otherwise stated) 3 As used in this Annual Report, the terms “we,” “us,” “our,” “Broadwind” and the “Company” refer to Broadwind, Business Overview Broadwind is a precision manufacturer of structures, equipment and components for clean technology and other specialized applications. We provide technologically advanced We were incorporated in 1996 in Nevada as Blackfoot Enterprises, Inc., and through a series of subsequent transactions, became Broadwind Energy, Inc., a Delaware corporation, in 2008. Through acquisitions in 2007 and 2008, we focused on expanding upon our core platform as a wind tower manufacturer, established our Gearing segment, and developed and broadened our industrial fabrications capabilities. In early 2017, we acquired Red Wolf Company, LLC, a kitter and assembler of industrial components primarily supporting the global gas turbine market.In 2020, we rebranded to Broadwind, Inc., a reflection of our diversification progress to date and our continued strategy to expand our product and customer diversification outside of wind energy. Effective with our 2020 rebranding, we renamed certain segments. Our Towers and Heavy Fabrications segment was renamed to Heavy Fabrications and our Process Systems segment was renamed to Industrial Solutions. Our Gearing segment name remained the same. Heavy Fabrications We provide large, complex and precision fabrications to customers in a broad range of industrial markets. Our most significant presence is within the U.S. wind energy industry, although we have diversified into other industrial markets in order to improve our capacity utilization, reduce our customer concentration, and reduce our exposure to uncertainty related to governmental policies currently impacting the U.S. wind energy industry. Gearing We provide 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, infrastructure, marine and other industrial
Industrial Solutions We provide supply chain solutions, light fabrication, inventory management, kitting and assembly services, primarily serving the
The following table
Business and Operating Strategy We intend to capitalize on the markets for wind energy,
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● | Pursue opportunistic acquisitions as well as organic investments. In addition to existing business and operating strategies, we are endeavoring to identify, and opportunistically execute on, accretive acquisitions and organic investments that will allow us to achieve further growth. Our investment criteria for opportunistic acquisitions as well as organic investments include, among other things, our ability to: improve manufacturing |
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COMPANY HISTORY
We were incorporated in 1996 in Nevada as Blackfoot Enterprises, Inc., and through a series of subsequent transactions, became Broadwind Energy, Inc., a Delaware corporation, in 2008. Through several acquisitions in 2007 and 2008, we focused on expanding upon our core platform as a wind tower component manufacturer, established our Gearing segment, and developed our Heavy Fabrications capabilities. In early 2017, we acquired Red Wolf, a kitter and assembler of industrial systems primarily supporting the global NGT market.
SALES AND MARKETING
We market our towers, gearing, kitting and heavy fabrications, productsgearing, and industrial solutions through a direct sales force, andsupplemented with independent sales agents.agents in certain markets. Our sales and marketing strategy is to develop and maintain long‑termlong-term relationships with our existing customers, and seek opportunities to expand these relationships across our business units. Our business development team uses market data, including marketing databases, information gathered at industry and trade shows, internet research and website marketing to identify and target new customers.
CUSTOMERS
We manufacture products for a variety of customers in the wind energy, O&G, gas turbine, mining, and infrastructure sector customers.other industrial markets. Within the wind energy industry, our customer base consists primarily of wind turbine manufacturers who supply end‑end users and wind farm operators with wind turbines, and wind farm operatorsgearbox re-manufacturers who use our replacement gears in their installed turbines.replacement gearboxes. The wind turbine market is very concentrated. According to Wood Mackenzie Power & Renewables 2022 industry data, the top fourwind turbine manufacturers comprised approximately 90% of the U.S. market. As a result, although we have historically produced towers for a broad range of wind turbine manufacturers, in any given year a limited number of customers have accounted for the majority of our revenues. Within the O&G and mining industries, our customer base consists of manufacturers of hydraulic fracturing and mud pumps, drilling and production equipment, mining equipment, and off‑off highway vehicles. Within the NGTgas turbine industry, our customers supply end-users with natural gas turbines and after-market replacement and efficiency upgrade packages. To support the effortsWithin our other industrial markets served, our customer base includes steel producers, ship builders, and manufacturers of material handling, pulp and paper and other power generation equipment. Sales to Siemens Gamesa Renewable Energy (“SGRE”) and GE Renewable Energy each represented greater than 10% of our sales force,consolidated revenues for the years ended December 31, 2022 and 2021. The loss of one of these customers could have a material adverse effect on our business, results of operation or financial condition. As a result, we utilize a number of marketing tacticshave an ongoing initiative to builddiversify our brand and position and promote our products. Our efforts include participation in industry conferences, media relations, use of social media and other channels and use of our website to connect with customers.customer base.
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COMPETITION
COMPETITION
Each of our businesses faces competition from both domestic and international companies. The December 2015 extension ofIn recent years, the PTC has boosted the market but has also attracted additional investment and competition in the wind energy industry. The industrial gearing industry has experienced consolidation of producers and acquisitions by strategic buyers in response to strong international competition, although recent tariff and reduced O&G and mining demand priorsupply chain uncertainties have caused buyers to 2017.shift more of their purchases to domestic gear manufacturers.
For
Within the wind tower product line of our Towers and Heavy Fabrications segment, the largest North American based competitor is Arcosa Inc., which was formerly a Trinity Industries.Industries company. Other competitors include VestasC.S. Wind, Systems, which has periodically produced towers for third party customers in addition to meeting its own captive tower requirements, anda South Korean Company, Marmen Industries, a Canadian company, that also hasand GRI Renewable Industries, a Spanish company, each of which have production facilityfacilities in the U.S. We also face competition from imported towers, although importsin recent years a number of trade cases have periodically significantly reduced competition from imports.
Imports from China and Vietnam have substantially ceaseddeclined following a determination by the U.S. International Trade Commission (“USITC”) in 2013 that wind towers from those countries were being sold in the U.S. at less than fair value. As a result of the determination, the U.S. Department of Commerce (“USDOC”) issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam. We continueIn May 2018, the U.S. Court of Appeals affirmed the decision from the U.S. Court of International Trade and at the same time excluded CS Wind Vietnam from the antidumping order. In April 2019, the USDOC extended the term of these duties for an additional five-year period. Following a renewed surge of tower imports from countries not impacted by existing tariffs, in July 2020, the USDOC issued antidumping and countervailing duty orders on imports of wind towers from Canada, Indonesia, and Vietnam and an antidumping order on imports of towers from Korea. Then in September 2020, a new trade case was brought before the USDOC and USITC, to monitorassess whether wind tower imports.towers imported from India, Malaysia, and Spain were being sold in the U.S. at less than fair value. The USDOC and USITC issued affirmative final determinations in all three antidumping (India, Malaysia, and Spain) and two countervailing duty cases (India and Malaysia). The USDOC imposed orders for two cases in August 2021 and the remainder in December 2021.Appeals of several of the USDOC determinations are currently pending at the CIT and the CAFC.
Within our industrial fabrications product line of our Heavy Fabrications segment, our competitors in a fragmented market include Weldall Manufacturing and AT&F Advanced Metals, along with a large number of other regional competitors. The primary differentiator among fabricators is the range of manufacturing and machining capabilities, including lifting capacity, precision machining, heat treatment capacity and the sophistication of quality systems.
In our Gearing segment, which is focused on the O&G, wind energy, mining and steel markets, ourwe compete with domestic and international manufacturers who produce gears greater than one meter in diameter. Our key competitors in a fragmented market include Overton Chicago Gear, Cincinnati Gearing Systems, Merit Gear, Milwaukee Gear and Horsburgh & Scott. In addition, we compete with the internal gear manufacturing capacity of relevant equipment manufacturers and face competition from foreign competitors.
In our Process SystemsIndustrial Solutions segment, which is primarily focused on the NGTgas turbine market, ourwe compete with electrical supply distributors. Our key competitors include Gexpro and Eastern Industrial.other small independent companies.
ENVIRONMENTAL
REGULATION AND COMPLIANCE
Production Tax Credit/Investment Tax Credit
The most impactful development incentive for our products has been the production tax credit (“PTC”) for new wind energy projects, which provides federal income tax credits based on electricity produced from qualifying wind turbines.Legislative support for the PTC has been intermittent since its introduction in 1992, which has caused volatility in the demand for new wind energy projects.
In December 2020, the Consolidated Appropriations Act of 2021 (“COVID IV”), a $2.3 trillion spending bill that combines a $1.4 trillion omnibus spending bill for federal fiscal year 2021 with $900 billion in stimulus relief for the COVID-19 pandemic was signed into law. As part of COVID IV, the PTC was extended for an additional year, allowing for a 60% credit for projects that start construction by the end of 2021. In order to benefit from the PTC, qualifying projects must either be completed within four years from their start of construction, or the developer must demonstrate that its projects are in continuous construction between start of construction and completion. As a result of COVID IV, the PTC will subsidize wind projects commenced as late as 2021 and completed by 2025, or later if continuous construction can be demonstrated. Included in COVID IV is the addition of a new 30% investment tax credit (“ITC”) created for offshore wind projects that start construction by the end of 2025. The provision will retroactively apply to projects that started production in 2016.
On August 16, 2022, the Inflation Reduction Act (“IRA”) was enacted to reduce inflation and promote clean energy in the United States. The IRA modifies and extends the PTC until the later of 2032 or when greenhouse gas emissions have been reduced by 75% compared to 2022. It provides for tax credits up to a maximum of 30%, adjusted for inflation annually, for electricity generated from qualified renewable energy sources where taxpayers meet prevailing wage standards and employ a sufficient proportion of qualified apprentices from registered apprenticeship programs. It also provides a bonus credit for qualifying clean energy production in energy communities.
The IRA also includes advanced manufacturing tax credits for manufacturers of eligible components, including wind and solar components (“45X credits”). Manufacturers qualify for the 45X credits based on the electricity output for each component produced and sold in the US starting in 2023 through 2032. The credit amount varies based on the eligible component, which includes solar components, wind energy components, inverters, qualifying battery components, and critical minerals. Tower manufacturers are eligible for credits of $0.03 per watt for applicable components produced. Manufacturers can apply to the Internal Revenue Service for cash refunds of the 45X credits for up to five years. After the first five years, the 45X credits are transferable and can be sold to third parties for cash. We are waiting for the Internal Revenue Service and the U.S. Treasury Department to provide implementation guidance for the legislation.
Investment in Infrastructure
In November 2021, the federal Infrastructure Investment and Jobs Act (“IIJA”) was signed into law. The IIJA provides for $548 billion in new infrastructure spending over the next five years and $650 billion in previously allocated funds. The IIJA allocated $62 billion to the Department of Energy for various projects focused on clean energy resources and expanding renewable energy. However the timing of the award of projects funded by the IIJA is uncertain thus the impact on our business is uncertain.
Occupational Safety and Health Administration
Our operations are subject to regulation of health and safety matters by the U.S. Occupational Safety and Health Administration. We believe that we take appropriate precautions to protect our employees and third parties from workplace injuries and harmful exposure to materials handled and managed at our facilities. However, claims asserted in the future against the Company for work-related injury or illnesses could increase our costs.
Environmental
Our operations are subject to numerous federal, state and local environmental laws and regulations. Although it is our objective to maintain compliance with these laws and regulations, it may not be possible to quantify with certainty the potential impact of actions regardinginvolving environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities.
BACKLOG
We sell our towers under either supply agreements or individual purchase orders (“POs”), depending on the size and duration of the purchase commitment. Under the supply agreements, we typically receive a purchase commitment for towers to be delivered in future fiscal quarters, then receive POs on a periodic basis depending upon the customer’s forecast of production volume requirements within the contract terms. For our Gearing and Process SystemsIndustrial Solutions segments, sales are generally based on individual POs. As of December 31, 2017,2022, the dollar amount of our backlog believed to be firm under our supply agreements and POs awarded was approximately $138 $297million. This represents a 27% decrease 179% increasefrom the backlog at December 31, 2016, which2021. Backlog as of December 31, 2022 and 2021 is due to the receiptnet of a three-year tower framework agreementrevenue recognized over time as described in mid-2016, against which we are still delivering. The reduction in tower backlog has been partially offset by higher gearing orders due to the rebound in the O&G market, and the additionNote 2, “Revenues” of Red Wolf backlog pursuant to the February 2017 acquisition.our consolidated financial statements.
SEASONALITY
The majority of our business is not affected by seasonality.
EMPLOYEES
We had 399499 U.S.-based employees at December 31, 2017,2022, of which 329451 were in manufacturing related functions and 7048 were in administrative functions. As of December 31, 2017,2022, approximately 24%19% of our employees were covered by collective bargaining agreements with local unions in our Cicero, Illinois and Neville Island, Pennsylvania locations. We anticipate that the collective bargaining agreements with our union members will be renewed through contract renegotiation near the contract expiration dates, although there can be no assurance that any such agreements will be concluded.The three-year collective bargaining agreement with the Neville Island union was renegotiated in November 2017,2022 and is expected to remain in effect through October 2022. The2026.A four-year collective bargaining agreement within regards to the Cicero, union expiresIllinois facility was negotiated in February 2018; the parties are currently negotiating a new collective bargaining agreement.2022 and is expected to remain in effect through February 2026. We believe that our relationship with our employees is generally positive. The table below summarizes our employees as of December 31, 2022:
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Number of Employees As of | ||||
Segment | December 31, 2022 | |||
Heavy Fabrications | 309 | |||
Gearing | 134 | |||
Industrial Solutions | 42 | |||
Corporate | 14 | |||
Total | 499 |
RAW MATERIALS
The primary raw material used in the construction of wind towersheavy fabrication and gearing products is steel in the form of plate, bar stock, forgings orand castings. The market for tower steel and internal packages has become increasingly globalized. Although we are generally responsible for procurement of the raw materials, our global tower customers often negotiate the prices and terms for steel purchases, and, through a “directed buy”, we purchase under these agreements. We then pass the steelraw material cost through to our end customer plus a conversion margin.
Outside of these directed buys, we operate a multiple supplier sourcing strategy and source our raw materials through various suppliers located throughout the U.S. and abroad. We generally do not have long‑long term supply agreements with our raw materialsmaterial suppliers, and closely match terms with those of our customers to limit our exposure to commodity price fluctuations. We believe that we will be able to obtain an adequate supply of steel and other raw materials to meet our manufacturing requirements, although from time to time we have faced shortages of specific grades of steel. Additionally, due to the globalization of the supply chain for tower steel prompted by the increasing use of directed buys, we faced supply disruptions during 2015 associated with the West Coast port labor slowdowns. Such shortages have periodically limited our ability to meet customer demand and caused manufacturing inefficiencies. We have made modifications to our supply chain management practices to deal more effectively with potential disruptions arising from these purchasing practices.
Although we have been affected by global supply chain issues that are at least partially a result of the COVID-19 pandemic, we believe that we will be able to obtain an adequate supply of steel and other raw materials in 2023 to meet our manufacturing requirements. From time to time we have faced shortages of specific grades of steel, internal packages and delays associated with other materials from foreign sources including shortages and delays resulting from the impact of the COVID-19 pandemic.
QUALITY CONTROL
We have a long‑standinglong-standing focus on processes for ensuring the manufacture of high‑qualityhigh-quality products. To achieve high standards of production and operational quality, we implement strict and extensive quality control and inspections throughout our production processes. We maintain internal quality controls over all core manufacturing processes and carry out quality assurance inspections at the completion of each major manufacturing step to ensure the quality of our products. The manufacturing process at our Gearing segment, for example, involves transforming forged steel into precision gears through cutting, heat treating, testing and finishing. We inspect and test raw materials before they enter the assembly process, re‑testretest the raw materials after rough machining, test the functioning of gear teeth and cores after thermal treatment and accuracy test final outputs for compliance with product specifications. We believe our investment in industry‑industry leading heat treatment, high precision machining, specialized grinding technologies and cutting‑edgecutting-edge welding has contributed to our high product reliability and the consistent performance of our products under varying operating conditions. Our Gearing segment is ISO 9001:2008 certified. Our tower manufacturing plants in Manitowoc, Wisconsin and Abilene, TexasAll of our core operating facilities are ISO 9001:2010 certified. Our global NGT manufacturing plant in Sanford, North Carolina is ISO 9001:2015 certified.
CUSTOMERS
INFORMATION SYSTEMS
We manufacture products for a varietyutilize standardized information technology systems across all areas of customersquoting and estimating, enterprise resource planning, materials resource planning, capacity planning and accounting, project execution and financial controls. We provide information technology oversight and support from our corporate headquarters in Cicero, IL. The operational information systems we employ throughout the wind energy, O&G, miningCompany are industry-specific applications that in some cases have been internally developed or modified by the vendor and other infrastructure industries. The majority ofimproved to fit our wind energy industry customer base consists of wind turbine manufacturers who supply wind farm operatorsoperations. Our enterprise resource planning software is integrated with our operational information systems wherever possible to deliver relevant and wind farm developersreal-time operational data. We believe our information systems provide our people with completed wind turbines. In the other industrial sectors, we selltools to execute their individual job function and achieve our products through our trained sales force or through manufacturers’ representatives to a wide variety of customers. The wind turbine market is very concentrated. According to American Wind Energy Association 2017 industry data, the top four wind turbine manufacturers constituted approximately 99% of the U.S. market. As a result, although we have historically produced towers for most of these global wind turbine manufacturers, in any given year a limited number of customers have accounted for the majority of our revenues. Sales to Siemens Gamesa Renewable Energy (“SGRE”), a company formed in early 2017 through the merger of Siemens and Gamesa’s global wind energy businesses, represented greater than 10% of our consolidated revenues for the year ended December 31, 2017 and sales to SGREand General Electric each represented greater than 10% of our consolidated revenues for the year ended December 31, 2016. The loss of one of these customers could have a material adverse effect on our business. As a result, we are seeking to diversify our customer base.strategic initiatives.
WORKING CAPITAL
Our primary customers are wind turbine manufacturers and various other
We sell to a broad range of industrial customers. In general, we produce to order rather than to stock. For wind towers, our primary business,largest product line, the industry has historically used customized contracts with varying terms and conditions between suppliers and customers, depending on the specific objectives of each party. As such, we produce to order rather than to stock. Our practices mirror this historical industry practice of negotiating agreements on a case‑by‑casecase- by-case basis. As a result, working capital needs, including levels of accounts receivable (“A/R”), customer depositsaccounts payable (“A/P”), and inventory, can vary significantly from quarter to quarter based on the contractual terms associated with each quarter’s sales, such as whether and when we are required to purchase and supply steel pursuant to such sales.meet our contractual obligations. Customer deposits can vary significantly from quarter to quarter based on customer mix, contractual terms associated with each quarter’s sales and the timing impacts associated with customers placing orders for future production. In recent years, our larger customers have increasingly used supplier financing programs, whereby a third-party lender advances customer payments to us net of an interest charge. The combination of customer deposits and supplier financing programs arrangements may significantly reduce our working capital requirements.
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In analyzing our liquidity, we focus onan important short-term metric is our use of operating working capital (“OWC”) in relationshiprelation to revenue. OWC is comprised of A/R and inventories, net of accounts payable (“A/P”)P and customer deposits. Our OWC at December 31, 20172022 was $11,376$475, or 16%0.3% of trailing three months of sales annualized. This is an increase of $12,215 fromannualized, compared to December 31, 2016,2021, when OWC was ($839),$18,635, or (.4%)18% of trailing three months of sales annualized. The increasedecrease in OWC was driven primarily by reducedthe timing and level of customer deposits due to lower production levels in our Towers and Heavy Fabrications segment in late 2017.received for future scheduled production.
CORPORATE INFORMATION
Our principal executive office is located at 3240 South Central Avenue, Cicero, IL 60804. Our phone number is (708) 780‑4800780-4800 and our website address is www.bwen.com.
OTHER INFORMATION
On our website at www.bwen.com, we make available under the “Investors” menu selection, free of charge, our Annual Reports on Form 10‑K,10-K, Quarterly Reports on Form 10‑Q,10-Q, Current Reports on Form 8‑8 K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). Materials that we file or furnish to the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1‑800‑SEC‑0330. Also, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.
RISKS RELATED TO OUR INDUSTRIES
Our financial and operating performance is subject to certain factors out of our control, including the state of the wind energy market in North America.
As a supplier of products to wind turbine manufacturers and owners and operators of wind energy generation facilities, our
Our results of operations (like those of our customers) are subject to general economic conditions, and specifically to the state of the wind energy market. In addition to the state and federal government policies supporting renewable energy described above,below, the growth and development of the larger wind energy market in North America is subject to a number of factors, including, among other things:
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● | public perception and localized community responses to wind energy |
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In addition, while some of the factors listed above may only affect individual wind energy project developments or portions of the market, in the aggregate they may have a significant effect on the successful development of the wind energy market as a whole, and thus affect our operating and financial results.
The U.S. wind energy industry is significantly impacted by tax and other economic incentives and political and governmental policies. A significant change in these incentives and policies could significantly impact our results of operations and growth.
We supply products to wind turbine manufacturers and owners and operators of wind energy generation facilities. The U.S. wind energy industry is significantly impacted by federal tax incentives and state Renewable Portfolio Standards (“RPS’s”). Despite recent reductions in the cost of wind energy, due to variability in wind quality and consistency, and other regional differences, wind energy may not be economically viable in certain parts of the country absent such incentives. These programs have provided material incentives to develop wind energy generation facilities and thereby impact the demand for our products. The increased demand for our products that generally results from the credits and incentives could be impacted by the expiration or curtailment of these programs.
One such federal government program, the PTC, provides economic incentives to the owners of wind energy facilities in the form of a tax credit. The PTC has been extended several times since its initial introduction in 1992. The FY16 Omnibus Appropriations Bill, passed on December 18, 2015, included a five-year extension and phase-down of the PTC, as well as providing the option to elect the ITC for wind energy projects. As a result, the PTC has been extended at full value for projects commenced in 2015 and 2016, and will continue at 80% of full value for projects commenced in 2017, 60% for projects commended in 2018, and 40% for projects commenced in 2019. Similarly, for the ITC election, projects that started construction in 2015 and 2016 are eligible for a full 30% ITC, and projects that start construction in 2017, 2018 and 2019 are eligible for an ITC of 24%, 18% and 12%, respectively. As before, the rules allow wind energy projects to qualify so long as construction is started before the end of the respective period.
State RPSs generally require or encourage state‑regulated electric utilities to supply a certain proportion of electricity from renewable energy sources or to devote a certain portion of their plant capacity to renewable energy generation. Typically, utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. Under many state standards, these renewable energy credits can be unbundled from their associated energy and traded in a market system, allowing generators with insufficient credits to meet their applicable state mandate. These standards have spurred significant growth in the wind energy industry and a corresponding increase in the demand for our products. Currently, the majority of states have RPS’s in place and certain states have voluntary utility commitments to supply a specific percentage of their electricity from renewable sources. The enactment of RPS’s in additional states or any changes to existing RPS’s (including changes due to the failure to extend or renew the federal incentives described above), or the enactment of a federal RPS or imposition of other greenhouse gas regulations, may impact the demand for our products. We cannot assure that government support for renewable energy will continue. The elimination of, or reduction in, state or federal government policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance and future development efforts.
We are substantially dependent on a few significant customers.
Historically, the majority of our revenues are highly concentrated with a limited number of customers. In 2017, one customer, SGRE, accounted for more than 10% of our consolidated revenues, and our five largest customers accounted for 85% of our consolidated revenues. Certain of our customers periodically have expressed their intent to scale back, delay or restructure existing customer agreements, which has led to reduced revenues from these customers. It is possible that this may occur again in the future. As a result, our operating profits and gross margins have historically been negatively affected by significant variability in production levels, which has created production volume inefficiencies in our operations and cost structures.
Our customers may be significantly affected by disruptions and volatility in the economy and in the wind energy market.
Market disruptions and regular market volatility, including decreases in oil and commodity prices, may adversely impact our customers’ ability to pay amounts due to us and could cause related increases in our working capital or borrowing needs. In addition, our customers have in the past attempted and may attempt in the future to renegotiate the terms of contracts or reduce the size of orders with us as a result of disruptions and volatility in the markets. We cannot predict with certainty the amount of our backlog that we will ultimately ship to our customers.
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Market disruptions and regular market volatility may also result in an increased likelihood of our customers asserting warranty or remediation claims in connection with our products that they would not ordinarily assert in a more stable economic environment. In the event of such a claim, we may incur costs if we decide to compensate the affected customer or to engage in litigation with the affected customer regarding the claim. We maintain product liability insurance, but there can be no guarantee that such insurance will be available or adequate to protect against such claims. A successful claim against us could have a material adverse effect on our business.
Consolidation among wind turbine manufacturers could increase our customer concentration and/or disrupt our supply chain relationships.
Wind turbine manufacturers are among our primary customers. There has been consolidation among these manufacturers, and more consolidation may occur in the future. For example, both Siemens Energy, Inc. and Gamesa Wind US, LLC, were customers for our tower business until their business combination in early 2017, at which time SGRE became our largest customer.they merged into SGRE. Customer consolidation may result in pricing pressures, to which we are subject, leading to downward pressure on our margins and profits, and may also disrupt our supply chain relationships.
We may have difficulty maintaining our current financing arrangements or obtaining additional financing when needed or on acceptable terms, and there can be no assurance that our operations will generate cash flows in an amount sufficient to enable us to pay our indebtedness.
We rely on banks and capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations or asset sales. We have experienced operating losses for most periods during which we have operated, and our committed sources of liquidity may be inadequate to satisfy our operational needs. There can be no assurances that even if we were to achieve in part any or all of our strategic objectives that we would be successful in improving profitability. If we are not able to access capital at competitive rates, the ability to implement our business plans may be adversely affected. In the absence of access to capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations at times when the prices for such assets or operations are depressed. In such event, we may not be able to consummate those dispositions. Furthermore, the proceeds of any such dispositions may not be adequate to meet our debt service obligations when due.
Additionally, our ability to comply with the restrictive covenants contained in our debt instruments, to make scheduled payments on our existing or future debt obligations, and to fund our operations will depend on our future financial and operating performance. There can be no assurances that our operations will generate sufficient cash flows to enable us to maintain compliance with the restrictive covenants contained in our debt instruments, pay our remaining indebtedness or to fund our other liquidity needs. If we cannot make scheduled payments on our debt, we will be in default and, as a result, among other things, our debt holders could declare all outstanding principal and interest to be due and payable which could force us to liquidate certain assets or alter our business operations or debt obligations. Moreover, if we are unable to obtain additional capital or if our current sources of financing including customer advances, are reduced or unavailable, our overall operations could be materially and negatively impacted. In addition, raising capital in the equity capital markets could result in limitations on our ability to use our net operating loss carryforwards.
We face competition from industry participants who may have greater resources than we do.
Our businesses are subject to risks associated with competition from new or existing industry participants who may have more resources and better access to capital. Certain of our competitors and potential competitors may have substantially greater financial resources, customer support, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than we do. Among other things, these industry participants compete with us based upon price, quality, location and available capacity. We cannot be sure that we will have the resources or expertise to compete successfully in the future. We also cannot be sure that we will be able to match cost reductions by our competitors or that we will be able to succeed in the face of current or future competition.
OPERATIONAL RISKS
We are substantially dependent on a few significant customers and the ordering levels for our products may vary based on customer needs.
Historically, the majority of our revenues are highly concentrated with a limited number of customers. Some of the markets we serve have a limited number of customers. In 2022, two customers, SGRE and GE Renewable Energy, each accounted for more than 10% of our consolidated revenues, and our five largest customers accounted for69% of our consolidated revenues. Certain of our customers have periodically expressed their intent to scale back, delay or restructure existing customer agreements, which has led to reduced revenues from these customers and periodic deviations in expected ordering levels. It is possible that this may occur again in the future. Additionally, not all of our customers make purchases every year. As a result, our operating profits and gross margins have historically been negatively affected by significant variability in production levels, which has created production volume inefficiencies in our operations and cost structures. Because of this variability, we believe that comparisons of our operating results in any particular quarterly period may not be a reliable indicator of future performance.
We face significant risks associated with uncertainties resulting from changes to policies and laws with the currentperiodic changes in the U.S. administration.administration as well as risks associated with changes in our relationship with our significant customers.
The change
Changes of administration in the U.S. federal government may affect our business in a manner that currently cannot be reliably predicted, especially given the potentially significant changes to various laws and regulations that affect us. These uncertainties may include changes in laws and policies in areas such as corporate taxation, taxation on imports of
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internationally-sourced internationally sourced products, international trade including trade treaties such as the North American Free TradeUnited States-Mexico-Canada Agreement, environmental protection and workplace safety laws, labor and employment law, immigration and health care, which individually or in the aggregate could materially and adversely affect our business, results of operations or financial condition.
Additionally, if our relationships with significant customers should change materially, it could be difficult for us to immediately and profitably replace lost sales in a market with such concentration, which could have a material adverse effect on our operating and financial results. We could be adversely impacted by decreased customer demand for our products due to (i) the impact of current or future economic conditions on our customers, (ii) our customers’ loss of market share to their competitors that do not use our products, and (iii) our loss of market share with our customers. We could lose market share with our customers to our competitors or to our customers themselves, should they decide to become more vertically integrated and produce the products that we currently provide.
In addition, even if our customers continue to do business with us, we could be adversely affected by a number of other potential developments with our customers. For example:
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The existence of government subsidies available to our competitors in certain countries may affect our ability to compete on a price basis.
In 2013, the USITC determined that wind towers from China and Vietnam were being sold in the U.S. at less than fair value. As a result of that determination, the USDOC issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam. Since that time, imports of wind towers from those countries have substantially ceased. Those orders expire in 2018, however, and there can be no assurance that they will be renewed or extended. Additionally, producers in other countries not subject to those orders may benefit from government subsidies (particularly with respect to the price of steel, the primary raw material used in the production of wind towers) which could lead to increased competition from those producers in the U.S. market, causing us to lose market share and/or reducing our margins. The possible introduction of U.S. tariffs on imported steel, if not applied to fabricated wind towers could adversely impact our cost structure and competitiveness relative to imported towers.
Our plans for growth and diversification may not be successful, and could result in poor financial performance.
We have made a strategic decision to diversify our business further into NGT power generation, O&G, mining and other industries, particularly within our gearing and Heavy Fabrications businesses and through our 2017 acquisition of Red Wolf. While we have historically participated in most of these lines of business, there is no assurance that we will be able to grow our presence in these markets at a rate sufficient to compensate for a potentially weaker wind energy market. Moreover, our participation in these markets may require additional investments in personnel, equipment and operational infrastructure. If we are unable to further penetrate these markets, our plans to diversify our operations may not be successful and our anticipated future growth may be adversely affected.
We may also grow our business through increased production levels at existing facilities and through acquisitions. Such growth will require coordinated efforts across the Company and continued enhancements to our current operating infrastructure, including management and operations personnel, systems, equipment and property. Moreover, if our efforts do not adequately predict the demand of our customers and our potential customers, our future earnings may be adversely affected.
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If our projections regarding the future market demand for our products are inaccurate, our operating results and our overall business may be adversely affected.
We have previously made significant capital investments in anticipation of rapid growth in the U.S. wind energy market. However, the growth in the U.S. wind energy market has not kept pace with our expectations when some of these capital investments were made, and there can be no assurance that the U.S. wind energy market will grow and develop in a manner consistent with our expectations, or that we will be able to fill our capacity through the further diversification of our operations. Our internal manufacturing capabilities have required significant upfront fixed costs. If market demand for our products does not increase at the pace we have anticipated and align with our manufacturing capacity, we may be unable to offset these costs and achieve economies of scale, and our operating results may continue to be adversely affected by high fixed costs, reduced margins and underutilization of capacity. In light of these considerations, we may be forced to temporarily idle existing capacity or sell to third parties manufacturing capacity that we cannot utilize in the near term, in addition to the steps that we have already taken to adjust our capacity more closely to demand. Alternatively, if we experience rapid increased demand for our products in excess of our estimates, or we reduce our manufacturing capacity, our installed capital equipment and existing workforce may be insufficient to support higher production volumes, which could adversely affect our customer relationships and overall reputation. In addition, we may not be able to expand our workforce and operations in a timely manner, procure adequate resources or locate suitable third‑party suppliers to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our business could be adversely affected. Our ability to meet such excess customer demand could also depend on our ability to raise additional capital and effectively scale our manufacturing operations.
Our growth strategies could be ineffective due to the risks of acquisitions and risks relating to integration.
Our growth strategy has included acquiring complementary businesses, such as Red Wolf, as more fully described in Note 21, “Business Combinations” in the notes to our consolidated financial statements. In regards to Red Wolf, or any other future acquisitions, we could fail to identify, finance or complete suitable acquisitions on acceptable terms and prices. Acquisitions and the related integration processes could increase a number of risks, including diversion of operations personnel, financial personnel and management’s attention, difficulties in integrating systems and operations, potential loss of key employees and customers of the acquired companies and exposure to unanticipated liabilities. The price we pay for a business may exceed the value realized and we cannot provide any assurance that we will realize the expected synergies and benefits of any acquisition, including Red Wolf. Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or after closing with regard to the timely discovery of breaches of representations or warranties, could materially harm our business. Our failure to meet the challenges involved in integrating a new business to realize the anticipated benefits of an acquisition could cause an interruption or loss of momentum in our existing activities and could adversely affect our profitability. Acquisitions also may result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial position and operating results.
Our diversification outside of the wind energy market exposes us to business risks associated with the CNG, NGT, O&G and mining industries, among others, which may slow our growth or penetration in these markets.
Although we have experience in the CNG and NGT market through the Process Systems segment, and experience in O&G and mining markets through our gearing and heavy fabrications businesses, these markets have not historically been our primary focus. In further diversifying our business to serve these markets, we face competitors who may have more resources, longer operating histories and more well‑established relationships than we do, and we may not be able to successfully or profitably generate additional business opportunities in these industries. Moreover, if we are able to successfully diversify into these markets, our businesses may be exposed to risks associated with these industries, which could adversely affect our future earnings and growth. These risks include, among other things:
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We have substantially generated net losses since our inception.
Although our business was profitable in 2016, we have experienced operating losses for all of the other years we have been in operation. We have incurred significant costs in connection with the development of our businesses, and because we have operated at low capacity utilization in certain facilities, there is no assurance that we will generate sufficient revenues to offset anticipated operating costs. Although we anticipate deriving revenues from the sale of our products, no assurance can be given that these products can be sold on a profitable basis. We cannot give any assurance that we will be able to sustain or increase profitability on a quarterly or annual basis in the future.
Current or future litigation and regulatory actions could have a material adverse impact on us.
From time to time, we are subject to litigation and other legal and regulatory proceedings relating to our business. No assurance can be given that the results of these matters will be favorable to us. An adverse resolution of lawsuits, investigations or arbitrations could have a material adverse effect on our business, financial condition and results of operations. Defending ourselves in these matters may be time‑consuming, expensive and disruptive to normal business operations and may result in significant expense and a diversion of management’s time and attention from the operation of our business, which could impede our ability to achieve our business objectives. Additionally, any amount that we may be required to pay to satisfy a judgment or settlement may not be covered by insurance. Under our charter and the indemnification agreements that we have entered into with our officers, directors and certain third parties, we are required to indemnify and advance expenses to them in connection with their participation in certain proceedings. There can be no assurance that any of these payments will not be material.
We may need to hire additional qualified personnel, including management personnel, and the loss of our key personnel could adversely affect our business.
Our future success will depend largely on the skills, efforts and motivation of our executive officers and other key personnel. Our success also depends, in large part, upon our ability to attract and retain highly qualified management and other key personnel throughout our organization. We face competition in the attraction and retention of personnel who possess the skill sets we seek. In addition, key personnel may leave us and subsequently compete against us. The loss of the services of any of our key personnel, or our failure to attract and retain other qualified and experienced personnel on acceptable terms, could have a material adverse effect on our business, results of operations or financial condition.
We rely on unionized labor, the loss of which could adversely affect our future success.
We depend on the services of unionized labor and have collective bargaining agreements with certain of our operations workforce at our Cicero, Illinois and Neville Island, Pennsylvania Gearing facilities. The loss of the services of these and other personnel, whether through terminations, attrition, labor strike or otherwise, or a material change in our collective bargaining agreements, could have a material adverse impact on us and our future profitability. In November 2017, a three-year collective bargaining agreement was ratified by the collective bargaining union in our Neville Island facility and is expected to remain in effect through October 2022. The collective bargaining agreement with the Cicero union expires in February 2018; the parties are currently negotiating a new collective bargaining agreement. As of December 31, 2017, these collective bargaining units represented approximately 24% of our workforce.
We could incur substantial costs to comply with environmental, health and safety (“EHS”) laws and regulations and to address violations of or liabilities under these requirements.
Our operations are subject to a variety of EHS laws and regulations in the jurisdictions in which we operate and sell products governing, among other things, health, safety, pollution and protection of the environment and natural resources, including the use, handling, transportation and disposal of non‑hazardous and hazardous materials and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil, product content, performance and packaging. We cannot guarantee that we have been, or will at all times be in compliance with such laws and regulations. Changes in existing EHS laws and regulations, or their application, could cause us to incur additional or unexpected costs to achieve or maintain compliance. Failure to comply with these laws and regulations, obtain the necessary permits to operate our business, or comply with the terms and conditions of such permits may subject us to a variety of administrative, civil and criminal enforcement measures, including the imposition of civil and criminal sanctions, monetary fines and penalties, remedial obligations, and the issuance of compliance requirements limiting or preventing some or all of our operations. The assertion of claims relating to regulatory compliance, on or off‑site contamination, natural resource damage, the discovery of previously unknown environmental liabilities, the imposition of criminal or civil fines or penalties and/or other sanctions, or the obligation to undertake investigation, remediation or monitoring activities
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could result in potentially significant costs and expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations. Under certain circumstances, violation of such EHS laws and regulations could result in us being disqualified from eligibility to receive federal government contracts or subcontracts under the federal government’s debarment and suspension system.
We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of currently and formerly owned, leased or operated properties, or properties to which hazardous substances or wastes were sent by current or former operators at our current or former facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities. The presence of contamination from hazardous substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing. We also could be held liable under third‑party claims for property damage, natural resource damage or personal injury and for penalties and other damages under such environmental laws and regulations, which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to comply with regulatory requirements is critical to our future success, and there can be no guarantee that our businesses are in full compliance with all such requirements.
As a manufacturer and distributor of wind and other energy industry products we are subject to the requirements of federal, state, local and foreign regulatory authorities. In addition, we are subject to a number of industry standard‑setting authorities, such as the American Gear Manufacturers Association and the American Welding Society. Changes in the standards and requirements imposed by such authorities could have a material adverse effect on us. In the event we are unable to meet any such standards when adopted, our businesses could be adversely affected. We may not be able to obtain all regulatory approvals, licenses and permits that may be required in the future, or any necessary modifications to existing regulatory approvals, licenses and permits, or maintain all required regulatory approvals, licenses and permits. There can be no guarantee that our businesses are fully compliant with such standards and requirements.
We may be unable to keep pace with rapidly changing technology in wind turbine and other industrial component manufacturing.
The global market for wind turbines, as well as for our other manufactured industrial components, is rapidly evolving technologically. Our component manufacturing equipment and technology may not be suited for future generations of products being developed by wind turbine companies. For example, some wind turbine manufacturers are using wind turbine towers made partially or fully from concrete instead of steel. Other wind turbine designs have reduced the use of gearing or eliminated the gearbox entirely through the use of direct or compact drive technologies. To maintain a successful business in our field, we must keep pace with technological developments and the changing standards of our customers and potential customers and meet their constantly evolving demands. If we fail to adequately respond to the technological changes in our industry, or are not suited to provide components for new types of wind turbines, our business, financial condition and operating results may be adversely affected.
Disruptions in the supply of parts and raw materials, or changes in supplier relations, may negatively impact our operating results.
We are dependent upon the supply of certain raw materials used in our production process, and these raw materials are exposed to price fluctuations on the open market. Raw material costs for materials such as steel, our primary raw material, have fluctuated significantly and may continue to fluctuate. To reduce price risk caused by market fluctuations, we have generally tried to match raw material purchases to our sales contracts or incorporated price adjustment clauses in our contracts. However, limitations on availability of raw materials or increases in the cost of raw materials (including steel), energy, transportation and other necessary services may impact our operating results if our manufacturing businesses are not able to fully pass on the costs associated with such increases to their respective customers. Alternatively, we will not realize material improvements from declinesany decline in steel prices as the terms of our contracts generally require that we pass these cost savings through to our customers. In addition, we may encounter supplier constraints, be unable to maintain favorable supplier arrangements and relations or be affected by disruptions in the supply chain caused by events such as natural disasters, pandemics, shipping delays, power outages and labor strikes. Additionally, our supply chain has become more global in nature and, thus, more complex from a shipping and logistics perspective. In the event of limitations on availability of raw
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materials or significant changes in the cost of raw materials, particularly steel, our margins and profitability could be negatively impacted.
We rely on unionized labor, the loss of which could adversely affect our future success.
We depend on the services of unionized labor and have collective bargaining agreements with certain of our operations workforce at our Cicero, Illinois and Neville Island, Pennsylvania Gearing facilities. The loss of the services of these and other personnel, whether through terminations, attrition, labor strike or otherwise, or a material change in our collective bargaining agreements, including a significant increase in labor costs, could have a material adverse impact on us and our future profitability. In November 2022, a four-year collective bargaining agreement was ratified by the collective bargaining union in our Neville Island facility and will remain in effect through October 2026. A four-year collective bargaining agreement in regard to the Cicero, Illinois facility was negotiated in February 2022, and is expected to remain in effect through February 2026. Any failure to negotiate and conclude a new collective bargaining agreement with a union when the applicable agreement expires could result in strikes, boycotts, or other labor disruptions. As of December 31, 2022, these collective bargaining units represented approximately 19% of our workforce.
Our ability to hire and retain qualified personnel at competitive cost could adversely affect our business.
Many of the products we sell, and related services that we provide require that we have skilled labor in our manufacturing facilities. The availability of labor in the markets in which we operate has declined in recent years and competition for such labor has increased, especially under the economic crises experienced throughout and following the COVID-19 pandemic. A significant increase in wages paid by competitors, both within and outside the energy industry, for such work force could result in insufficient availability of workers or increase our labor costs, or both. In the event prevailing wage rates continue to increase in the markets in which we operate, we may be required to concurrently increase the wages paid to our employees to maintain the quality of our workforce and customer service. If the supply of skilled labor is constrained or our costs of attracting and maintaining a workforce increase, our profit margins could decrease, and our growth potential and brand image could be impaired.
We may be unable to keep pace with rapidly changing technology in wind turbine and other industrial component manufacturing.
The global markets for wind turbines and our other manufactured industrial components are rapidly evolving technologically. Our component manufacturing equipment and technology may not be suited for future generations of products being developed by wind turbine companies. As turbines grow in size, particularly to support the development of offshore windfarms, tower manufacturing becomes more complicated and may require investments in new manufacturing equipment. For example, some wind turbine manufacturers are using wind turbine towers made partially or wholly from concrete instead of steel. To maintain a successful business in our field, we must keep pace with technological developments and the changing standards of our customers and potential customers and meet their constantly evolving demands. If we fail to adequately respond to the technological changes in our industry, make the necessary capital investments or are not suited to provide components for new types of wind turbines, our business, financial condition and operating results may be adversely affected.
If our estimates for warranty expenses differ materially from actual claims made, or if we are unable to reasonably estimate future warranty expense for our products, our business and financial results could be adversely affected.
We provide warranty terms generally ranging between one and five years to our customers depending upon the specific product and terms of the customer agreement. We reserve for warranty claims based on prior experience and estimates made by management based upon a percentage of our sales revenues related to such products. From time to time, customers have submitted warranty claims to us. However, we have a limited history on which to base our warranty estimates for certain of our manufactured products. Our assumptions could materially differ from the actual performance of our products in the future and could exceed the levels against which we have reserved. In some instances, our customers have interpreted the scope and coverage of certain of our warranty provisions differently from our interpretation of such provisions. The expenses associated with remediation activities in the wind energy industry can be substantial, and if we are required to pay such costs in connection with a customer’s warranty claim, we could be subject to additional unplanned cash expenditures. If our estimates prove materially incorrect, or if we are required to cover remediation expenses in addition to our regular warranty coverage, we could be required to incur additional expenses and could face a material unplanned cash expenditure, which could adversely affect our business, financial condition and results of operations. Market disruptions and volatility may result in an increased likelihood of our customers asserting warranty or remediation claims in connection with our products that they would not ordinarily assert in a more stable economic environment. In the event of such a claim, we may incur costs if we decide to compensate the affected customer or to engage in litigation with the affected customer regarding the claim. We maintain product liability insurance, but there can be no guarantee that such insurance will be available or adequate to protect against such claims. A successful claim against us could have a material adverse effect on our business.
Because our industry is capital intensive and we have significant fixed and semi-fixed costs, our profitability is sensitive to changes in volume.
The property, plants and equipment needed to manufacture products for our customers and provide our processes and solutions can be very expensive. We must spend a substantial amount of capital to purchase and maintain such property, plant and equipment. Although we believe our current cash balance, along with our projected internal cash flows and available financing sources, will provide sufficient cash to support our currently anticipated operating and capital needs, if we are unable to generate sufficient cash to purchase and maintain the property, plant and equipment necessary to operate our business, we may be required to reduce or delay planned capital expenditures or to incur additional indebtedness.
The COVID-19 pandemic has had, and may continue to have, adverse effects on our operations.
In prior periods, we experienced adverse impacts from the COVID-19 pandemic including a decline in order activity levels within the Gearing and Heavy Fabrications segments and customers’ postponement of scheduled purchases and project timing partially offset by the continued operation of our facilities as essential businesses in light of the customers and markets served. We continue to incur manufacturing inefficiencies associated with severe supply chain disruptions and realized employee staffing constraints due to the continued spread of the COVID-19 pandemic.
Although availability of vaccines and reopening of state and local economies have improved the outlook for recovery from the impact of the COVID-19 pandemic, due to the ongoing global pandemic, including emerging variants, we may again experience weaker customer demand, requests for extended payment terms, customer bankruptcies, additional supply chain disruption, more employee staffing constraints and difficulties, government restrictions or other factors that could negatively impact us and our business, operations and financial results. In addition, a possible recession or market correction resulting from the spread of COVID-19 or otherwise could materially affect our business and the value of our stock.
The impacts and potential impacts of COVID-19 that could directly or indirectly materially affect our business also include, but are not limited to, effectiveness of the vaccines against the evolving variants, additional widespread resurgences in COVID-19 infections, and evolving safety protocols such as requirements for proof of vaccination or regular testing in certain of our markets. As we cannot predict the duration or scope of the pandemic or its impact on economic and financial markets, any negative impact to our results cannot be reasonably estimated, but it could be material.
Cybersecurity incidents could disrupt our business and result in the compromise of confidential information.
Our business is at risk from and may be impacted by information security incidents, including attempts to gain unauthorized access to our confidential data, ransomware, malware, phishing emails, and other electronic security events. Such incidents can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. They can also result from internal compromises, such as human error, or malicious acts. While we seek to employ measures to prevent, detect, and mitigate these threats, there is no guarantee such efforts will be successful in preventing a cyber event. Cybersecurity incidents could disrupt our business and compromise confidential information belonging to us and third parties.
Recent increases in inflation and interest rates in the United States and elsewhere could adversely affect our business.
We are exposed to fluctuations in inflation and interest rates, which could negatively affect our business, financial condition and results of operations. The United States and other jurisdictions have recently experienced high levels of inflation. If the inflation rate continues to increase, it will likely affect our expenses, including, but not limited to, employee compensation and labor expenses and increased costs for supplies, and we may not be successful in offsetting such cost increases. In addition, historically we have carried a significant amount of variable rate debt which is subject to fluctuations in interest rates. Recent increases in interest rates will result in increased interest expense to the extent we cannot limit our debt balances.
RISKS RELATED TO OUR CORPORATE STRATEGY
Our plans for growth and diversification may not be successful, and could result in poor financial performance.
We continue to seek to strategically diversify and grow the business to improve operational efficiency and meet customer demand. Our diversification efforts into the natural gas turbine power generation, O&G, mining and other industries may require additional investments in personnel, equipment and operational infrastructure. Moreover, although we have historically participated in most of these lines of business, there is no assurance that we will be able to grow our presence in these markets at a rate sufficient to compensate for a potentially weaker wind energy market. If we are unable to produce, maintainfurther penetrate these markets, our plans to diversify our operations may not be successful and disseminate relevant and/or reliable dataour anticipated future growth may be adversely affected.
Our growth efforts through increased production levels at existing facilities, acquisitions and information pertainingcontinuous improvement activities such as the proper coordination and integration of the supply chain, the consistent use of systems with respect to production activities, the Advanced Product Quality Processes (APQP) to support the introduction of new products, and the hiring of continuous improvement experts to optimize our production processes, will require coordinated efforts across the Company and continued enhancements to our current operating infrastructure. If the cost of making these changes increases or if our efforts are unsuccessful, the Company may not realize anticipated benefits and our future earnings may be adversely affected.
Our diversification outside of the wind energy market exposes us to business risks associated with the gas turbine, O&G, and mining industries, among others, which may slow our growth or penetration in an efficient, cost-effective, securethese markets.
Although we have experience in the gas turbine, O&G and well-controlled fashion and avoid security breaches affectingmining industry markets, these markets have not historically been our information technology systems, such inabilityprimary focus. In further diversifying our business to serve these markets, we face competitors who may have significant negative impacts onmore resources, longer operating histories and more well-established relationships than we do, and we may not be able to successfully or profitably generate additional business opportunities in these industries. Moreover, if we are able to successfully diversify into these markets, our confidentiality obligations, and proprietary needs and therefore on our future operations, profitability and competitive position.
Management relies on information technology infrastructure and architecture, including hardware, network, software, people and processes,businesses may be exposed to provide useful and confidential information to conduct our business in the ordinary course, including correspondence and commercial data and information interchangerisks associated with customers, suppliers, consultants, advisors and governmental agencies, and to support assessments and conclusions about future plans and initiatives pertaining to market demands, operating performance and competitive positioning. In addition, any material failure, interruption of service, compromised data security or cybersecurity threatthese industries, which could adversely affect our relationsfuture earnings and growth. These risks include, among other things:
● | Variability in the prices and relative demand for oil, gas, minerals and other commodities; |
● | Changes in domestic and global political and economic conditions affecting the O&G and mining industries; |
● | Changes in technology; |
● | Changes in the price and availability of alternative fuels and energy sources and changes in energy consumption or supply; and |
● | Changes in federal, state and local regulations, including, among other regulations, relating to hydraulic fracturing and greenhouse gas emissions. |
If our projections regarding the future market demand for our products are inaccurate, our operating results and our overall business may be adversely affected.
We have previously made significant capital investments in anticipation of rapid growth in the U.S. wind energy market. However, the growth in the U.S. wind energy market has not kept pace with our expectations when some of these capital investments were made, and there can be no assurance that the U.S. wind energy market will grow and develop in a manner consistent with our expectations, or that we will be able to fill our capacity through the further diversification of our operations. Our internal manufacturing capabilities have required significant upfront capital costs. If market demand for our products does not increase at the pace we have anticipated and align with our manufacturing capacity, we may be unable to offset these costs and achieve economies of scale, and our operating results may continue to be adversely affected by high fixed costs, reduced margins and underutilization of capacity which may prevent us from achieving or maintaining profitability. In light of these considerations, we may be forced to reduce our labor force and production to minimum levels, as was done at certain operating locations in the past, temporarily idle existing capacity or sell to third parties manufacturing capacity that we cannot utilize in the near term, in addition to the steps that we have already taken to adjust our capacity more closely to demand. Alternatively, if we experience rapid increased demand for our products in excess of our estimates, or we reduce our manufacturing capacity, our installed capital equipment and existing workforce may be insufficient to support higher production volumes, which could adversely affect our customer relationships and overall reputation. In addition, we may not be able to expand our workforce and operations in a timely manner, procure adequate resources or locate suitable third-party suppliers to respond effectively to changes in demand for our existing products or to the demand for new products requested by our customers, and our business could be adversely affected. Our ability to meet such excess customer demand could also depend on our ability to raise additional capital and effectively scale our manufacturing operations.
Additionally, most of our customers do not commit to long-term contracts or firm production schedules, and accordingly, we frequently experience volatile lead-times in customer orders. Additionally, customers may change production quantities or delay production with little advance notice. Therefore, we rely on and plan our production and inventory levels based on our customers’ advance orders, commitments and/or forecasts, as well as our internal assessments and forecasts of customer demand. The variations in volume and timing of sales make it difficult to schedule production and optimize utilization of manufacturing capacity. This uncertainty may require us to increase staffing and incur other expenses in order to meet an unexpected increase in customer demand, potentially placing a significant burden on our resources. An inability to respond to such changes in a timely manner may also cause customer dissatisfaction, which may negatively affect our customer relationships.
Our growth strategies could be ineffective due to the risks of acquisitions and risks relating to integration.
Our growth strategy includes acquiring complementary businesses. In regards to any other future acquisitions, we could fail to identify, finance or complete suitable acquisitions on acceptable terms and prices. Acquisitions and the related integration processes could increase a number of risks, including diversion of operations personnel, financial personnel and management’s attention, difficulties in integrating systems and operations, potential loss of key employees and customers place usof the acquired companies and exposure to unanticipated liabilities. The price we pay for a business may exceed the value realized and we cannot provide any assurance that we will realize the expected synergies and benefits of any acquisitions. Our discovery of, or failure to discover, material issues during due diligence investigations of acquisition targets, either before closing with regard to potential risks of the acquired operations, or after closing with regard to the timely discovery of breaches of representations or warranties, could materially harm our business. Our failure to meet the challenges involved in violationintegrating a new business to realize the anticipated benefits of confidentialityan acquisition could cause an interruption or loss of momentum in our existing activities and data protection laws, rules and regulations, andcould adversely affect our profitability. Acquisitions also may result in negative impactsthe recording of goodwill and other intangible assets which are subject to potential impairments in the future that could diminish our market share, operationsreported earnings and profitability. Security breachesoperating results.
We are subject to risks associated with proxy contests and other actions of activist stockholders.
Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as governance changes, financial restructurings, increased borrowings, special dividends, stock repurchases or even sales of assets or entire companies to third parties or the activists themselves. We have received a notice dated January 18, 2023 from WM Argyle Fund, LLC (“WM Argyle”), which allegedly owned approximately 1.0% of the Company’s outstanding shares at the time of submission, purporting to nominate a slate of six candidates for election as directors at our 2023 Annual Meeting of Stockholders. The Company values input from all stockholders, including WM Argyle, and remains open to ongoing engagement with WM Argyle. However, if the Company and WM Argyle cannot reach an agreement in connection with its nomination, there will be a contested election at the Company’s 2023 Annual Meeting of Stockholders. A proxy contest or related activities on the part of activist stockholders, including, among others, WM Argyle, could adversely affect our information technologybusiness for a number of reasons, including, without limitation, the following:
● | Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of our Board of Directors (the “Board”), management and our employees; |
● | Perceived uncertainties as to our future direction may result in the loss of potential business opportunities and may make it more difficult to attract and retain qualified personnel, business partners, customers and others important to our success, any of which could negatively affect our business and our results of operations and financial condition; | |
● | Action by activist stockholders may be exploited by our competitors, cause concern to our current or potential customers and make it more difficult to attract and retain qualified personnel; |
● | A successful proxy contest could result in a change in control of our Board, and such an event could subject us to certain contractual obligations under several material agreements, including our existing 2015 EIP agreement and certain employment agreements; | |
● | If nominees advanced by activist stockholders are elected or appointed to our Board with a specific agenda, it may adversely affect our ability to effectively and timely implement our strategic plans or to realize long-term value from our assets, and this could in turn have an adverse effect on our business and on our results of operations and financial condition; and | |
● | Proxy contests may cause our stock price to experience periods of volatility. |
FINANCIAL RISKS
We have substantially generated net losses since our inception.
We have experienced operating losses since inception, except that we were profitable in 2016 and 2021. We have incurred significant costs in connection with the development of our businesses, and because we have operated at low-capacity utilization in certain facilities, there is no assurance that we will generate sufficient revenues to offset anticipated operating costs. Although we anticipate deriving revenues from the sale of our products, no assurance can be given that these products can be sold on a profitable basis. We cannot give any assurance that we will be able to sustain or increase profitability on a quarterly or annual basis in the future.
We may continue to incur significant losses in the future for a number of reasons, including other risks described in this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications, delays, and other unknown factors.
Our PPP Loans were forgiven, but we may still be subject to audit and any resulting adverse audit financings of non-compliance could result in theft, destruction, loss, misappropriationthe repayment of a portion or releaseall of confidential datathe PPP Loans and may restrict our flexibility in operating our business or intellectual propertyotherwise adversely affect our results of operations.
On April 15, 2020, we received funds under notes and related documents (“PPP Loans”) with CIBC Bank, USA under the Paycheck Protection Program (the “PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Paycheck Protection Program Flexibility Act of 2020 in response to the COVID-19 pandemic and is administered by the U.S. Small Business Administration (the “SBA”). We received total proceeds of $9,530 from the PPP Loans and made repayments of $379 on May 13, 2020. We used at least 60% of our PPP Loan proceeds to pay for payroll costs and the balance on other eligible qualifying expenses that we believe to be consistent with the PPP.
We submitted our forgiveness applications to CIBC Bank, USA in the first quarter of 2021, and during the second quarter of 2021, all PPP Loans were forgiven by the SBA. The U.S. Department of the Treasury has announced that it will conduct audits for PPP Loans that exceed $2,000 for a period of six years after forgiveness. Should we be audited or reviewed by the U.S. Department of the Treasury or the SBA, such audit or review could result in the diversion of management’s time and attention and cause us to incur significant costs. If we were to be audited and receive an adverse outcome in such an audit, we could be required to return the full amount of the PPP Loans and may potentially be subject to civil and criminal fines and penalties. If it is subsequently determined that the PPP Loans must be repaid, we may be required to use a substantial portion of our available cash and/or cash flows from operations to pay interest and principal on the PPP Loans, and any future repayment of such loans, would adversely impact our futureoperations and financial results.
Future sales
RISKS RELATED TO OWNING OUR COMMON STOCK
There is a limited trading market for our securities and the market price of our securities is subject to volatility.
Our common stock trades on the Nasdaq Capital Market. Historically, we have not had an active trading market for our common stock. The absence of an active trading market increases price volatility and reduces the liquidity of our common stock. The market price and level of trading of our common stock could be subject to wide fluctuations in response to numerous factors, many of which are beyond our control. These factors include, among other things, our limited trading volume, actual or securities convertible intoanticipated variations in our common stock may depress our stock price.
Sales of a substantial number of sharesoperating results and cash flow, the nature and content of our common stockearnings releases, announcements or events that impact our business and the general state of the securities convertible intomarket, as well as general economic, political and market conditions and other factors that may affect our common stock infuture results. In 2022, the public market, or the perception that these sales might occur, may reduce the prevailing marketclosing price of our common stock and could impairvaried from a high of $3.59per share to a low of $1.47 per share. Stockholders may have incurred substantial losses with regard to any investment in our ability to raise capital through the sale of additional equity securities and may make it more difficult for our stockholders to sell their common stock at a time and price that they deem appropriate.adversely affecting stockholder confidence.
On August 11, 2017, we filed a registration statement on Form S-3 (File No. 333-219931), which was declared effective by the SEC on October 10, 2017, to register securities that we may choose to issue in the future (the “Broadwind Form S-3”). Under the registration statement, we have the option to offer and sell up to $50,000 in the aggregate of securities in one or more offerings.
Limitations on our ability to utilize our net operating losses (“NOLs”)NOLs may negatively affect our financial results.
We may not be able to utilize all of our NOLs. For financial statement presentation, all benefits associated with the NOL carryforwards have been reserved; therefore, this potential asset is not reflected on our balance sheet. To the extent available, we will use any NOL carryforwards to reduce the U.S. corporate income tax liability associated with our operations. However, if we do not achieve sufficient profitability prior to their expiration, we will not be able to fully utilize our NOLs to offset income. Section 382 of the IRC (“Section 382”) generally imposes an annual limitation on the amount of NOL carryforwards that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. Our ability to utilize NOL carryforwards and built‑inbuilt-in losses may be limited, under Section 382 or otherwise, by our issuance of common stock or by other changes in ownership of our stock. After analyzing Section 382 in 2010, we determined that aggregate changes in our stock ownership had triggered an annual limitation of NOL carryforwards and built‑inbuilt-in losses available for utilization to $14,284 per annum. Although this event limited the amount of pre‑pre ownership
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change date NOLs and built‑built- in losses we can utilize annually, it does not preclude us from fully utilizing our current NOL carryforwards prior to their expiration. However, subsequent changes in our stock ownership could further limit our ability to use our NOL carryforwards and our income could be subject to taxation earlier than it would if we were able to use NOL carryforwards and built‑inbuilt-in losses without an annual limitation, which could result in lower profits. To address these concerns, in February 2013 we adopted a Section 382 Stockholder Rights Plan, which was subsequently approved by our stockholders and extended in 2016 and 2019 for an additional three-year periodperiods (as amended, the “Rights Plan”), designed to preserve our substantial tax assets associated with NOL carryforwards under Section 382. The Rights Plan is intended to deter any person or group from being or becoming the beneficial owner of 4.9% or more of our common stock and thereby triggering a further limitation of our available NOL carryforwards. On February 3, 2022, the Board of Directors (the “Board”) approved an amendment which included an extension of the Rights Plan for an additional three years, which was subsequently approved by our stockholders at our 2022 Annual Meeting of Stockholders. See Note 14,13, “Income Taxes” of our consolidated financial statements for further discussion of our Rights Plan. There can be no assurance that the Rights Plan will be effective in protecting our NOL carryforwards. Additionally, because the Rights Plan subjects any person that acquires 4.9% of our common stock without the Board’s permission to significant dilution, it could make it harder for a third party to acquire us without the consent of the Board. In particular, the Rights Plan may deter a third party from completing or even initiating an acquisition of the Company, which may prevent stockholders from realizing a control premium from a potential acquirer, or from otherwise maximizing stockholder value.
INTELLECTUAL PROPERTY RISKS
Any failure to protect our customers’ intellectual property that we use in the products we manufacture for them could harm our customer relationships and subject us to liability.
The products we manufacture for our customers often contain our customers’ intellectual property, including copyrights, patents, trade secrets and know-how. Our success depends, in part, on our ability to protect our customers’ intellectual property. The steps we take to protect our customers’ intellectual property may not adequately prevent its disclosure or misappropriation. If we fail to protect our customers’ intellectual property, our customer relationships could be harmed and we may experience difficulty in establishing new customer relationships. Additionally, our customers might pursue legal claims against us for any failure to protect their intellectual property, possibly resulting in harm to our reputation and our business, financial condition and operating results.
We may not be able to protect important intellectual property and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.
Our ability to compete effectively will depend, in part, on our ability to protect our proprietary system level technologies, systems designs and manufacturing processes. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be successful in doing so.
Further, our competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third-party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non infringing intellectual property.
We may need to pursue lawsuits or legal action in the future to enforce our intellectual property rights and to determine the validity and scope of the proprietary rights of others. Litigation and other proceedings, even if they are successful, are expensive to pursue and time consuming, and we could use a substantial amount of our management and financial resources in either case.
Confidentiality agreements to which we are party may be breached, and we may not have adequate remedies for any breach. Our trade secrets may also be known without breach of such agreements or may be independently developed by competitors. Our inability to maintain the proprietary nature of our technology and processes could allow our competitors to limit or eliminate any competitive advantages we may have.
LEGAL, TAX, REGULATORY AND COMPLIANCE RISKS
The U.S. wind energy industry is significantly impacted by tax and other economic incentives. A significant change in these incentives could significantly impact our results of operations and growth.
We sell towers to wind turbine manufacturers who supply wind energy generation facilities. The U.S. wind energy industry is significantly impacted by federal tax incentives and state Renewable Portfolio Standards (“RPSs”). Despite recent reductions in the cost of wind energy, due to variability in wind quality and consistency, and other regional differences, wind energy may not be economically viable in certain parts of the country absent such incentives. These programs have provided material incentives to develop wind energy generation facilities and thereby impact the demand for our products. The increased demand for our products that generally results from the credits and incentives could be impacted by the expiration or curtailment of these programs.
One such federal government program, the PTC, provides a supplemental payment based on electricity produced from each qualifying wind turbine. Legislative support for the PTC has been intermittent since its introduction in 1992, which has caused volatility in the demand for new wind energy projects. In 2015, the PTC was extended for a five-year period, with a time-based phase-out depending on the year the wind project is commenced. The phase-out schedule legislated in 2015 provided for: 100% extension of the credit for projects commenced before the end of 2016, 80% extension of the credit for projects commenced in 2017, 60% extension of the credit for projects commenced in 2018 and 40% extension of the credit for projects commenced in 2019. As part of a year-end tax extenders bill in 2019, the PTC was extended for an additional year, allowing for a 60% extension of the credit for projects commenced before the end of 2020.
On December 27, 2020, COVID IV was signed into law. As part of COVID IV, the PTC was extended for an additional year, allowing for a 60% credit for projects that start construction by the end of 2021. In order to benefit from the PTC, qualifying projects must either be completed within four years from their start of construction, or the developer must demonstrate that its projects are in continuous construction between start of construction and completion. As a result of COVID IV, the PTC will subsidize wind projects commenced as late as 2021 and completed by 2025, or later if continuous construction can be demonstrated. The PTC tax benefits are available for the first ten years of operation of a wind energy facility, and also applies to significant redevelopment of existing wind energy facilities. Included in COVID IV is the addition of a new 30% ITC created for offshore wind projects that start construction by the end of 2025. The provision will be retroactively applied to projects that started production in 2016.
On August 16, 2022, the IRA was enacted to reduce inflation and promote clean energy in the United States. The IRA modifies and extends the PTC until the later of 2032 or when greenhouse gas emissions have been reduced by 75% compared to 2022. It provides for tax credits up to a maximum of 30%, adjusted for inflation annually, for electricity generated from qualified renewable energy sources where taxpayers meet prevailing wage standards and employ a sufficient proportion of qualified apprentices from registered apprenticeship programs. It also provides a bonus credit for qualifying clean energy production in energy communities.
The IRA also includes advanced manufacturing tax credits for manufacturers of eligible components, including wind and solar components (“45X credits”). Manufacturers qualify for the 45X credits based on the electricity output for each component produced and sold in the US starting in 2023 through 2032. The credit amount varies based on the eligible component, which includes solar components, wind energy components, inverters, qualifying battery components, and critical minerals. Tower manufacturers are eligible for credits of $0.03 per watt for applicable components produced. Manufacturers can apply to the Internal Revenue Service for cash refunds of the 45X credits for up to five years. After the first five years, the 45X credits are transferable and can be sold to third parties for cash. We are waiting for the Internal Revenue Service and the U.S. Treasury Department to provide implementation guidance for the legislation.
RPSs generally require or encourage state regulated electric utilities to supply a certain proportion of electricity from renewable energy sources or to devote a certain portion of their plant capacity to renewable energy generation. Typically, utilities comply with such standards by qualifying for renewable energy credits evidencing the share of electricity that was produced from renewable sources. Under many state standards, these renewable energy credits can be unbundled from their associated energy and traded in a market system, allowing generators with insufficient credits to meet their applicable state mandate. These standards have spurred significant growth in the wind energy industry and a corresponding increase in the demand for our products. Currently, the majority of states have RPSs in place and certain states have voluntary utility commitments to supply a specific percentage of their electricity from renewable sources. The enactment of RPSs in additional states or any changes to existing RPSs (including changes due to the failure to extend or renew the federal incentives described above), or the enactment of a federal RPS or imposition of other greenhouse gas regulations, may impact the demand for our products. We cannot assure that government support for renewable energy will continue including any assurance regarding the adoption of any of the clean energy provisions of the Build Back Better agenda. The elimination of, or reduction in, state or federal government policies that support renewable energy could have a material adverse impact on our business, results of operations, financial performance and future development efforts.
Changes to trade regulation, quotas, duties or tariffs, and sanctions caused by changing U.S. and geopolitical policies, may impact our competitive position or adversely impact our margins.
Tariffs have resulted in increased prices, including with respect to certain steel products, and could adversely affect our consolidated results of operations, financial position and cash flows. These tariffs, along with any additional tariffs or trade restrictions that may be implemented by the U.S. or other countries, could result in further increased prices and a decreased available supply of steel and other imported components and inputs. We may not be able to pass price increases on to our customers and may not be able to secure adequate alternative sources of steel on a timely basis.
The existence of government subsidies available to our competitors in certain countries may affect our ability to compete on a price basis. In 2013, the USITC determined that wind towers from China and Vietnam were being sold in the U.S. at less than fair value. Imports from China and Vietnam have declined following a determination by the USITC in 2013 that wind towers from those countries were being sold in the U.S. at less than fair value. As a result of the determination, the USDOC issued antidumping and countervailing duty orders on imports of wind towers from China and an antidumping duty order on imports of towers from Vietnam. In May 2018, the U.S. Court of Appeals affirmed the decision from the U.S. Court of International Trade and at the same time excluded CS Wind Vietnam from the antidumping order. In April 2019, the USDOC extended the term of these duties for an additional five-year period. Following a renewed surge of tower imports from countries not impacted by existing tariffs, in July 2020, the USDOC issued antidumping and countervailing duty orders on imports of wind towers from Canada, Indonesia, and Vietnam and an antidumping order on imports of towers from Korea. Then in September 2020, a new trade case was brought before the USDOC and USITC, to assess whether wind towers imported from India, Malaysia, and Spain were being sold in the U.S. at less than fair value. The USDOC and USITC issued affirmative final determinations in all three antidumping (India, Malaysia, and Spain) and two countervailing duty cases (India and Malaysia). The USDOC imposed orders for two cases in August 2021 and the remainder in December 2021. Appeals of several of the USDOC determinations are currently pending at the CIT and the CAFC.
Additionally, the war in Ukraine has led to economic sanctions imposed against Russia by the U.S. and certain European nations, including a prohibition on doing business with certain Russian companies. Such sanctions may impact companies in many sectors and could lead to volatility of prices in the global energy industry. The extent and duration of the war and extent and strength of the sanctions are still developing, and the corresponding effect on the Company remains uncertain.
We could incur substantial costs to comply with environmental, health and safety (“EHS”) laws and regulations and to address violations of or liabilities under these requirements.
Our operations are subject to a variety of EHS laws and regulations in the jurisdictions in which we operate and sell products governing, among other things, health, safety, pollution and protection of the environment and natural resources, including the use, handling, transportation and disposal of non-hazardous and hazardous materials and wastes, as well as emissions and discharges into the environment, including discharges to air, surface water, groundwater and soil, product content, performance and packaging. We cannot guarantee that we have been, or will at all times be in compliance with such laws and regulations. Changes in existing EHS laws and regulations, or their application, could cause us to incur additional or unexpected costs to achieve or maintain compliance. Failure to comply with these laws and regulations, obtain the necessary permits to operate our business, or comply with the terms and conditions of such permits may subject us to a variety of administrative, civil and criminal enforcement measures, including the imposition of civil and criminal sanctions, monetary fines and penalties, remedial obligations, and the issuance of compliance requirements limiting or preventing some or all of our operations. The assertion of claims relating to regulatory compliance, on or off-site contamination, natural resource damage, the discovery of previously unknown environmental liabilities, the imposition of criminal or civil fines or penalties and/or other sanctions, or the obligation to undertake investigation, remediation or monitoring activities could result in potentially significant costs and expenditures to address contamination or resolve claims or liabilities. Such costs and expenditures could have a material adverse effect on our business, financial condition or results of operations. Under certain circumstances, violation of such EHS laws and regulations could result in us being disqualified from eligibility to receive federal government contracts or subcontracts under the federal government’s debarment and suspension system.
We also are subject to laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, such liabilities can be imposed for cleanup of currently and formerly owned, leased or operated properties, or properties to which hazardous substances or wastes were sent by current or former operators at our current or former facilities, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. Several of our facilities have a history of industrial operations, and contaminants have been detected at some of our facilities. The presence of contamination from hazardous substances or wastes could interfere with ongoing operations or adversely affect our ability to sell, lease or use our properties as collateral for financing. We also could be held liable under third-party claims for property damage, natural resource damage or personal injury and for penalties and other damages under such environmental laws and regulations, which could have a material adverse effect on our business, financial condition and results of operations. During 2022, we did not incur significant remediation costs or penalties related to environmental matters.
Our ability to comply with regulatory requirements and potential environmental, social and governance (“ESG”) regulations and trends is critical to our future success, and there can be no guarantee that our businesses are in full compliance with all such requirements.
As a manufacturer and distributor of wind and other energy industry products we are subject to the requirements of federal, state, local and foreign regulatory authorities. In addition, we are subject to a number of authorities setting industry standards, such as the American Gear Manufacturers Association and the American Welding Society. Changes in the standards and requirements imposed by such authorities could have a material adverse effect on us. In the event we are unable to meet any such standards when adopted, our businesses could be adversely affected. We may not be able to obtain all regulatory approvals, licenses and permits that may be required in the future, or any necessary modifications to existing regulatory approvals, licenses and permits, or maintain all required regulatory approvals, licenses and permits. There can be no guarantee that our businesses are fully compliant with such standards and requirements.
Additionally, other ESG-related laws, regulations, treaties, and similar initiatives and programs are being proposed, adopted and implemented throughout the world. If we were to violate or become liable under environmental or certain ESG-related laws or if our products become non-compliant with such laws or market access requirements, our customers may refuse to purchase our products, and we could incur costs or face other sanctions, such as restrictions on our products entering certain jurisdictions, fines, and/or civil or criminal sanctions. In addition to potential implementation of ESG laws, investor advocacy groups, certain institutional investors, investment funds, other market participants, stockholders, and customers have focused increasingly on the ESG practices of companies, including those associated with climate change. If our ESG practices do not meet investor or other industry stakeholder expectations and standards, which continue to evolve, our brand, reputation and employee retention may be negatively impacted based on an assessment of our ESG practices.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our corporate headquarters is located in Cicero, Illinois, a suburb located west of Chicago, Illinois. In addition, the Subsidiaries own or lease operating facilities, which are presented by operating segment as follows (information below is as of December 31, 2017)2022).
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We consider our active facilities to be in good condition and adequate for our present and future needs.
We are party to a variety of legal proceedings that arise in the ordinary course of our business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations, financial condition or cash flows. Due to the inherent uncertainty of litigation, there can be no assurance that the resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations, financial condition or cash flows. It is possible that if one or more of such matters were decided against us, the effects could be material to our results of operations in the period in which we would be required to record or adjust the related liability and could also be material to our financial condition and cash flows in the period in which we would be required to pay such liability.
We received a notice dated January 18, 2023 from WM Argyle Fund, LLC, which allegedly owned approximately 1.0% of our outstanding shares at the time of submission, purporting to nominate a slate of six candidates for election as directors at our 2023 Annual Meeting of Stockholders. We remain open to ongoing engagement with WM Argyle. However, if the Company and WM Argyle cannot reach an agreement in connection with its nomination, there will be a contested election at the Company’s 2023 Annual Meeting of Stockholders.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
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(Dollar amounts are presented in thousands, except per share data and unless otherwise stated)
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol “BWEN.” The following table sets forth the high and low bid prices of our common stock traded on the NASDAQ.
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2017 |
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First quarter |
| $ | 8.33 |
| $ | 4.02 |
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Second quarter |
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| 9.41 |
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| 4.57 |
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Third quarter |
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| 4.84 |
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| 2.98 |
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Fourth quarter |
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2016 |
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2022 | |||||||||||||||
First quarter |
| $ | 3.12 |
| $ | 1.72 |
| $ | 2.36 | $ | 1.58 | ||||
Second quarter |
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| 4.66 |
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| 2.90 |
| 2.17 | 1.52 | ||||||
Third quarter |
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| 5.48 |
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| 4.14 |
| 3.59 | 1.47 | ||||||
Fourth quarter |
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| 4.46 |
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| 4.05 |
| 2.83 | 1.57 |
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2021 | ||||||||
First quarter | $ | 11.55 | $ | 4.84 | ||||
Second quarter | 6.41 | 3.97 | ||||||
Third quarter | 4.55 | 2.46 | ||||||
Fourth quarter | 3.51 | 1.88 |
The closing price for our common stock as of February 22, 2018March 6, 2023 was $2.30.$4.65. As of February 22, 2018,March 6, 2023, there were 5349 holders of record of our common stock.
Dividends
We have never paid cash dividends on our common stock and have no current plan to do so in the foreseeable future. The declaration and payment of dividends on our common stock are subject to the discretion of our Board and are further limited by our credit agreement and other contractual agreements we may have in place from time to time. The decision of our Board to pay future dividends will depend on general business conditions, the effect of a dividend payment on our financial condition, and other factors our Board may consider relevant. The current policy of our Board is to reinvest cash generated in our operations to promote future growth and to fund potential investments.
Repurchases
There were no repurchases of our equity securities under our repurchase program made during the years ended December 31, 20172022 and 2016.2021.
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities for the years ended December 31, 20172022 or 2016.2021.
Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K for information as of December 31, 20172022 with respect to shares of our common stock that may be issued under our existing share‑basedshare-based compensation plans.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.
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[RESERVED]
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As used in this Annual Report, the terms “we,” “us,” “our,” “Broadwind,” and the “Company”“Company” refer to Broadwind Energy,, Inc., a Delaware corporation headquarteredheadquartered in Cicero, Illinois, and its subsidiaries.Subsidiaries.
(Dollar amounts are presented in thousands, except per share data and unless otherwise stated)
We booked $87,562$368,027 in net new orders in 2017, down2022, up from $275,010$159,025 in 2016. The reduction of2021. Heavy Fabrications orders increased by 215% from the prior year as demand increased for our capacity as tower customers secured production capacity through 2024 for ongoing wind turbine tower installation projects. Gearing segment orders increased 16% from the prior year primarily due to increased demand in all end markets led by industrial customers. Industrial Solutions segment orders increased by 3% in 2022 from the prior year primarily due to an increase in orders associated with new gas turbine projects. At December 31, 2022, total backlog was driven by a decrease in tower orders, driven$297,200, up 179% from $106,383 at December 31, 2021 primarily by a multi-year baseload order received in 2016, in responsedue to the December 2015 five-year extensionaforementioned increase in Heavy Fabrication segment orders.
We recognized revenue of the Production Tax Credit (“PTC”) for new wind energy development projects. We are experiencing lower orders for wind towers as customers work off inventories built to support the terms$176,759in 2022, up21% from revenue of the PTC qualification period and$145,619 in 2021. Heavy Fabrications segment revenues increased by 15% during 2022 primarily due to other market conditions. The Gearing segment realized a significant92% increase of $22,708 in ordersindustrial fabrication revenue as a result of higher recent order intake from O&Gindustrial customers and other industrial customers. Our recently formed Process Systems segment received $15,761 of ordersrevenue recognized from our PRS units in the current year.
We recognized revenue of $146,785Gearing segment revenues increased 49% during 2022 from the prior year primarily due to recent higher order intake levels from customers in 2017, down from revenue of $180,840 in 2016. A 35% reduction in Towers and Heavy Fabrications revenue wasmost end markets, particularly O&G, partially offset by a decrease in aftermarket wind revenue. Industrial Solutions segment revenue increased 16% from the addition of Red Wolf revenue associated with our 2017 acquisition and increased Gearing segment volumes. The Towers and Heavy Fabrications segment revenues decrease wasprior year primarily due to a 41% decrease in towers sold related to a slowdown in demand following early purchases by customers to take advantagethe timing of safe harbor provisions of the PTC in the early months of 2017. The revenue impact of the tower unit sales decrease was partially offset by the impact of higher steel content related to a more complex tower design and higher material costs, which are generally passed through to customers. Gearing segment revenues were up $5,358 or 26%, driven by improved order intake throughout the current year from O&G customers. Process Systems, which includes our Abilene, Texas compressed natural gas (“CNG”) and fabrication facility and our newly acquired subsidiary, Red Wolf Company, LLC (“Red Wolf”), recognized revenue of $17,390. At December 31, 2017, total backlog was $138,198, down 27% from $188,717 at December 31, 2016.aftermarket installations.
We reported a net loss of $3,641,$9,730, or $0.24$0.48 per share in 2017,2022, compared to a net income of $319$2,847 or $0.02$0.15 per share in 2016.2021. The $0.26 per share decrease in earnings was primarily due to the absence of the $9,151 benefit recognized from the PPP loan forgiveness and the $6,965 ERC benefit (described below), both of which were recognized in “Other Income (expense), net” in our consolidated statement of operations for the year ended December 31, 2021. This decrease was partially offset by the volume related increases discussed above.
On March 27, 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. As amended, the ERC was available for wages paid through September 30, 2021 and was equal to 70% of qualified wages (which included employer qualified health plan expenses) paid to employees. During each quarter of 2021, a maximum of $10,000 in Towersqualified wages for each employee was eligible for the ERC. Therefore, the maximum tax credit that could be claimed by an eligible employer in 2021 was $7,000 per employee per calendar quarter. We qualified for the ERC in the first quarter of the year because we experienced a reduction in gross receipts of more than 20% for the first quarter of 2021 compared to the first quarter of 2019, the relevant criteria for the ERC. Since we qualified for the ERC in the first quarter of 2021, we automatically qualified for the ERC in the second quarter of 2021. In the first and Heavy Fabrications segment volume.second quarters of 2021, we received ERC benefits of $3,372 and $3,593, respectively, and under analogy to IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” were recorded in “Other income (expense), net” in our consolidated statement of operations. During the third quarter of 2021 due to relatively higher revenues in 2021 as compared to the third quarter of 2019, we did not qualify for the ERC benefit. 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 our consolidated balance sheet at December 31, 2021. The $497 receivable balance was collected during January 2022.
We use our credit facility from time to time to fund temporary increases in working capital requirements and believe that our credit facility, together with the operating cash generated by our businesses, and any potential proceeds from access to the public or private debt or equity markets, isare sufficient to meet all cash obligations over the next twelve months. On December 31, 2022, we had $0 outstanding under our senior secured revolving credit facility, $7,217 outstanding under our senior secured term loan, $12,732 of cash on hand, with the ability to borrow an additional $27,351. For a further discussion of our capital resources and liquidity, including a description of recent amendments and waivers under our credit facility, please see the discussion under “Liquidity, Financial Position and Capital Resources”. in this Annual Report on Form 10-K.
COVID-19 Pandemic
18
Our facilities continued to operate as essential businesses in light of the customers and markets served. However, through December 31, 2022, we have experienced an adverse impact to our business, operations and financial results as a result of this pandemic due in part to 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.
Although the long-term effects of COVID-19 remain unknown, the availability of vaccines and reopening of state and local economies have improved the outlook for recovery from COVID-19 impacts. However, 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.
KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE
In addition to measures of financial performance presented in our consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”), we use certain other financial measures to analyze our performance. These non-GAAP financial measures primarily consist of adjusted EBITDA 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
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Net revenues | $ | 176,759 | $ | 145,619 | ||||
Net (loss) income | $ | (9,730 | ) | $ | 2,847 | |||
Adjusted EBITDA (1) | $ | 2,444 | $ | 13,209 | ||||
Capital expenditures | $ | 3,098 | $ | 1,707 | ||||
Free cash flow (2) | $ | 17,506 | $ | (2,038 | ) | |||
Operating working capital (3) | $ | 475 | $ | 18,635 | ||||
Total debt | $ | 8,311 | $ | 6,827 | ||||
Total orders | $ | 368,027 | $ | 159,025 | ||||
Backlog at end of period (4) | $ | 297,200 | $ | 106,383 | ||||
Book-to-bill (5) | 2.1 | 1.1 |
(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 business acquisitions. |
(3) | We define operating working capital as accounts receivable and inventory net of accounts payable and customer deposits. |
(4) | Our backlog at December 31, 2022 and 2021 is net of revenue recognized over time. |
(5) | We define 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:
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Net (loss) income from continuing operations | $ | (9,730 | ) | $ | 2,847 | |||
Interest expense | 3,218 | 1,129 | ||||||
Income tax provision | 35 | 25 | ||||||
Depreciation and amortization | 6,060 | 6,336 | ||||||
Share-based compensation and other stock payments | 2,861 | 2,872 | ||||||
Adjusted EBITDA | 2,444 | 13,209 | ||||||
Changes in operating working capital | 18,160 | (13,573 | ) | |||||
Capital expenditures | (3,098 | ) | (1,707 | ) | ||||
Proceeds from disposal of property and equipment | — | 33 | ||||||
Free Cash Flow | $ | 17,506 | $ | (2,038 | ) |
RESULTS OF OPERATIONS
Year Ended December 31, 20172022 Compared to Year Ended December 31, 20162021
The summary of selected financial data table below should be referenced in connection with a review of the following discussion of our results of operations for the year ended December 31, 20172022 compared to the year ended December 31, 2016.2021.
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| For the Year Ended December 31, |
| 2017 vs. 2016 |
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| 2017 |
| Revenue |
| 2016 |
| Revenue |
| $ Change |
| % Change |
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Revenues |
| $ | 146,785 |
| 100 | % | $ | 180,840 |
| 100 | % | $ | (34,055) |
| (18.8) | % |
Cost of sales |
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| 138,626 |
| 94.4 | % |
| 162,701 |
| 90.0 | % |
| (24,075) |
| (14.8) | % |
Gross profit |
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| 8,159 |
| 5.6 | % |
| 18,139 |
| 10.0 | % |
| (9,980) |
| (55.0) | % |
Operating expenses |
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Selling, general and administrative expenses |
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| 13,828 |
| 9.4 | % |
| 15,786 |
| 8.7 | % |
| (1,958) |
| (12.4) | % |
Intangible amortization |
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| 1,764 |
| 1.2 | % |
| 444 |
| 0.2 | % |
| 1,320 |
| 297.3 | % |
Total operating expenses |
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| 15,592 |
| 10.6 | % |
| 16,230 |
| 9.0 | % |
| (638) |
| (3.9) | % |
Operating (loss) income |
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| (7,433) |
| (5.1) | % |
| 1,909 |
| 1.1 | % |
| (9,342) |
| (489.4) | % |
Other expense |
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Interest expense, net |
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| (798) |
| (0.5) | % |
| (625) |
| (0.3) | % |
| (173) |
| (27.7) | % |
Other, net |
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| 3 |
| 0 | % |
| 49 |
| — | % |
| (46) |
| (93.9) | % |
Total other expense, net |
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| (795) |
| (0.5) | % |
| (576) |
| (0.3) | % |
| (219) |
| (38.0) | % |
Net (loss) income before benefit for income taxes |
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| (8,228) |
| (5.6) | % |
| 1,333 |
| 0.7 | % |
| (9,561) |
| (717.3) | % |
Benefit for income taxes |
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| (5,045) |
| (3.4) | % |
| (2) |
| — | % |
| (5,043) |
| (252,150.0) | % |
(Loss) income from continuing operations |
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| (3,183) |
| (2.2) | % |
| 1,335 |
| 0.7 | % |
| (4,518) |
| (338.4) | % |
Loss from discontinued operations |
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| (458) |
| (0.3) | % |
| (1,016) |
| (0.6) | % |
| 558 |
| 54.9 | % |
Net (loss) income |
| $ | (3,641) |
| (2.5) | % | $ | 319 |
| 0.2 | % | $ | (3,960) |
| (1,241.4) | % |
Year Ended December 31, | 2022 vs. 2021 | |||||||||||||||||||||||
% of Total | % of Total | |||||||||||||||||||||||
2022 | Revenue | 2021 | Revenue | $ Change | % Change | |||||||||||||||||||
Revenues | $ | 176,759 | 100.0 | % | $ | 145,619 | 100.0 | % | $ | 31,140 | 21.4 | % | ||||||||||||
Cost of sales | 166,049 | 93.9 | % | 140,108 | 96.2 | % | 25,941 | 18.5 | % | |||||||||||||||
Gross profit | 10,710 | 6.1 | % | 5,511 | 3.8 | % | 5,199 | 94.3 | % | |||||||||||||||
Operating expenses | ||||||||||||||||||||||||
Selling, general and administrative expenses | 16,592 | 9.4 | % | 17,372 | 11.9 | % | (780 | ) | (4.5 | )% | ||||||||||||||
Intangible amortization | 725 | 0.4 | % | 733 | 0.5 | % | (8 | ) | (1.1 | )% | ||||||||||||||
Total operating expenses | 17,317 | 9.8 | % | 18,105 | 12.4 | % | (788 | ) | (4.4 | )% | ||||||||||||||
Operating loss | (6,607 | ) | (3.7 | )% | (12,594 | ) | (8.6 | )% | 5,987 | 47.5 | % | |||||||||||||
Other income (expense), net | ||||||||||||||||||||||||
Paycheck Protection Program loan forgiveness | — | — | % | 9,151 | 6.3 | % | (9,151 | ) | (100.0 | )% | ||||||||||||||
Interest expense, net | (3,218 | ) | (1.8 | )% | (1,129 | ) | (0.8 | )% | (2,089 | ) | (185.0 | )% | ||||||||||||
Other, net | 130 | 0.1 | % | 7,444 | 5.1 | % | (7,314 | ) | (98.3 | )% | ||||||||||||||
Total other income (expense), net | (3,088 | ) | (1.7 | )% | 15,466 | 10.6 | % | (18,554 | ) | (120.0 | )% | |||||||||||||
Net (loss) income before provision for income taxes | (9,695 | ) | (5.5 | )% | 2,872 | 2.0 | % | (12,567 | ) | (437.6 | )% | |||||||||||||
Provision for income taxes | 35 | 0.0 | % | 25 | 0.0 | % | 10 | 40.0 | % | |||||||||||||||
Net (loss) income | $ | (9,730 | ) | (5.5 | )% | $ | 2,847 | 2.0 | % | $ | (12,577 | ) | (441.8 | )% |
Consolidated
Revenues decreased increasedby $34,055$31,140 during the year ended December 31, 2022 primarily due to a 92% increase in industrial fabrications product line revenue within the Heavy Fabrications segment compared to the prior year. This was primarily due to higher recent order intake from $180,840industrial customers and revenue recognized from our PRS units in the current year. Gearing segment revenue increased by 49% compared to the prior year primarily due to higher order intake in recent quarters from customers in most end markets, particularly O&G, partially offset by a decrease in aftermarket wind revenue. Industrial Solutions segment revenue increased 16% primarily due to the timing of aftermarket installations.
Gross profit improved by $5,199 during the year ended December 31, 2022 primarily due to higher sales volumes in the Gearing and the Heavy Fabrications segments, partially offset by higher material costs and ramp-up costs. As a result, our gross margin increased from 3.8% for the year ended December 31, 2016,2021, to $146,7856.1% for the year ended December 31, 2017. The decrease primarily reflects lower sales in our Towers and Heavy Fabrications segment of $56,821, partially offset by higher sales in the Gearing segment of $5,358, and the addition of sales from the acquisition of Red Wolf in February 2017. The Towers and Heavy Fabrications segment revenue decrease was due to a 41% decrease in towers sold, partially offset by the impact of higher steel content related to the mix of tower designs produced. The Gearing segment revenue increase was due primarily to the recovery of the market for O&G gearing.2022.
Gross profit decreased by $9,980, from $18,139 for the year ended December 31, 2016, to $8,159, for the year ended December 31, 2017. The decrease in gross profit was primarily attributable to the decrease in the production volumes in the Towers and Heavy Fabrications segment, partially offset by the benefit of increased production volumes in the Gearing segment and additional gross profit due to the acquisition of Red Wolf. As a result, our gross margin decreased from 10.0% for the year ended December 31, 2016, to 5.6% for the year ended December 31, 2017.
Operating expenses decreased from $16,230 during the year ended December 31, 2016, to $15,592 during the year ended December 31, 2017. Compensation costs decreased by $894 as a result of lower incentive compensation and staffing reductions primarily in response to lower tower production volumes, but were offset by $2,791 of operating and intangible amortization expenses associated with the acquisition of Red Wolf. Also impacting operating expenses in the current year was the reversal of the current portion of the Red Wolf earn-out payment of $1,394 and the release of a $727 environmental reserve due to completing remediation of a vacated gearing facility. Operating expenses as a percentage of sales increaseddecreased to 9.8% in 2022 from 9.0%12.4% in the prior-year to 10.6% in the current year2021 primarily due to lower revenues.higher revenue levels, reduced salaries and benefits and reduced legal fees.
Income from continuing operationsNet income decreased from income of $1,335$2,847 for the year ended December 31, 20162021 to a net loss of $3,183$9,730 for the year ended December 31, 2017,2022.The decrease in net income was primarily as a result of the factors described above, partly offset by a $5,060 tax benefit due to the release of a portionabsence of the valuation allowance related to$9,151 benefit recognized from the acquisitionPPP loan forgiveness and the $6,965 ERC benefit, both of Red Wolf.
Profitability decreased from net incomewhich were recognized in “Other Income (expense), net” in our consolidated statement of $319operations for the year ended December 31, 2016, to a net loss of $3,641, for the year ended December 31, 2017, primarily as a result of the factors described above, partly2021. This decrease was partially offset by a reduction in the net loss from discontinued operations due to a reduction in wind down expenses in our Services business.volume related increases discussed above.
19
Towers and Heavy Fabrications Segment
The following table summarizes the Towers and Heavy Fabrications segment operating results for the yearstwelve months ended December 31, 20172022 and 2016:2021:
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| Twelve Months Ended |
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| 2016 |
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Orders |
| $ | 34,873 |
| $ | 260,790 |
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Revenues |
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| 103,389 |
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| 160,210 |
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Operating income |
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| 2,667 |
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| 12,788 |
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Operating margin |
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| 2.6 | % |
| 8.0 | % |
The significant reduction in orders is due primarily to the absence of the $137,000 multi-year tower order received in 2016, which supports deliveries through 2019, and an inventory correction by our largest customer in the second half of 2017. Towers and
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Orders | $ | 294,097 | $ | 93,246 | ||||
Tower sections sold | 570 | 747 | ||||||
Revenues | 117,206 | 101,994 | ||||||
Operating loss | (1,044 | ) | (3,214 | ) | ||||
Operating margin | (0.9 | )% | (3.2 | )% |
Heavy Fabrications segmentorders increased by 215% versus the prior year as a result of increased demand for our capacity as tower customers secured production capacity through 2024 for ongoing wind turbine tower installation projects. Segment revenues decreasedincreased by $56,821, from $160,21015% during the year ended December 31, 2016,2022 primarily due to $103,389a 92% increase in industrial fabrication revenue due to higher recent order intake from industrial customers and revenue recognized from our PRS units in the current year.
Heavy Fabrications segment operating results improved by $2,170 as compared to the prior year. The improvement in operating performance was primarily a result of higher sales in the current year and the absence of one-time events that occurred during the prior year period including a weather-related event and a customer driven project delay, partially offset by costs associated with transitioning a portion of the workforce to support growth in the industrial fabrications product line and inefficiencies associated with a change to a new tower design in the fourth quarter. Operating profit margin was (0.9%) during the year ended December 31, 2017. The Towers and Heavy Fabrications segment revenue decrease was primarily due2022 compared to a 41% decrease in towers sold, partially offset by higher prices due to a more complex tower design and higher material costs, which are generally passed through to customers.
Towers and Heavy Fabrications segment operating income decreased by $10,121, from $12,788 for the year ended December 31, 2016, to $2,667 for the year ended December 31, 2017. The decrease was primarily attributable to lower production volumes and the corresponding underutilization of plant capacity, offset in part by significant cost reduction actions including a $1,510 decrease in incentive compensation, and staffing reductions. Operating margin decreased from 8.0%(3.2%) during the year ended December 31, 2016, to 2.6% during the year ended December 31, 2017.2021.
Gearing Segment
The following table summarizes the Gearing segment operating results for the yearstwelve months ended December 31, 20172022 and 2016:2021:
The following table summarizes the Gearing segment operating results for the years ended December 31, 2017 and 2016: |
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| Twelve Months Ended |
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| 2016 |
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Orders |
| $ | 36,928 |
| $ | 14,220 |
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Revenues |
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| 26,006 |
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| 20,648 |
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Operating loss |
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| (2,632) |
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| (3,244) |
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Operating margin |
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| (15.7) | % |
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Orders | $ | 53,597 | $ | 46,081 | ||||
Revenues | 42,588 | 28,583 | ||||||
Operating income (loss) | 43 | (2,593 | ) | |||||
Operating margin | 0.1 | % | (9.1 | )% |
Gearing segment orders more than doubled in 2017, primarily due to the recovery in demand from O&G customers. Revenues rose more gradually, up 26% from the prior year, as the business ramped up production in the second half of the current year to support the higher demand.
Gearing segment operating loss improved by $612 from $3,244 for the year ended December 31, 2016,2022 increased 16% compared to $2,632the year ended December 31, 2021 primarily due to increased demand from customers in all end markets. Revenues increased 49% during the year ended December 31, 2022 primarily due to higher order intake in recent quarters from customers in most end markets, particularly O&G, partially offset by a decrease in aftermarket wind revenue.
The Gearing segment's operating income improved by $2,636during the year ended December 31, 2022 from the year ended December 31, 2021 primarily due to higher sales,partially offset by higher material costs, ramp-up costs, and increased fixed costs to support higher volumes. Operating margin was 0.1% for the year ended December 31, 2017. The improvement was primarily due2022 compared to the $1,886 impact of higher sales volumes and the $727 release of an environmental reserve following the successful completion of remediation activities on a facility that is now held for sale. Partially offsetting these factors were higher maintenance and tooling expense associated with supporting the volume increases, and higher commission expenses of $288. The operating margin improved based on the above items from (15.7%)(9.1)% during the year ended December 31, 2016,2021.
Industrial Solutions Segment
The following table summarizes the Industrial Solutions segment operating results for the twelve months ended December 31, 2022 and 2021.
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Orders | $ | 20,333 | $ | 19,698 | ||||
Revenues | 17,804 | 15,402 | ||||||
Operating income (loss) | 120 | (386 | ) | |||||
Operating margin | 0.7 | % | (2.5 | )% |
Industrial Solutions segment orders increased by 3% for the year ended December 31, 2022 primarily due to (10.1%) an increase in new gas turbine orders. Segment revenue increased 16% from the prior year primarily due tothe timing of aftermarket installations. The improvement in operating incomeduring the year ended December 31, 2017.
Process Systems Segment
2022 was a result of the revenue increase, partially offset by increased labor and freight costs. The following table summarizes the Process Systems segment operating results formargin improved from (2.5)% during the year ended December 31, 2017.
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| Twelve Months Ended | ||
| December 31, | ||
| 2017 |
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Orders | $ | 15,761 |
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Revenues |
| 17,390 |
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Operating loss |
| (2,269) |
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Operating margin |
| (13.0) | % |
We acquired Red Wolf on February 1, 2017 and as a result, aggregated our Abilene CNG with Red Wolf2021, to form the Process Systems reportable segment. The current year loss reflects low capacity utilization in the Abilene facility, due
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to weak CNG equipment demand, a one-time charge of $350 for the write-down of CNG inventory and fixed assets due to market conditions and the impact of $1,320 of intangible amortization associated with the Red Wolf transaction.
Corporate and Other
Corporate and Other expenses improved by $2,436, from $7,635 for0.7% during the year ended December 31, 2016, to $5,199 for2022.
Corporate and Other
Corporate and Other expensesdecreased by $679 during the year ended December 31, 2017.2022. The decrease was primarily dueattributable to the reversal into income of the current portion of the accrued Red Wolf earn-out payment of $1,394lower salaries and a reduction of incentive compensation expenses of $934.benefits.
SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The methods, estimates and judgments that we use in applying our critical accounting policies have a significant impact on the results that we report in our financial statements. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain.
We have identified the accounting policies listed below to be critical to obtain an understanding of our consolidated financial statements. This section should also be read in conjunction with Note 1, “Description of Business and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements for further discussion of these and other significant accounting policies.
Revenue Recognition
We recognize revenue when control of the earnings process is complete and when persuasive evidence of an arrangement exists, transfer of title has occurredpromised goods or services have been rendered,is transferred to customers, in an amount that reflects the selling price is fixedconsideration the Company expects to be entitled to in exchange for those goods or determinable, collectability is reasonably assured and delivery has occurred per the terms of the contract.services. Customer deposits and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers, like those made for liquidated damages, are presumed to be classified as reductions of revenue in our statement of operations.
In mostmany instances within our Towers and Heavy Fabrications segment, productswind towers are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition versus shipment, due to our customers’ preference to ship towersproducts in batches to support efficient construction of wind farms. We recognize revenue under these arrangements only when there is a substantive reason for the arrangement (i.e., the buyer requests the arrangement, title and risk of ownership has passed to the buyer, a fixed schedule for delivery exists,arrangement), the ordered goods are segregated from inventory and not available to fill other orders, and the goods are complete andcurrently ready for shipment.physical transfer to the customer, and we do not have the ability to use the product or to direct it to another customer. Assuming these required revenue recognition criteria are met, revenue is recognized upon completion of product manufacture and customer acceptance.
We will adopt
During 2022 and 2021, we also recognized revenue over time, versus point in time, when products in the provisionsGearing and Heavy Fabrications segments had no alternative use to us and we had an enforceable right to payment, including profit, upon termination of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers,the contract by the customer. Since the projects are labor intensive, we use labor hours as the input measure of progress for the fiscal year beginning January 1, 2018 and will be electingcontract. Contract assets are recorded when performance obligations are satisfied but we are not yet entitled to payment. We recognize contract assets associated with this revenue which represents our rights to consideration for work completed but not billed at the modified retrospective approach. Through our assessmentend of the ASC 606, we have determined there are minimal changes to the assumptions currently utilized for the year ending December 31, 2017 and the adoption of the guidance will not result in a material impact on our consolidated financial statements.period.
Warranty Liability
We provide warranty terms that generally range from one to five years for various products relating to workmanship and materials supplied by us. In certain contracts, we have recourse provisions for items that would enable us to seek recovery from third parties for amounts paid to customers under warranty provisions. We estimate the warranty accrual based on various factors, including historical warranty costs, current trends, product mix and sales.
Inventories
Inventories consist of raw materials, work-in-process and finished goods. Raw materials consist of components and parts for general production use. Work-in-process consists of labor and overhead, processing costs, purchased subcomponents, and materials purchased for specific customer orders. Finished goods consist of components purchased from third parties as well as components manufactured by us.
Inventories are stated at the lower of cost or market and net realizable value. WeWhere necessary, we have recorded a reserve for the excess of cost over marketnet realizable value in our inventory allowance. MarketNet realizable value of inventory, and management’s judgment concerning the need for reserves, encompasses consideration of othermany business factors including physical condition, inventory holding period, contract terms and usefulness. Inventories are valued based either on actual cost or using a first‑in,first-in, first out method.
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Long-Lived Assets
We review property and equipment and other long-lived assets (“long-lived assets”) for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. In evaluating the recoverability of long-lived assets, we utilize a fair value technique accepted by ASC 820, Fair Value Measurement, which is the asset accumulation approach. If the fair value of the asset group is less than the carrying amount, we recognize an impairment loss.
Due to triggering events identified within our segments at various times in the Gearing segment’s operating losses in 2017 and 2016 combined with its history of continued operating losses,past, we continue to evaluate the recoverability of certain of the long-lived assetsassets. During November 2022, we identified a triggering event associated with the GearingHeavy Fabrications segment. Based on third-party appraisals and other estimates ofIn accordance with GAAP, we compared the faircarrying value of the Gearingsegment asset group we determinedto the fair value offorecast undiscounted cash flows associated with the asset group is in excess of carrying amounts under ASC 360 testing, and no impairment was indicated as of December 31, 2017 or 2016. The appraised value of the assets was determined primarily through the use of market value third-party appraisals. To the extent assumptions used in our evaluations are not achieved, there may be a negative effectgroup. Based on the valuation of these assets.
Goodwill
We review goodwill for impairment on an annual basis is accordance with ASC 350, Intangibles- Goodwill and Other. In evaluatinganalysis performed, the goodwill, we must make assumptions regarding the discounted futureforecast undiscounted cash flows of the acquired company. If the discounted cash flows are less thanexceeded the carrying value we then determine if anresulting in no recorded impairment loss is recognized by evaluating the fair value of the goodwill. We utilize fair value techniques accepted by ASC 820, which include the income, market and cost approach. If the fair value of the goodwill is less than the carrying amount, we recognize an impairment loss.this group.
With the Red Wolf acquisition, we recorded goodwill associated with the transaction. In accordance with ASC 350, we have elected to perform the review of goodwill for impairment on an annual basis during the fourth quarter of our fiscal year. Based on the discounted cash flows calculation utilizing three weighted average scenarios and a 19.5% discount rate, we determined the fair value of the goodwill is in excess of carrying value, and no impairment was indicated.
Income Taxes
We account for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted.
In connection with the preparation of our consolidated financial statements, we are required to estimate our income tax liability for each of the tax jurisdictions in which we operate. This process involves estimating our actual current income tax expense and assessing temporary differences resulting from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. We also recognize the expected future income tax benefits of NOL carryforwards as deferred income tax assets. In evaluating the realizability of deferred income tax assets associated with NOL carryforwards, we consider, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences, and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates or future taxable income levels could materially impact our valuation of income tax assets and liabilities and could cause our income tax provision to vary significantly among financial reporting periods.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate; (2) eliminating the corporate alternative minimum tax; (3) creating a new limitation on deductible interest expense; and (4) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017.
We also account for the uncertainty in income taxes related to the recognition and measurement of a tax position taken or expected to be taken in an income tax return. We follow the applicable pronouncement guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition related to the uncertainty in these income tax positions.
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Workers’ Compensation Reserves
At the beginning of the third quarter of 2013, we began to self‑insure for our workers’ compensation liability, and began establishing reserves for self‑retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required workers’ compensation reserves. We take into account claims incurred but not reported when determining our workers’ compensation reserves. Workers’ compensation reserves are included in accrued liabilities. While we believe that we have adequately reserved for these claims, the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred. Although we entered into a guaranteed cost program at the beginning of the third quarter of 2016, we maintain a liability for the trailing claims from the self-insured policies.
Health Insurance Reserves
At the beginning of the first quarter of 2014, we began to self‑insure for our health insurance liabilities, including reserves for self‑retained losses. Historical loss experience combined with actuarial evaluation methods and the application of risk transfer programs are used to determine required health insurance reserves. We take into account claims incurred but not reported when determining our health insurance reserves. Health insurance reserves are included in accrued liabilities. While we believe that we have adequately reserved for these claims, the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred.
LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES
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 December 31, 2017,2022, cash and cash equivalents and short-term investments totaled $78, a decrease$12,732, an increase of $21,792 $11,880from December 31, 2016.2021. Debt and capitalfinance lease obligations at December 31, 20172022 totaled $16,752,$14,545, and we had the ability to borrow up to $11,796$27,351 under ourthe 2022 Credit Facility.
In addition to the 2022 Credit Facility, (as definedwe 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 Note 10, “Debtthe 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 August 18, 2020, we filed a “shelf” registration statement on Form S-3, which was declared effective by the Securities and CreditExchange 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 us at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the base prospectus, we 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, we entered into a $10,000 Equity Distribution Agreement (the “Equity Distribution Agreement”) with Craig-Hallum Capital Group, LLC. 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 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 the Company’s common stock, par value $0.001 per share with an aggregate sales price of up to $12,000. The Company 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 the Company’s common stock under the Sales Agreement and the net proceeds (before upfront costs) from the sale of the Company’s common stock were approximately $323 after deducting commissions paid of approximately $9 and before deducting other expenses of $93. As of December 31, 2022, shares of the Company’s common stock having a value of approximately $11,667 remained available for issuance under the Sales Agreement.
On March 27, 2020, the CARES Act was signed into law providing numerous tax provisions and other stimulus measures, including the Employee Retention Credit (“ERC”), which is a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. As amended, the ERC was available for wages paid through September 30, 2021 and was equal to 70% of qualified wages (which included employer qualified health plan expenses) paid to employees. During each quarter of 2021, a maximum of $10,000 in qualified wages for each employee was eligible for the ERC. Therefore, the maximum tax credit that could be claimed by an eligible employer in 2021 was $7,000 per employee per calendar quarter. We qualified for the ERC in the first quarter of the year because we experienced a reduction in gross receipts of more than 20% for the first quarter of 2021 compared to the first quarter of 2019, the relevant criteria for the ERC. Since we qualified for the ERC in the first quarter of 2021, we automatically qualified for the ERC in the second quarter of 2021. In the first and second quarters of 2021, we received ERC benefits of $3,372 and $3,593, respectively, and under analogy to IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” were recorded in “Other income (expense), net” in our consolidated financial statements). statement of operations. During the third quarter of 2021 due to relatively higher revenues in 2021 as compared to the third quarter of 2019, we did not qualify for the ERC benefit. 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 our consolidated balance sheet at December 31, 2021. The $497 receivable balance was collected during January 2022.
We anticipate that we will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and lease commitments through at least the next twelve months primarily through cash generated from operations, available cash balances, our Credit Facility, sales of shares under the Sales Agreement, additional equipment financing, and access to the public or private debt and/or equity markets, including the option to raise additional capital from the sale of our securities under the Broadwinda “shelf” registration statement on Form S-3.
On January 29, 2018, we executed the Third Amendment to Loan and Security Agreement (the “Third Amendment”), which waived the Fixed Charge Coverage Ratio Covenant as of December 31, 2017 and added new minimum EBITDA and capital expenditure covenants through June 30, 2018. Among other changes, the amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated for future periods commencing with the quarter ending June 30, 2018.
While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and amended debt covenants, there can be no assurance that our operations will generate sufficient cash, that we will be able to comply with applicable loan covenants or that credit facilities will be available in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.
Sources and Uses of Cash
Operating Cash Flows
During the year ended December 31, 2017 net cash used in operations was $9,350 compared to net cash provided by operating activities of $17,300 for the year ended December 31, 2016. The decrease in net cash provided by operating activities was primarily attributable to reduced customer deposits, accrued liabilities, and accounts payable based primarily on lower scheduled tower production.
Investing Cash Flows
During the year ended December 31, 2017, net cash used in investing activities was $19,894 compared to net cash used in investing activities of $3,164 for the year ended December 31, 2016. The increase in net cash used in investing activities as compared to the prior-year period was primarily attributable to the $16,449 cash paid for the Red Wolf acquisition in February 2017.
23
Financing Cash Flows
During the year ended December 31, 2017, net cash provided by financing activities totaled $10,660 compared to net cash used in financing activities of $3,319 for the year ended December 31, 2016. The increase in net cash provided by financing activities as compared to the prior‑year period was due primarily to drawing proceeds of $158,856 from the Credit Facility partially offset by repayments of $148,009 on the Credit Facility during the year ended December 31, 2017.
Other
Included in Line of Credit, NMTC and other notes payable line item of our consolidated financial statements is $2,600 associated with the New Markets Tax Credit transaction described further in Note 18, “New Markets Tax Credit Transaction” in the notes to our consolidated financial statements. We have
In 2016, we entered into a $570 unsecured loan agreement with the Development Corporation of Abilene of which $114 is included in Current maturities, long-term debt in the consolidated financial statements and $456 is included in Long-term debt, less current maturities. The loan is forgivable upon us meeting and maintaining specific employment thresholds. During each of the years ended December 31, 2022 and 2021, $114 of the loan was forgiven. As of December 31, 2022, the loan balance was $0. In addition, we have outstanding notes payable for capital expenditures in the amount of $1,146,$1,094 and $363 as of December 31, 2022 and 2021, respectively, with $804$88 and $186 included in the Line“Line of Credit, NMTCcredit and othercurrent portion of long-term debt” line item of our consolidated financial statements as of December 31, 2022 and 2021, respectively. The notes payable line item.have monthly payments that range from $3 to $16 and an interest rate of 4%. The equipment purchased is utilized as collateral for the notes payable. Of theThe outstanding notes payable one matures on Marchhave maturity dates that range from July2023toSeptember 2028.
Sources and Uses of Cash
The following table summarizes our cash flows from operating, investing, and financing activities for the years ended December 31, 20182022 and 2021:
Year Ended | ||||||||
December 31, | ||||||||
2022 | 2021 | |||||||
Total cash provided by (used in): | ||||||||
Operating activities | $ | 16,643 | $ | (12,826 | ) | |||
Investing activities | (3,098 | ) | (1,674 | ) | ||||
Financing activities | (1,665 | ) | 11,980 | |||||
Net increase (decrease) in cash | $ | 11,880 | $ | (2,520 | ) |
Operating Cash Flows
During the other matures on April 25, 2020.year ended December 31, 2022, net cash provided by operations was $16,643 compared to net cash used in operating activities of $12,826 for the year ended December 31, 2021. The increase in net cash provided by operating activities was primarily due to an increase in customer deposits for future scheduled production during the current year period and an increase in accounts payable as compared to the prior year.
Investing Cash Flows
During the year ended December 31, 2022, net cash used in investing activities was $3,098 compared to net cash used in investing activities of $1,674 for the year ended December 31, 2021. The increase was primarily due to an increase in net purchases of property and equipment.
Financing Cash Flows
During the year ended December 31, 2022, net cash used in financing activities totaled $1,665 compared to net cash provided by financing activities of $11,980 for the year ended December 31, 2021. The decrease was primarily due to greater proceeds from the sale of securities under the Equity Distribution Agreement received in the prior year and increased net repayments under our 2022 Credit Facility during the current year. This was partially offset by an increase in proceeds from long term debt primarily related to the senior secured term loan under our 2022 Credit Facility.
Contractual Obligations
We enter into a variety of contractual obligations as part of our normal operations in addition to capital expenditures. As of December 31, 2022, we have (i) debt obligations related to our Credit Facility and other notes payable as described in Note 9, “Debt and Credit Agreements” of our consolidated financial statements (ii) cash payments for operating and finance lease obligations that are described in Note 10, “Leases” of our consolidated financial statements and (iii) purchase obligations made in the normal course of business. We expect to fund these cash requirements primarily through cash generated from operations, available cash balances, our 2022 Credit Facility, additional equipment financing, and access to the public or private debt and/or equity markets, including the option to raise additional capital from the sale of our securities under a “shelf” registration statement on Form S-3.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and as such are not required to provide information under this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial information required by Item 8 is contained in Part IV, Item 15 “EXHIBITS AND FINANCIAL STATEMENT SCHEDULES” of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures
(a) | Evaluation of Disclosure Controls and Procedures |
We seek to maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. This information is also accumulated and communicated to management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure. Our management, under the supervision and with the participation of our CEO and CFO, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal year reported on herein. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective as of December 31, 2017.2022.
(b)Changes in Internal Control over Financial Reporting
(b) | Changes in Internal Control over Financial Reporting |
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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(c) | Report of Management on Internal Control Over Financial Reporting |
(c)Report of Management on Internal Control Over Financial Reporting
Our management, including our CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).
Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. Management based this assessment on criteria for effective internal control over financial reporting described in “Internal Control—Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management determined that our internal control over financial reporting was effective as of December 31, 2017.2022.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting.
None.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
With the exception of the description of our Code of Ethics and Business Conduct below, the information required by this item is incorporated herein by reference from the discussion under the headings “Directors and Director Compensation,” “Corporate Governance,” and “Executive Officers and Executive Compensation” and “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance”Officers” in our definitive Proxy Statement to be filed in connection with our 20182023 Annual Meeting of Stockholders (the “2018“2023 Proxy Statement”).
Code of Ethics and Business Conduct
We have adopted a Code of Ethics and Business Conduct (the “Code”) that applies to all of our directors, executive officers and senior financial officers (including our principal executive officer, principal financial officer, principal accounting officer, controller, and any person performing similar functions). The Code is available on our website at www.bwen.com under the caption “Investors” and is available in print, free of charge, to any stockholder who sends a request for a paper copy to Broadwind, Energy, Inc., Attn: Investor Relations, 3240 South Central Avenue, Cicero, IL 60804. We intend to include on our website any amendment to, or waiver from, a provision of the Code that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, that relates to any element of the code of ethics definition enumerated in Item 406(b) of Regulation S‑K.S-K.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding director and executive compensation is incorporated by reference from the discussion under the headings “Directors and Director Compensation”Compensation,” “Executive Officers” and “Executive Officers“Compensation Discussion and Executive Compensation”Analysis” in the 20182023 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Certain of the information required by this item is incorporated herein by reference from the discussion under the heading “Security Ownership of Certain Beneficial Holders and Management” in the 20182023 Proxy Statement.
The following table provides information as of December 31, 2017,2022, with respect to shares of our common stock that may be issued under our existing equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
|
|
|
|
|
|
|
|
|
|
| (a) |
| (b) |
| (c) |
| |
|
|
|
|
|
|
| Number of securities |
|
|
|
|
|
|
|
| remaining available for |
|
|
| Number of securities |
|
|
|
| future issuances under |
|
|
| to be issued upon |
| Weighted‑average |
| equity compensation |
| |
|
| exercise of |
| exercise price of |
| plans (excluding |
| |
|
| outstanding options, |
| outstanding options, |
| securities reflected in |
| |
Plan Category |
| warrants, and rights |
| warrants, and rights |
| column (a)) |
| |
Equity compensation plans approved by stockholders |
| 579,330 | (1) | $ | 6.90 |
| 621,281 |
|
Total |
| 579,330 |
| $ | 6.90 |
| 621,281 |
|
(a) | (b) | (c) | |||||||||||
Number of securities | |||||||||||||
remaining available for | |||||||||||||
Number of securities | future issuances under | ||||||||||||
to be issued upon | Weighted‑average | equity compensation | |||||||||||
exercise of | exercise price of | plans (excluding | |||||||||||
outstanding options, | outstanding options, | securities reflected in | |||||||||||
Plan Category | warrants, and rights | warrants, and rights | column (a)) | ||||||||||
Equity compensation plans approved by stockholders | 822,737 | (1) | $ | 2.37 | 130,201 | ||||||||
Total | 822,737 | $ | 2.37 | 130,201 |
(1) | Includes |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference from the discussion under the headings “Certain Transactions and Business Relationships” and “Corporate Governance” in the 20182023 Proxy Statement.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from the discussion under the heading “Ratification of Appointment of Independent Registered Public Accounting Firm” in the 20182023 Proxy Statement.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The financial statements listed on the Index to Financial Statements (page 29)34) are filed as part of this Annual Report.
2. Financial Statement Schedules
These schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto or because they are not applicable or not required.
3. Exhibits
The exhibits listed on the Index to Exhibits (pages 65 through 67) are filed as part of this Annual Report.
None.
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None.
INDEX TO FINANCIAL STATEMENTS
34
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Broadwind,
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Broadwind,
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical AuditMatter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which is relates. 35 Long-Lived Assets As described in Note 7 of the financial statements, the Company’s evaluation of long-lived asset impairment involves the comparison of the undiscounted future cash flows of a respective asset group to its corresponding carrying value. This requires management to make significant qualitative and quantitative estimates and assumptions including estimates of future revenue growth rates, operating cash flow margins, and capital expenditures. Changes in these assumptions could have a significant impact on the amount of undiscounted cash flows, which could have an impact on the impairment charge, if any. The Company’s Heavy Fabrications asset group has experienced recurring operating losses in consecutive years ending December 31, 2022. Company management determined that the carrying amount of the Heavy Fabrications asset group may not be recoverable based on the operating performance of the asset group. Accordingly, the Company performed an impairment assessment of the asset group as of November 30, 2022. As part of the impairment assessment, it was determined that the asset group had undiscounted future cash flows that exceeded its estimated carrying value. Additionally, there were no changes in facts or circumstances following the November 30, 2022 assessment through December 31, 2022, which would alter the asset group’s initial undiscounted future cash flows or carrying value estimates. As a result, no impairment charge was recorded in the consolidated statement of operations for the year ended December 31, 2022, for the Heavy Fabrications asset group. Key financial assumptions used to determine the undiscounted cash flows of the asset group were developed by management. We identified the long-lived asset impairment assessment of the Heavy Fabrications asset group as a critical audit matter because of the high degree of judgement and subjectivity involved in auditing management’s assumptions regarding their asset group determination, the asset group’s primary asset determination, and projected revenue growth rates, operating cash flow margins and capital expenditures utilized to determine the recoverability of the asset group’s long-lived assets. How the Critical Audit Matter Was Addressed in the Audit The audit procedures performed related to the evaluation of Company management’s assumptions and estimates relating to their determination of recoverability of the Heavy Fabrications asset group included the following, among others:
/ We have served as the Company's auditor since 2016.
Chicago, Illinois
March 9, 2023
BROADWIND CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
37
BROADWIND CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
38
BROADWIND CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
39
BROADWIND CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
The accompanying notes are an integral part of these consolidated financial
40
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, (in thousands, except share and per share data)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business Broadwind,
Heavy Fabrications The Company 41 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and (in thousands, except share and Gearing The Company
The Company provides supply chain solutions, light fabrication, inventory management, kitting and assembly services, primarily serving the Liquidity The Company meets its short term liquidity needs through cash generated from operations,
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 years ended December 31,2022 and December 31, 2021, the Company sold account receivables totaling $93,245 and $99,130, respectively, related to supply chain financing arrangements, of which customers’ financial institutions applied discount fees totaling $1,431 and $251, respectively.
42 BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
Debt and On August On March 9, 2021, the Company entered into a $10,000 Equity Distribution Agreement (the “Equity Distribution Agreement”) with Craig-Hallum Capital Group, LLC. Pursuant to the terms of the Equity Distribution Agreement, the Company issued 1,897,697 shares of the Company’s common stock thereunder during the firsttwo quarters of 2021. The net proceeds (before upfront costs) to the Company from the sale of such shares were approximately $9,725 after deducting commissions paid of approximately $275 and before deducting other expenses of $411. On September 12, 2022, the Company 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, the Company may sell from time to time through the Agents shares of the Company’s common stock, par value $0.001 per share with an aggregate sales price of up to $12,000. Any shares offered and sold under the Sales Agreement are to be issued pursuant to the Form S-3 and the 424(b) prospectus supplement relating to the offering dated September 12, 2022. The Company 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, the Company issued 100,379 shares of the Company’s common stock under the Sales Agreement and the net proceeds (before upfront costs) to the Company from the sale of the Company’s common stock were approximately $323 after deducting commissions paid of approximately $9 and before deducting other expenses of $93. As of December 31, 2022, shares of the Company’s common stock having a value of approximately $11,667 remained available for issuance under the Sales Agreement. 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 Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERC. As amended, 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. During each quarter of 2021, a maximum of $10,000 in qualified wages for each employee is eligible for the ERC. Therefore, the maximum tax credit that can be claimed by an eligible employer in 2021 is $7,000 per employee per calendar quarter. In the first and second quarters of 2021, the Company received ERC benefits of $3,372 and $3,593, respectively, and under analogy to IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” were recorded in “Other income (expense), net” in our consolidated statement of operations. The Company qualified for the ERC in the first quarter of 2021 because it experienced a reduction in gross receipts of more than 20% for the first quarter of 2021 compared to the first quarter of 2019, the relevant criteria for the ERC. Since the Company qualified for the ERC in the first quarter of 2021, it automatically qualified for the ERC in the second quarter of 2021. As a result of the Company averaging 500 or fewer full-time employees in 2019, all wages paid to employees were eligible for the ERC (rather than only wages paid to employees not providing services). During the third quarter of 2021 due to relatively higher revenues in 2021 as compared to the third quarter of 2019, the Company did not qualify for the ERC benefit. 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 the Company’s consolidated balance sheet at December 31,2021. The $497 receivable balance was collected during January 2022. The Company anticipates that current cash resources, amounts available under the 2022Credit Facility, cash to be generated from operations Reclassifications Certain prior year amounts, which are
Summary of Significant Accounting Policies
Management’s Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“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
43 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) Cash
As of December 31, Revenue Recognition
Revenues are recognized when control of the
For many tower sales within the Company’s During2022 and 2021, the Company also recognized revenue over time, versus point in time, when products in the Gearing and Heavy Fabrications segments had no alternative use to the Company and the Company had an enforceable right to payment, including profit, upon termination of the contract by the customer. Since the projects are labor intensive, the Company uses labor hours as the input measure of progress for the contract. Contract assets are recorded when performance obligations are satisfied but the Company is not yet entitled to payment. The Company
Cost of Sales Cost of sales represents all direct and indirect costs associated with the production of products for sale to customers. These costs include operation, repair and maintenance of equipment, materials, direct and indirect labor and benefit costs, rent and utilities, maintenance, insurance, equipment rentals, freight, Selling, General and Administrative Expenses Selling, general and administrative (“SG&A”) expenses include all corporate and administrative functions such as sales and marketing, legal, human resource management, finance, investor and public relations, information technology and senior management. These functions serve to support the Company’s current and future operations and provide an infrastructure to support future growth. Major expense items in this category include management and staff wages and benefits, 44 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data) Accounts Receivable (A/R) The Company generally grants uncollateralized credit to customers on an individual basis based upon the customer’s financial condition and credit history. Credit is typically on net 30 day terms and customer deposits are frequently required at various stages of the production process to finance customized products and minimize credit risk. Historically, the Company’s A/R is highly concentrated with a select number of customers. During the year ended December 31, Allowance for Doubtful Accounts Based upon past experience and judgment, the Company establishes an allowance for doubtful accounts with respect to A/R. 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 realizability of its A/R. These factors include individual customer circumstances, history with the Company and other relevant criteria. A/R balances that remain outstanding after the Company has exhausted reasonable collection efforts are written off through a charge to the valuation allowance and a credit to A/R. The Company monitors its collections and
Inventories Inventories are stated at the lower of cost or Inventories consist of raw materials,
45 BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) Long-Lived Assets Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and equipment is recognized using the The Company reviews property and equipment and other In evaluating the recoverability of
Leases The Company
46
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) Warranty Liability The Company provides warranty terms that generally range from one to five years for various products and services relating to workmanship and materials supplied by the Company. In certain contracts, the Company has recourse provisions for items that would enable the Company to pursue recovery from third parties for amounts paid to customers under warranty provisions. Warranty liability is recorded in accrued liabilities within the consolidated balance sheet. The Company estimates the warranty accrual based on various factors, including historical warranty costs, current trends, product mix and sales. The changes in the carrying amount of the Company’s total product warranty liability for the years ended December 31,
Income Taxes The Company accounts for income taxes based upon an asset and liability approach. Deferred tax assets and liabilities represent the future tax consequences of the differences between the financial statement carrying amounts of assets and liabilities versus the tax basis of assets and liabilities. Under this method, deferred tax assets are recognized for deductible temporary differences, and operating loss and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The impact of tax rate changes on deferred tax assets and liabilities is recognized in the year that the change is enacted. In connection with the preparation of its consolidated financial statements, the Company is required to estimate its income tax liability for each of the tax jurisdictions in which the Company operates. This process involves estimating the Company’s actual current income tax expense and assessing temporary differences resulting from differing treatment of certain income or expense items for income tax reporting and financial reporting purposes. The Company also recognizes as deferred income tax assets the expected future income tax benefits of net operating loss (“NOL”) carryforwards. In evaluating the realizability of deferred income tax assets associated with NOL carryforwards, the Company considers, among other things, expected future taxable income, the expected timing of the reversals of existing temporary reporting differences and the expected impact of tax planning strategies that may be implemented to prevent the potential loss of future income tax benefits. Changes in, among other things, income tax legislation, statutory income tax rates or future taxable income levels could materially impact the Company’s valuation of income tax assets and liabilities and could cause its income tax provision to vary significantly among financial reporting periods.
47 BROADWIND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data) The Company also accounts for the uncertainty in income taxes related to the recognition and measurement of a tax position taken or expected to be taken in an income tax return. The Company follows the applicable pronouncement guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition related to the uncertainty in these income tax positions.
The Company grants incentive stock options, restricted stock units (“RSUs”) and/or performance awards (“PSUs”) to certain officers, directors, and employees. The Company accounts for Net Income The Company presents both basic and diluted net income (loss) per share. Basic net income (loss) per share is based solely upon the weighted average number of common shares outstanding and excludes any dilutive effects of restricted stock, options, warrants and convertible securities. Diluted net income (loss) per share is based upon the weighted average number of common shares and 2. REVENUES Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The following table presents the Company’s revenues disaggregated by revenue source for the years ended December 31, 2022 and 2021:
The Company’s revenue is generally recognized at a point in time, typically when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The Company measures revenue based on the consideration specified in the purchase order and revenue is recognized when the performance obligations are satisfied. If applicable, the transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. 48 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data) 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 versus shipment. The Company recognizes revenue under these arrangements only when there is a substantive reason for the arrangement, the ordered goods are identified separately as belonging to the customer and not available to fill other orders, the goods are currently ready for physical transfer to the customer, and the Company does not have the ability to use the product or to direct it to another customer. Assuming these required revenue recognition criteria are met, revenue is recognized upon completion of product manufacture and customer acceptance. During the years ended December 31,2022 and 2021, the Company recognized a portion of revenue within the Gearing and Heavy Fabrications segments over time, as the products had no alternative use to the Company and the Company had an enforceable right to payment, including profit, upon termination of the contracts. Since the projects are labor intensive, the Company uses labor hours as the input measure of progress for the applicable contracts. Within the Heavy Fabrications segment, the Company recognized revenue over time of $14,298 and $5,665 for the years ended December 30,2022 and 2021, respectively. Within the Gearing segment, the Company recognized revenue over time of $2,444 for the year ended December 31,2021. During the fourth quarter of 2021, the Company ceased recording revenue over time within the Gearing segment due to a change in contract terms with a customer. Contract assets are recorded when performance obligations are satisfied but the Company is not yet entitled to payment. Contract assets represent the Company’s rights to consideration for work completed but not billed at the end of the period. 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. 3. EARNINGS PER SHARE The following table presents a reconciliation of basic and diluted earnings per share for the years ended December 31,
(1) Restricted stock units granted and outstanding of
49
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
4. 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 consolidated financial In
The activity in the
6. INVENTORIES The components of inventories as of December
50
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
The cost basis and estimated lives of property and equipment from continuing operations as of December 31,
As of December 31,
During November 2022, the Company identified a triggering event associated withan expected operating loss within the Heavy Fabrications segment during the year ended December 31, 2022. Accordingly, the Company performed an undiscounted cash flow analysis as of November 30, 2022 and determined that the undiscounted future cash flows exceeded the asset group's carrying value. Additionally, there were no changes in facts or circumstances following the November 30, 2022 assessment through December 31, 2022, which would alter the asset group’s initial undiscounted future cash flows or carrying value estimates. As a result, no impairment charge was recorded for the Heavy Fabrications asset group for the year ended December 31, 2022. During November 2021, the Company identified triggering events associated with operating losses within the Gearing segment and a decline in revenue and operating margin within the Heavy Fabrications segment during the year ended December 31, 2021. Accordingly, the Company performed undiscounted cash flow analyses as of November 30, 2021 and determined that the undiscounted future cash flows exceeded the asset groups' carrying values. Additionally, there were no changes in facts or circumstances following the November 30, 2021 assessments through December 31, 2021, which would alter the asset groups initial undiscounted future cash flows or carrying value estimates. As a result, no impairment charges were recorded for the Heavy Fabrications and Gearing asset groups for the year ended December 31, 2021. 51 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data)
As of December 31,
Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 6 to 20 years. Amortization expense was $725 for the years ended December 31, 2022 and 2021. As of December 31, 2022, estimated future amortization expense is as follows:
8. ACCRUED LIABILITIES Accrued liabilities as of December 31, 2022 and 2021 consisted of the following:
52
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
The Company’s outstanding debt balances as of December 31,
As of December 31,
Credit Facilities On October 26, 2016, the Company established On
53 BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
On February 23, 2021, the Company executed the Second Amendment to the Amended and Restated Loan Agreement, which waived testing of 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 $5,000 to the Revolving Loan Availability through December 31, 2022. 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 $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 liquidity reserve 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. In conjunction with the 2016 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 $6,000 and a schedule matching that of the underlying loan that synthetically fixes the interest rate on LIBOR borrowings for the entire term of the 2016 Credit Facility at 2.13%, before considering the Company’s risk premium. The interest rate swap is accounted for using mark-to-market accounting. Accordingly, changes in the fair value of the swap each reporting period are adjusted through earnings, which may subject the Company’s results of operations to non-cash volatility. The interest rate swap liability is included in the “Accrued liabilities” line item of the Company’s consolidated financial statements as of December 31, 2021. The interest rate swap expired in February 2022. All obligations outstanding under the 2016 Credit Facility were refinanced by the 2022 Credit Facility on August 5, 2022. On August 4, 2022, the Company 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. The 2022 Credit Facility replaced the 2016 Credit Facility. In connection with the 2022 Credit Facility, the Company incurred deferred financing costs in the amount of $470 primarily related to the revolving credit loan. These costs are included in the “Other assets” line item of the Company's consolidated financial statements as of December 31, 2022. The 2022 Credit Facility, as amended, 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 (i) as of the twelve-month period ending January 31, 2024 through and including June 30, 2024 of 1.0 to 1.0, and (ii) as of each twelve-month period thereafter to be greater than 1.1 to 1.0 and minimum EBITDA (as defined in the 2022 Credit Facility) on a month-end basis of $1,921,000 for the twelve-month period ending March 31, 2023, $3,661,000 for the twelve-month period ending June 30, 2023, $5,876,000 for the twelve-month period ending September 30, 2023, and $9,929,000 for the twelve-month period ending December 31, 2023. The initial term of the revolving credit facility matures August 4, 2027. The term loan also matures on August 4, 2027, with monthly payments based on an 84-month amortization. On February 8, 2023, the Company executed Amendment No.1 to Credit Agreement and Limited Waiver (the “First Amendment to 2022 Credit Agreement”),whichwaived the Company's fourth quarter minimum EBITDA (as defined in the 2022 Credit Facility) requirement for the period ended December 31, 2022, amended the Fixed Charge Coverage Ratio (as defined in the 2022 Credit Facility) requirements for the twelve-month period ending January 31, 2024 through and including June 30, 2024 and each twelve-month period thereafter, and amended the minimum EBITDA requirements applicable to the twelve-month periods ending March 31, 2023, June 30, 2023, September 30, 2023, and December 31, 2023. As of December 31, 2022, only $7,217from the senior secured term loan was outstanding under the 2022 Credit Facility. The Company had $0 drawn on the senior secured revolving credit facility and had the ability to borrow up to $27,351 under the 2022 Credit Facility as of December 31, 2022. As of December 31, 2022, the effective interest rate of the senior secured revolving credit facility was 6.55% and the effective rate of the senior secured term loan was 6.80%. As of December 31, 2021, the effective interest rate of the 2016 Credit Facility was4.0%. Other In 2016, the Company entered into a $570 unsecured loan agreement with the Development Corporation of Abilene On April 15, 2020, the Company received funds under notes and related documents (“PPP Loans”) with CIBC, under the Paycheck Protection Program (the “PPP”) which was established under the CARES Act enacted on March
54 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data) 10. LEASES The Company leases various property and equipment under operating lease arrangements. On January 1, 2019, the Company adopted Topic 842 and ASU 2018-11 using the cumulative effect method and has elected to apply each available practical expedient. The standard requires companies to recognize operating lease assets and liabilities on the balance sheet and to disclose key information regarding leasing arrangements. The Company has elected to apply the short-term lease exception to all leases of one year or less. As of December 31, 2022, the right-of-use (“ROU”) asset had a balance of $16,396which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities relating to the ROU asset of $1,882and $16,696, respectively, and are included in the “Current portion of operating lease obligations” and “Long-term operating lease obligations, net of current portion” line items of these consolidated financial statements. As of December 31, 2021, the ROU asset had a balance of $18,029 and current and non-current lease liabilities relating to the ROU asset of $1,775and $18,405, respectively. The discount rates used for leases accounted for under Topic 842 are based on an interest rate yield curve developed for the leases in the Company’s lease portfolio. Lease terms generally range from 3 to 15years with renewal options for extended terms. Some of the Company’s facility leases include options to renew. The exercise of the renewal options is at the Company’s discretion. Therefore, the majority of renewals to extend the lease terms are not included in ROU assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and includes them in the lease term when the Company is reasonably certain to exercise them. Certain leases contain rent escalation clauses that require additional rental payments in the later years of the term. Rent expense for these types of leases is recognized on a In addition, the Company has entered into
Amortization expense recorded in connection with assets recorded under 55 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data ) Quantitative information regarding the Company’s leases is as follows:
Amortization associated with new right-of-use assets obtained in exchange for new operating lease liabilities is $20 and $270 for the years ended December 31, 2022 and 2021, respectively. As of December 31,
56
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
Legal Proceedings From time to time, the Company is subject to legal proceedings or claims that arise in the ordinary course of its business. The Company accrues for costs related to loss contingencies when such costs are probable and reasonably estimable. As of December 31, 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. Also, certain environmental laws can 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.
57 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) 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. Warranty Liability The Company provides warranty terms that generally range from one to five years for various products and services relating to workmanship and materials supplied by the Company. In certain contracts, the Company has recourse provisions for items that would enable the Company to pursue recovery from third parties for amounts paid to customers under warranty provisions. 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 dependent on actual losses sustained by the customer. When the damages are determined to be probable and
estimable, the damages are recorded as a reduction to revenue. During Workers’ Compensation Reserves As of December 31,
Health Insurance Reserves As of December 31, 58 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data) Other As of December 31, 2022, approximately
12.
The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. Additionally, the Company is required to provide disclosure and categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value while Level 3 generally requires significant management judgment. Financial assets and liabilities are classified in their entirety based on the lowest level of input significant to the fair value measurement. Financial instruments are assessed quarterly to determine the appropriate classification within the fair value hierarchy. Transfers between fair value classifications are made based upon the nature and type of the observable inputs. The fair value hierarchy is defined as follows: Level 1 — Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 — Valuations are based on quoted prices for similar assets or liabilities in active markets, or quoted prices in markets that are not active for which significant inputs are observable, either directly or indirectly. For the Company’s corporate and municipal bonds, although quoted prices are available and used to value said assets, they are traded less frequently. Level 3 — Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants
would use in valuing the asset or liability at the measurement date.
Fair value of financial instruments The carrying amounts of the Company’s financial instruments, which include
59 BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) 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 9, “Debt and Credit Agreements,” of these 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 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 following table represents the fair value of the Company’s financial assets measured as of December 31, 2022 and 2021:
13. INCOME TAXES The provision for income taxes for the years ended December 31, 2022 and 2021 consists of the following:
During the year ended December 31, 2022, the Company recorded an expense for income taxes of $35, compared to an expense for income taxes of $25 during the year ended December 31, 2021. On August 16, 2022, Congress enacted the Inflation Reduction Act which includes advanced manufacturing tax credits for manufacturers of eligible components, including wind and solar components produced and sold in the US from 2023 through 2032.No rulings have been made on the taxability of these credits. The total change in the deferred tax valuation allowance was $2,549and $1,944 for the years ended December 31, 2022 and 2021, respectively. The changes in the deferred tax valuation allowance in 2022 and 2021 were primarily the result of increases to the deferred tax assets pertaining to federal and state NOLs. Management believes that significant uncertainty exists surrounding the recoverability of deferred tax assets. As a result, the Company recorded a valuation allowance against the remaining deferred tax assets. 60 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, 2022 and 2021 (in thousands, except share and per share data)
The tax effects of the temporary differences and NOLs that give rise to significant portions of deferred tax assets and liabilities are as follows:
Certain prior year amounts have been reclassified to conform to current year presentation. Valuation allowances of
As of December 31,
The reconciliation between the statutory U.S. federal income tax rate and the Company’s effective income tax rate is as follows:
61
BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
The Company accounts for the uncertainty in income taxes by prescribing a minimum recognition threshold for a tax position taken, or expected to be taken, in a tax return that is required to be met before being recognized in the financial statements. The
The Company files income tax returns in the U.S. federal and state jurisdictions. As of December 31, 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
that aggregate changes in stock ownership have resulted in an annual limitation of $14,284 on NOLs and In February 2013, the Company adopted a Stockholder Rights Plan, which was amended in February 2016 and approved by our stockholders (as amended, the “Rights Plan”), designed to preserve the Company’s substantial tax assets associated with NOL carryforwards under The Rights Plan is intended to act as a deterrent to any person or group, together with its affiliates and associates, being or becoming the beneficial owner of 4.9% or more of the Company’s common stock and thereby triggering a further limitation of the Company’s available NOL carryforwards. In connection with the adoption of the Rights Plan, the Board declared a
62 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and
14. SHARE-BASED COMPENSATION Overview of
The Company has granted incentive stock options and other equity awards pursuant to
The purposes of the
Stock Options. The exercise price of stock options granted under the Restricted Stock Units (RSUs). The granting of RSUs is provided for under the Performance Awards (PSUs). The granting of PSUs is provided for under the
63 BROADWIND, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data)
The 2015 EIP reserves 3,200,000shares of the Company’s common stock. As of December 31, 2022, 1,854,919shares of common stock reserved for issuance pursuant to stock options and RSU awards granted under the 2015 EIP had been issued in the form of common stock and 822,737shares of common stock are issued and unvested. There was no stock option activity during the
2022 and 2021.The fair value of each stock option award is estimated on the date of grant using the 64 BROADWIND, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) December 31, (in thousands, except share and per share data) The following table summarizes information with respect to outstanding
RSUs and PSUs are generally subject to ratable vesting over a three-year period. Compensation expense related to these service and performance based awards is generally recognized on a straight-line basis over the vesting period. During the years ended December 31,
During the year ended December 31,
has a balance of $619 as of December 31, 2022. The following table summarizes
|
As of December 31, 2017,2022, the Company estimates that pre‑taxpre-tax compensation expense for all unvested share‑based awards, including both stock optionsshare-based RSUs and RSUs,PSUs in the amount of approximately $1,211 $1,162will be recognized through the year 2020.2024. The Company expects to satisfy the exercise of stock options and future distribution of shares of restricted stock by issuing new shares of common stock.
16.
15. 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. On February 1, 2017, the Company acquired Red Wolf,
BROADWIND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2022 and Red Wolf is being operated as a wholly-owned subsidiary, as more fully described 2021
(in Note 21, “Business Combinations” in the notes to the Company’s consolidated financial statements. The Red Wolf acquisition aligns with the Company’s growth strategy approved by our Board in late 2016 to expandthousands, except share and diversify our business through organic growth and strategic bolt-on acquisitions. Red Wolf’s operations is being reported in the “Process Systems” segment. per share data)
As a result of the 2017 Red Wolf acquisition, the Company has revised its segment presentation to include three reportable operating segments: Towers and Weldments, Gearing and Process Systems. All current and prior period financial results have been revised to reflect these changes. In the fourth quarter 2017, the segment changed its name from Towers and Weldments to Towers and Heavy Fabrications to more accurately reflect the nature of the business’ activities.
The Company’s segments and their product offerings are summarized below:
Towers and
Heavy Fabrications
The Company manufacturesprovides large, complex and precision fabrications to customers in a broad range of industrial markets. The Company’s most significant presence is within the U.S. wind energy industry, although it has diversified into other industrial markets in order to improve capacity utilization, reduce customer concentrations, and reduce exposure to uncertainty related to governmental policies currently impacting the U.S. wind energy industry. Within the U.S. wind energy industry, the Company provides steel towers forand adapters primarily to wind turbines, specifically the large and heavier wind towers that are designed for multiple MW wind turbines.turbine manufacturers. Production facilities, located in Manitowoc, Wisconsin and Abilene, Texas, are situated in close proximity to the primary U.S. domestic wind energy and equipment manufacturing hubs. The two facilities have a combined annual tower production capacity of up to approximately 550 towers (1650 tower sections), sufficient to support turbines generating more than 1,100 MW of power. This product segment also encompasses the fabrication of heavy weldments forThe Company has expanded production capabilities and leveraged manufacturing competencies, including welding, lifting capacity and stringent quality practices, into aftermarket and OEM components utilized in surface and underground mining, construction, material handling, O&G and other industrial customers.
58
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 and 2016
(in thousands, except share and per share data)infrastructure markets.
Gearing
Gearing
The Company engineers, buildsprovides gearing and remanufactures precision gearsgearboxes to a broad set of customers in diverse markets including; onshore and gearing systems for oiloffshore O&G fracking and gas,drilling, surface and underground mining, wind mining,energy, steel, material handling and other industrial applications.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.
Process Systems
Industrial Solutions
The Company acquired Red Wolf on February 1, 2017provides supply chain solutions, light fabrication, inventory management, kitting and as a result, aggregated its Abilene compressedassembly services, primarily serving the combined cycle natural gas (“CNG”) turbine market.
BROADWIND, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2022 and fabrication business with Red Wolf to form the Process Systems reportable segment. This segment provides contract manufacturing services that include build-to-spec, kitting, fabrication2021
(in thousands, except share and inventory management for customers throughout the U.S. and in foreign countries, primarily supporting the natural gas electrical generation market.per share data)
Corporate and Other
“Corporate” includes the assets and SG&A 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, “Description of Business and Summary of Significant Accounting Policies” of these consolidated financial statements. Summary financial information by reportable segment is as follows:
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|
|
|
|
|
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| Towers and |
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| Process |
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| ||
|
|
| Heavy Fabrications |
| Gearing |
| Systems |
| Corporate |
| Eliminations |
| Consolidated |
| ||||||
For the Year Ended December 31, 2017 |
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
| $ | 103,389 |
| $ | 26,006 |
| $ | 17,390 |
| $ | — |
| $ | — |
| $ | 146,785 |
|
Operating (loss) profit |
|
|
| 2,667 |
|
| (2,632) |
|
| (2,269) |
|
| (5,199) |
|
| — |
|
| (7,433) |
|
Depreciation and amortization |
|
|
| 4,638 |
|
| 2,430 |
|
| 1,706 |
|
| 225 |
|
| — |
|
| 8,999 |
|
Capital expenditures |
|
|
| 5,355 |
|
| 726 |
|
| 426 |
|
| 181 |
|
| — |
|
| 6,688 |
|
Assets held for sale |
|
|
| — |
|
| 560 |
|
| — |
|
| 20 |
|
| — |
|
| 580 |
|
Total assets |
|
|
| 27,958 |
|
| 38,016 |
|
| 26,442 |
|
| 249,346 |
|
| (229,412) |
|
| 112,350 |
|
Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | |||||||||||||||||||
For the Year Ended December 31, 2022 | ||||||||||||||||||||||||
Revenues from external customers | $ | 117,194 | 42,572 | 16,993 | — | — | $ | 176,759 | ||||||||||||||||
Intersegment revenues | 12 | 16 | 811 | — | (839 | ) | — | |||||||||||||||||
Net revenues | 117,206 | 42,588 | 17,804 | — | (839 | ) | 176,759 | |||||||||||||||||
Operating (loss) income | (1,044 | ) | 43 | 120 | (5,722 | ) | (4 | ) | (6,607 | ) | ||||||||||||||
Depreciation and amortization | 3,446 | 1,978 | 397 | 239 | — | 6,060 | ||||||||||||||||||
Capital expenditures | 2,601 | 446 | 48 | 3 | — | 3,098 | ||||||||||||||||||
Total assets | 45,475 | 51,944 | 12,775 | 224,856 | (190,510 | ) | 144,540 |
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| Heavy Fabrications | Gearing | Industrial Solutions | Corporate | Eliminations | Consolidated | ||||||||||||||||||
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| Towers and |
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| Heavy Fabrications |
| Gearing |
| Corporate |
| Eliminations |
| Consolidated |
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For the Year Ended December 31, 2016 |
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| ||||||||||||||||||||||||
For the Year Ended December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||
Revenues from external customers |
| $ | 160,210 |
| $ | 20,630 |
| $ | — |
| $ | — |
| $ | 180,840 |
| $ | 101,989 | 28,583 | 15,047 | — | — | $ | 145,619 | ||||||||||||||||
Intersegment revenues |
|
| — |
|
| 18 |
|
| — |
|
| (18) |
|
| — |
| 5 | — | 355 | — | (360 | ) | — | |||||||||||||||||
Net revenues |
|
| 160,210 |
|
| 20,648 |
|
| — |
|
| (18) |
|
| 180,840 |
| 101,994 | 28,583 | 15,402 | — | (360 | ) | 145,619 | |||||||||||||||||
Operating profit (loss) |
|
| 12,788 |
|
| (3,244) |
|
| (7,636) |
|
| 1 |
|
| 1,909 |
| ||||||||||||||||||||||||
Operating loss | (3,214 | ) | (2,593 | ) | (386 | ) | (6,401 | ) | — | (12,594 | ) | |||||||||||||||||||||||||||||
Depreciation and amortization |
|
| 4,166 |
|
| 2,545 |
|
| 203 |
|
| — |
|
| 6,914 |
| 3,844 | 1,855 | 425 | 212 | — | 6,336 | ||||||||||||||||||
Capital expenditures |
|
| 6,161 |
|
| 386 |
|
| 77 |
|
| — |
|
| 6,624 |
| 1,038 | 328 | 261 | 80 | — | 1,707 | ||||||||||||||||||
Assets held for sale |
|
| — |
|
| 353 |
|
| 455 |
|
| — |
|
| 808 |
| ||||||||||||||||||||||||
Total assets |
|
| 45,367 |
|
| 30,415 |
|
| 244,639 |
|
| (202,759) |
|
| 117,662 |
| 37,131 | 46,219 | 10,825 | 228,219 | (204,347 | ) | 118,047 |
The Company generates revenues entirely from transactions completed in the U.S. and its long‑livedlong-lived assets are all located in the U.S. All intercompany revenue is eliminated in consolidation. During 2017, one customer2022, twocustomers accounted for more than 10% of total net revenues. The customercustomers, reported within the Heavy Fabricationssegment, accounted for revenues of $100,413 for fiscal year 2017$64,625 and was reported within the Towers and Heavy Fabrications segment.$20,336, respectively. During 2016, three2021, two customers accounted for more than 10% of total net revenues. These threeThe customers, reported within the Heavy Fabrications segment, accounted for revenues of $111,480, $23,018,$59,278 and $21,237 for fiscal year 2016 and were reported within the Towers and Heavy Fabrications segment.$25,946 respectively. During the years ended December 31, 2017 2022 and 2016,2021, five customers accounted for 85%69% and 91%71%, respectively, of total net revenues.
59
BROADWIND, ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 2022 and 20162021
(in thousands, except share and per share data)
17.16. EMPLOYEE BENEFIT PLANS
Retirement Savings and Profit Sharing Plans
Retirement Savings and Profit Sharing Plans
The Company offers a 401(k)401(k) retirement savings plan to all eligible employees who may elect to contribute a portion of their salary on a pre‑taxpre-tax basis, subject to applicable statutory limitations. Participating non‑unionAs of December 31, 2022, all employees arewere eligible to receive safe harbor matching contributions equal to 100% of the first 3% of the participant’s elective deferral contributions and 50% of the next 2% of the participant’s elective deferral contributions. In accordance with the collective bargaining agreements in place at its two union locations, the Company’s Illinois‑based union employees are eligible to receive a discretionary match in an amount up to 50% of each participant’s first 4% of elective deferral contributions, and the Company’s Pennsylvania‑based union employees are eligible to receive a discretionary match in an amount up to 100% of each participant’s first 3% and 50% of the next 2% of elective deferral contributions. The Company has the discretion, subject to applicable statutory requirements, to fund any matching contribution with a contribution to the plan of the Company’s common stock. Beginning with the first quarter of 2012, theThe Company fundedperiodically evaluates whether to fund the matching contributionscontribution in the form of the Company’s common stock. Startingcash or in the first quarter of 2014, the Company resumed funding the matching contributions in cash. Beginning in the third quarter of 2017, the Company resumed funding the matching contributions in the form of the Company’s common stock. Under the plan, elective deferrals and basic Company matching is 100% vested at all times.
For the years ended December 31, 2017 2022 and 2016,2021, the Company recorded expense under these plans of approximately $765$1,247 and $823,$1,195, respectively.
Deferred Compensation Plan
The Company maintains a deferred compensation plan for certain key employees and nonemployee directors, whereby certain wages earned, compensation for services rendered, and discretionary company‑matchingcompany-matching contributions may be deferred and deemed to be invested in the Company’s common stock. Changes in the fair value of the plan liability are recorded as charges or credits to compensation expense. Compensation expenseincome associated with the deferred compensation plan recorded during the years ended December 31, 2017 2022 and 20162021 was $(12) $(1)and $24, respectively.$(55). The fair value of the plan liability to the Company is included in accrued liabilities in the Company’s consolidated balance sheets. As of December 31, 2017 2022 and 2016,2021, the fair value of plan liability to the Company was $24$15 and $36,$16, respectively.
In addition to the employee benefit plans described above, the Company participates in certain customary employee benefits plans, including those which provide health and life insurance benefits to employees.
18. NEW MARKETS TAX CREDIT TRANSACTION
On July 20, 2011, the Company executed the NMTC Transaction, which was amended on August 24, 2015, involving the following third parties: AMCREF Fund VII, LLC (“AMCREF”), a registered community development entity; COCRF Investor VIII, LLC (“COCRF”); and Capital One. The NMTC Transaction allows the Company to receive below market interest rate funds through the federal New Markets Tax Credit (“NMTC”) program. The Company received $2,280 in proceeds via the NMTC Transaction. The NMTC Transaction qualifies under the NMTC program and includes a gross loan from AMCREF to the Company's wholly-owned subsidiary Broadwind Services, LLC, a Delaware limited liability company, in the principal amount of $10,000, with a term of fifteen years and interest payable at the rate of 1.4% per annum, largely offset by a gross loan in the principal amount of $7,720 from the Company to COCRF, with a term of fifteen years and interest payable at the rate of 2.5% per annum. The August 2015 amendment did not change the financial terms of the NMTC Transaction, but did add the activities and assets of the Abilene Heavy Industries Facility to the NMTC Transaction and allow for the sale of the Abilene Gearbox Facility assets provided that the proceeds of such sale be re-invested in the Abilene Heavy Industries Facility.
The NMTC regulations permit taxpayers to claim credits against their federal income taxes for up to 39% of qualified investments in the equity of community development entities. The NMTC Transaction could generate $3,900 in
60
BROADWIND, ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 2022 and 20162021
(in thousands, except share and per share data)
tax credits, which the Company has made available under the structure by passing them through to Capital One. The proceeds have been applied to the Company’s investment in the Abilene Gearbox Facility assets and associated operating costs and in the assets of the Abilene Heavy Industries Facility, as permitted under the amended NMTC Transaction.
The Abilene Heavy Industries Facility and the Abilene Gearbox Facility must operate and remain in compliance with various regulations and restrictions through September 2018, the end of the seven year compliance period, to comply with the terms of the NMTC Transaction, or the Company may be liable under its indemnification agreement with Capital One for the recapture of tax credits. In the event the Company does not comply with these regulations and restrictions, the NMTC program tax credits may be subject to 100% recapture for a period of seven years as provided in the IRC. The Company does not anticipate that any tax credit recapture events will occur or that it will be required to make any payments to Capital One under the indemnification agreement.
The Capital One contribution, including a loan origination payment of $320, has been included as other assets in the Company’s consolidated balance sheet as of December 31, 2017. The NMTC Transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase Capital One’s interest in the third quarter of 2018. Capital One may exercise an option to put its investment to the Company and receive $130 from the Company at that time. If Capital One does not exercise its put option, the Company can exercise a call option at the then fair market value of the call. The Company expects that Capital One will exercise the put option at the end of the tax credit recapture period. The Capital One contribution other than the amount allocated to the put obligation will be recognized as income only after the put/call is exercised and when Capital One has no ongoing interest. However, there is no legal obligation for Capital One to exercise the put, and the Company has attributed only an insignificant value to the put option included in this transaction structure.
The Company has determined that two pass‑through financing entities created under NMTC Transaction structure are VIEs. The ongoing activities of the VIEs—collecting and remitting interest and fees and complying with NMTC program requirements—were considered in the initial design of the NMTC Transaction and are not expected to significantly affect economic performance throughout the life of the VIEs. In making this determination, management also considered the contractual arrangements that obligate the Company to deliver tax benefits and provide various other guarantees under the NMTC Transaction structure, Capital One’s lack of a material interest in the underlying economics of the project, and the fact that the Company is obligated to absorb losses of the VIEs. The Company has concluded that it is required to consolidate the VIEs because the Company has both (i) the power to direct those matters that most significantly impact the activities of each VIE, and (ii) the obligation to absorb losses or the right to receive benefits of each VIE.
The $262 of issue costs paid to third parties in connection with the NMTC Transaction are recorded as prepaid expenses, and are being amortized over the expected seven-year term of the NMTC arrangement. Capital One’s net contribution of $2,600 is included in Line of Credit and NMTC Note Payable in the consolidated balance sheet. Incremental costs to maintain the transaction structure during the compliance period will be recognized as they are incurred.
61
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 and 2016
(in thousands, except share and per share data)
19.17. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following table provides a summary of selected financial results of operations by quarter for the years ended December 31, 2017 2022 and 20162021 as follows:
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2017 |
| First |
| Second |
| Third |
| Fourth |
| ||||
Revenues |
| $ | 56,060 |
| $ | 43,362 |
| $ | 29,595 |
| $ | 17,768 |
|
Gross profit (loss) |
|
| 6,374 |
|
| 3,872 |
|
| 1,014 |
|
| (3,101) |
|
Operating profit (loss) |
|
| 1,603 |
|
| (516) |
|
| (1,831) |
|
| (6,689) |
|
Income (loss) from continuing operations, net of tax |
|
| 6,482 |
|
| (688) |
|
| (2,049) |
|
| (6,928) |
|
Net income (loss) |
|
| 6,327 |
|
| (780) |
|
| (2,207) |
|
| (6,981) |
|
Income (loss) from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.43 |
| $ | (0.05) |
| $ | (0.14) |
| $ | (0.45) |
|
Diluted |
| $ | 0.43 |
| $ | (0.05) |
| $ | (0.14) |
| $ | (0.45) |
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.42 |
| $ | (0.05) |
| $ | (0.15) |
| $ | (0.46) |
|
Diluted |
| $ | 0.42 |
| $ | (0.05) |
| $ | (0.15) |
| $ | (0.46) |
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
2016 |
| First |
| Second |
| Third |
| Fourth |
| ||||
Revenues |
| $ | 46,757 |
| $ | 43,380 |
| $ | 42,552 |
| $ | 48,151 |
|
Gross profit (loss) |
|
| 3,962 |
|
| 4,142 |
|
| 5,331 |
|
| 4,704 |
|
Operating (loss) profit |
|
| (224) |
|
| 181 |
|
| 1,360 |
|
| 592 |
|
(Loss) income from continuing operations, net of tax |
|
| (358) |
|
| 42 |
|
| 1,245 |
|
| 406 |
|
Net (loss) income |
|
| (377) |
|
| (474) |
|
| 872 |
|
| 298 |
|
(Loss) income from continuing operations per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.02) |
| $ | 0.00 |
| $ | 0.08 |
| $ | 0.03 |
|
Diluted |
| $ | (0.02) |
| $ | 0.00 |
| $ | 0.08 |
| $ | 0.03 |
|
Net (loss) income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.03) |
| $ | (0.03) |
| $ | 0.06 |
| $ | 0.02 |
|
Diluted |
| $ | (0.03) |
| $ | (0.03) |
| $ | 0.06 |
| $ | 0.02 |
|
2022 | First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 41,844 | $ | 50,012 | $ | 44,843 | $ | 40,060 | ||||||||
Gross profit | 2,012 | 2,394 | 3,748 | 2,556 | ||||||||||||
Operating loss | (2,073 | ) | (1,912 | ) | (520 | ) | (2,102 | ) | ||||||||
Net loss | (2,404 | ) | (2,703 | ) | (1,772 | ) | (2,851 | ) | ||||||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.09 | ) | $ | (0.14 | ) | ||||
Diluted | $ | (0.12 | ) | $ | (0.13 | ) | $ | (0.09 | ) | $ | (0.14 | ) |
2021 | First | Second | Third | Fourth | ||||||||||||
Revenues | $ | 32,728 | $ | 46,491 | $ | 40,389 | $ | 26,011 | ||||||||
Gross profit | 282 | 2,198 | 2,074 | 957 | ||||||||||||
Operating loss | (4,311 | ) | (2,311 | ) | (1,997 | ) | (3,975 | ) | ||||||||
Net (loss) income | (1,210 | ) | 10,252 | (2,105 | ) | (4,090 | ) | |||||||||
Net (loss) income per share: | ||||||||||||||||
Basic | $ | (0.07 | ) | $ | 0.55 | $ | (0.11 | ) | $ | (0.21 | ) | |||||
Diluted | $ | (0.07 | ) | $ | 0.53 | $ | (0.11 | ) | $ | (0.21 | ) |
BROADWIND, INC. AND SUBSIDIARIES
20.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2022 and 2021
(in thousands, except share and per share data)
18. 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 suchlitigation 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.
21. BUSINESS COMBINATIONS
Overview
On The Company received a notice dated January 30, 2017, the Company announced that it had agreed upon the material terms to acquire Red Wolf, a Sanford, North Carolina-based, privately held fabricator, kitter and assembler of industrial systems primarily supporting the global gas turbine market, for18, 2023 from WM Argyle Fund, LLC, which allegedly owned approximately $18,983, subject to certain adjustments. The transaction closed on February 1, 2017, and Red Wolf is being operated as a wholly-owned subsidiary1.0% of the Company.
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BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 and 2016
(in thousands, except share and per share data)
Accounting for the Transaction
The Company accounts for acquisitions in accordance with guidance found in ASC 805, Business Combinations. The guidance requires consideration given, including contingent consideration, assets acquired and liabilities assumed to be valued at their fair market values at the acquisition date. The guidance further provides that: (1) in-process research and development will be recorded at fair value as an indefinite-lived intangible asset; (2) acquisition costs will generally be expensed as incurred, (3) restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and (4) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. ASC 805 requires that any excess of purchase price over fair value of assets acquired, including identifiable intangibles and liabilities assumed, be recognized as goodwill. Red Wolf’s results are included in the Company’s results from the acquisition date of February 1, 2017.
The purchase price of the transaction totaled $18,983, of which $16,449 was paid in cash and $2,534 was the expected value of contingent future earn-out payments. The contingent consideration arrangement requires the Company to pay the former owners of Red Wolf a payout if Red Wolf achieves a targeted profitability benchmark. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangement is between $0 and $9,900. Annual earn-out payments may not exceed $4,950. The fair value of the contingent consideration arrangement of $2,534 was estimated by using a Monte Carlo simulation. Key assumptions include a short-term weighted average cost of capital of 15% and historical volatility of public company comparables.
During the third quarter of 2017, the Company released $1,394 of this contingency into operating income because management determined that Red Wolf’s full-year financial performance during the first year of ownership by the Company was unlikely to meet the threshold required to pay the first installment of the contingent earn-out. The release of the first installment of the contingent earn-out is reflected in the selling, general, and administrative line item in the consolidated statements of operations. Following the release of this portion of the contingency, $1,140 remains in other long-term liabilities, relating to the potential final contingent earn-out that depends on financial performance during the second year of ownership of Red Wolf. Based on information currently known, the Company believes that the long-term contingency is still applicable.
The Company’s allocation of the $18,983 purchase price to Red Wolf’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their fair values as of February 1, 2017, is included in the table below. Goodwill is recorded based on the amount by which the purchase price exceeds the fair value of the net assets acquired and is not deductible for tax purposes. The measurement period adjustments were a result of changes in the fair value of the contingent consideration arrangement and adjustments to working capital accounts. The decrease in goodwill from March 31, 2017 is due to opening balance sheet changes noted in the table below.
The purchase price allocation as of March 31 and December 31, 2017 is as follows (in thousands):
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| Allocation as of 3/31/2017 |
| Measurement Period Adjustments |
| Allocation as of 12/31/2017 |
Assets acquired and liabilities assumed: |
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Cash and cash equivalents | $ | 63 | $ | (63) | $ | - |
Receivables |
| 2,796 |
| (96) |
| 2,700 |
Inventories |
| 4,998 |
| 179 |
| 5,177 |
Property and equipment |
| 462 |
| - |
| 462 |
Noncompete agreements |
| 170 |
| - |
| 170 |
Customer relationships |
| 12,000 |
| - |
| 12,000 |
Trade names |
| 1,100 |
| - |
| 1,100 |
Goodwill |
| 5,568 |
| (575) |
| 4,993 |
Accounts payable |
| (1,354) |
| 2 |
| (1,352) |
Accrued expenses |
| (809) |
| (67) |
| (876) |
Deferred tax liabilities |
| (5,391) |
| - |
| (5,391) |
Total purchase price | $ | 19,603 | $ | (620) | $ | 18,983 |
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BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2017 and 2016
(in thousands, except share and per share data)
The allocation of the purchase price is based on valuations performed to determine the fair value of such assets and liabilities as of the acquisition date. The acquired noncompete agreements, customer relationships, and trade names have weighted average amortization periods of 6.0 years, 9.0 years, and 14.0 years, respectively and the total weighted average life of the acquired intangible assets is 9.4 years. Goodwill from this transaction has been allocated to the Company’s Process Systems segment and is not deductible for tax purposes.
The Company incurred transaction costs of $182 for the year ended December 31, 2017 related to the acquisition. These costs were expensed as incurred and were primarily recorded as selling, general, and administrative expenses on the Company’s consolidated statements of operations. Red Wolf recorded revenues of $15,868 and a net loss of $146 for the period beginning from the acquisition date of February 1, 2017 and ending on December 31, 2017.
Pro Forma Results
The Company’s unaudited pro forma results of operations for the years ended December 31, 2017 and 2016 assuming the Red Wolf acquisition had occurred as of January 1, 2016 are presented for comparative purposes below. These amounts are based on available information of the results of operations of Red Wolf prior to the acquisition date and are not necessarily indicative of what the results of operations would have been had the acquisition been completed on January 1, 2016.
This unaudited pro forma information is as follows (in thousands, except per share amounts):
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| Year Ended December 31, | ||||
| 2017 |
| 2016 | ||
Total revenues | $ | 149,418 |
| $ | 213,218 |
Net (loss) income* | $ | (3,410) |
| $ | 9,814 |
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Pro forma (loss) income per common share - basic | $ | (0.23) |
| $ | 0.66 |
Pro forma (loss) income per common share - diluted | $ | (0.23) |
| $ | 0.65 |
*The release of a portion of the tax provision related to the acquisition is presented within the year ended December 31, 2016 net income for pro forma as the release is considered to occuroutstanding shares at the time of submission, purporting to nominate a slate of six candidates for election as directors at the acquisition.Company's 2023 Annual Meeting of Stockholders. The Company remains open to ongoing engagement with WM Argyle. However, if the Company and WM Argyle cannot reach an agreement in connection with its nomination, there will be a contested election at the Company’s 2023 Annual Meeting of Stockholders.
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†Indicates management contract or compensation plan or arrangement.
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† | Indicates management contract or compensation plan or arrangement. |
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BROADWIND, | ||
By: | /s/ | |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons (including a majority of the board of directors) on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE | TITLE | DATE | |||
/s/ | President, Chief Executive Officer, and Director (Principal Executive Officer) |
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/s/ | Vice President and Chief Financial Officer |
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/s/ David P. Reiland | Director |
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David P. Reiland | |||||
/s/ | Director |
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/s/ Thomas A. Wagner | Director |
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Thomas A. Wagner | |||||
/s/ Cary B. Wood | Director |
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Cary B. Wood | |||||
/s/ Sachin Shivaram | Director | March 9, 2023 | |||
Sachin Shivaram |
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