RESULTS OF OPERATIONS
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
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, 2018 compared to the year ended December 31, 2017.
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For the Year Ended December 31,
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2018 vs. 2017
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% of Total
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% of Total
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2018
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Revenue
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2017
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Revenue
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$ Change
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% Change
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Revenues
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$
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125,380
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100
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%
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$
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146,785
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100.0
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%
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$
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(21,405)
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(14.6)
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%
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Cost of sales
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121,684
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97.1
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%
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138,626
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94.4
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%
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(16,942)
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(12.2)
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%
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Restructuring
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631
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0.5
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%
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—
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0.0
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%
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631
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100.0
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%
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Gross profit
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3,065
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2.4
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%
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8,159
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5.6
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%
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(5,094)
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(62.4)
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%
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Operating expenses
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Selling, general and administrative expenses
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13,625
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10.9
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%
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13,828
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9.4
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%
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(203)
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(1.5)
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%
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Impairment charges
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12,585
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10.0
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%
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—
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0.0
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%
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12,585
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100.0
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%
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Intangible amortization
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1,884
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1.5
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%
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1,764
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1.2
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%
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120
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6.8
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%
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Restructuring
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37
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—
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%
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—
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—
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%
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37
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100.0
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%
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Total operating expenses
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28,131
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22.4
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%
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15,592
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10.6
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%
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12,539
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80.4
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%
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Operating loss
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(25,066)
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(20.0)
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%
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(7,433)
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(5.1)
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%
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(17,633)
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(237.2)
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%
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Other expense
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Interest expense, net
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(1,496)
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(1.2)
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%
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(798)
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(0.5)
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%
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(698)
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(87.5)
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%
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Other, net
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2,355
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1.9
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%
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3
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0.0
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%
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2,352
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78,400.0
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%
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Total other expense, net
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859
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0.7
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%
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(795)
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(0.5)
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%
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1,654
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208.1
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%
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Net loss before benefit for income taxes
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(24,207)
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(19.3)
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%
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(8,228)
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(5.6)
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%
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(15,979)
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(194.2)
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%
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Benefit for income taxes
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(205)
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(0.2)
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%
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(5,045)
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(3.4)
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%
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4,840
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95.9
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%
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Loss from continuing operations
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(24,002)
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(19.1)
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%
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(3,183)
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(2.2)
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%
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(20,819)
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(654.1)
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%
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Loss from discontinued operations
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(144)
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(0.1)
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%
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(458)
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(0.3)
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%
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314
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68.6
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%
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Net loss
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$
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(24,146)
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(19.3)
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%
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$
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(3,641)
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(2.5)
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%
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$
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(20,505)
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(563.2)
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%
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Consolidated
Revenues decreased by $21,405 from $146,785 for the year ended December 31, 2017, to $125,380 for the year ended December 31, 2018. Lower sales in our Towers and Heavy Fabrications segment of $34,574 were partially offset by higher sales in the Gearing segment of $12,370 and higher sales in the Process Systems segment of $929. The Towers and Heavy Fabrications segment revenue decrease was primarily due to a 34% decrease in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the towers revenue decrease was an increase in the volume of heavy fabrications primarily due to the recovery in mining and other industrial markets and the expansion of our machining capabilities. Gearing segment revenues increased primarily due to improved order intake beginning in the second half of 2017, primarily resulting from the recovery in demand from O&G and mining customers due to expanding our customer base.
Gross profit decreased by $5,094, from $8,159 for the year ended December 31, 2017, to $3,065, for the year ended December 31, 2018. The decrease in gross profit was primarily attributable to lower capacity utilization in the tower plants early in 2018 following a near shutdown at year end 2017 as our major customer rebalanced inventories. This decrease was partially offset by a $3,571 improvement in gross profit in our Gearing segment due to improved plant utilization and manufacturing efficiencies. As a result, our gross margin decreased from 5.6% for the year ended December 31, 2017, to 2.4% for the year ended December 31, 2018.
Operating expenses increased from $15,592 during the year ended December 31, 2017, to $28,131 during the year ended December 31, 2018. The increase was primarily attributable to a $7,592 intangible asset impairment charge recognized during the fourth quarter of 2018 and a $4,993 goodwill impairment charge recognized during the second quarter of 2018. As a result, operating expenses as a percentage of sales increased from 10.6% in 2017 to 22.4% in 2018.
Loss from continuing operations increased from a loss of $3,183 for the year ended December 31, 2017 to a loss of $24,002 for the year ended December 31, 2018, primarily as a result of the factors described above, partially offset by a $2,249 gain recognized on the NMTC Transaction during the current year.
The Company had a net loss of $3,641 for the year ended December 31, 2017, compared to a net loss of $24,146 for the year ended December 31, 2018, primarily as a result of the factors described above, in addition to the absence of a
$5,034 benefit from income taxes in the prior year due to the release of a portion of the tax provision related to the acquisition of Red Wolf.
Towers and Heavy Fabrications Segment
The following table summarizes the Towers and Heavy Fabrications segment operating results for the years ended December 31, 2018 and 2017:
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Twelve Months Ended
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December 31,
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2018
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2017
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Orders
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$
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23,511
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$
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34,873
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Revenues
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68,815
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103,389
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Operating (loss) income
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(4,346)
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2,667
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Operating margin
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(6.3)
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%
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2.6
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%
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Towers orders decreased from $34,873 for the year ended December 31, 2017 to $23,511 for the year ended December 31, 2018. Lower demand for towers was partially offset by increased heavy fabrication orders for the year ended December 31, 2018 primarily due to the recovery in mining demand, and in response to a strategic focus on broadening our manufacturing capabilities and diversifying the customer base in this segment. Towers and Heavy Fabrications segment revenues decreased by $34,574, from $103,389 during the year ended December 31, 2017 to $68,815 during the year ended December 31, 2018 primarily due to a 34% reduction in towers sections sold and a lower average sales price on the product mix sold. Partially offsetting the impact of the decrease in towers revenue was an increase in heavy fabrications due primarily to the recovery in mining activity.
Towers and Heavy Fabrications segment operating income decreased by $7,013, from income of $2,667 during the year ended December 31, 2017, to a loss of $4,346 during the year ended December 31, 2018. This reduction was primarily attributable to lower capacity utilization, a lower margin product mix and start-up costs associated with restoring production levels as we ramped up activity during the first quarter following a near shutdown in late 2017. These factors were partially offset by increased sales and margins on the heavy fabrications product line, a reduction in manufacturing overhead and productivity improvements. The operating margin decreased from 2.6% during the year ended December 31, 2017, to a loss of 6.3% during the year ended December 31, 2018.
Gearing Segment
The following table summarizes the Gearing segment operating results for the years ended December 31, 2018 and 2017:
The following table summarizes the Gearing segment operating results for the years ended December 31, 2017 and 2016:
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Twelve Months Ended
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December 31,
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2018
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2017
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Orders
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$
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41,576
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$
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36,928
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Revenues
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38,376
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26,006
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Operating income (loss)
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51
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(2,632)
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Operating margin
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0.1
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%
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(10.1)
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%
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Gearing segment orders rose 13% from the year ended December 31, 2017, primarily due to strong demand from wind and mining customers. As a result of the recovery in order intake that began in the prior year, revenue increased from $26,006 during the year ended December 31, 2017, to $38,376 during the year ended December 31, 2018.
The Gearing segment had operating income of $51 during the year ended December 31, 2018, an improvement from a loss of $2,632 during the year ended December 31, 2017. The operating income improvement was primarily due to improved plant utilization and manufacturing efficiencies, and higher labor productivity. Partially offsetting this was the absence of the $727 environmental reserve reversal that occurred in the prior year, as well as increased commissions and overhead costs to support higher production levels. The operating margin improved based on the above items from (10.1%) during the year ended December 31, 2017, to 0.1% during the year ended December 31, 2018.
Process Systems Segment
The following table summarizes the Process Systems segment operating results for the years ended December 31, 2018 and 2017.
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Year Ended
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December 31,
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2018
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2017
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Orders
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$
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18,154
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$
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15,761
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Revenues
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18,319
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17,390
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Impairment charges
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12,585
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-
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Operating loss
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(16,442)
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(2,269)
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Operating margin
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(89.8)
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%
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(13.0)
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%
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Process Systems segment orders increased $2,393 from $15,761 during the year ended December 31, 2017, to $18,154 during the year ended December 31, 2018 primarily due to higher demand from mining and industrial customers, partially offset by weaker natural gas turbine component demand. Process Systems segment revenues increased by $929, from $17,390 during the year ended December 31, 2017, to $18,319 during the year ended December 31, 2018 primarily due to the recovery in mining and other industrial markets and the full year impact of the Red Wolf acquisition which closed in February of 2017.
The Process Systems segment operating loss increased by $14,173, from $2,269 during the year ended December 31, 2017, to $16,442 during the year ended December 31, 2018 primarily due to a $7,592 intangible asset impairment charge recognized during the fourth quarter of 2018, a $4,993 impairment charge resulting from the write-off of goodwill and $668 of restructuring costs related to the exit of a leased production facility in Abilene, TX. The operating margin decreased from a loss of 13.0% during the year ended December 30, 2017, to a loss of 89.8% during the year ended December 31, 2018.
Corporate and Other
Corporate and Other expenses decreased by $870, from $5,199 for the year ended December 31, 2017, to $4,329 for the year ended December 31, 2018. The decrease was primarily attributable to lower salaries and benefits expense of $811, partially offset by the $254 reduction in the Red Wolf earn-out release in the current period compared to the prior year.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
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 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. 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 many instances within our Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition due to our customers’ preference to ship towers in batches to support efficient construction of wind farms. We recognize revenue under these arrangements when there is a substantive reason for the arrangement (i.e. the buyer requests the arrangement), the ordered goods are segregated from inventory and not available to fill other orders, the goods are currently ready for 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 adopted the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, for the fiscal year beginning January 1, 2018 and elected the modified retrospective approach. Through our assessment of the ASC 606, we determined minimal changes to the assumptions utilized for the year ending December 31, 2017 and the adoption of the guidance did not result in a material impact on our consolidated financial statements.
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. We have recorded a reserve for the excess of cost over market value in our inventory allowance. Market value of inventory, and management’s judgment concerning the need for reserves, encompasses consideration of other 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 out method.
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 the Gearing segment’s operating losses in 2017 combined with its history of operating losses, we continue to evaluate the recoverability of certain of the long-lived assets associated with the Gearing segment. Based on third-party appraisals and other estimates of the fair value of the Gearing asset group, we determined the fair value of the asset group is in excess of carrying amounts under ASC 360 testing, and no impairment was indicated as of December 31, 2018 or 2017. 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 effect on the valuation of these assets.
During the second quarter of 2018, we identified triggering events associated with the release of Red Wolf’s final earn-out reserve, Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, we evaluated the recoverability of the Red Wolf asset group. In accordance with GAAP, we compared the carrying value of the Red Wolf asset group to the forecast undiscounted cash flows associated with this asset group. Based on the analysis performed, the forecast undiscounted cash flows exceeded the carrying value and no impairment of this group was indicated or recorded.
Next we compared the carrying value of the Red Wolf reporting unit to the fair value of the Red Wolf reporting unit. The fair value was determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The two main assumptions utilized in the forecast discounted cash flow analysis were the cash flows from operations and the weighted average cost of capital of 18.6%. Based on the analysis performed, we determined that the carrying amount of the reporting unit exceeded the fair value and recorded a $4,993 goodwill impairment charge in the second quarter of 2018. We utilized a third-party appraisal to validate the results of the analysis.
During the fourth quarter of 2018, we identified triggering events associated with Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, we tested the long‑lived assets associated with Red Wolf for impairment. The carrying value of the asset group was
found to exceed both its undiscounted cash flows and its fair value determined using the asset accumulation approach. We relied upon a third-party valuation and determined that the customer relationship intangible asset was impaired, and recorded a corresponding $7,592 impairment charge during the fourth quarter of 2018. The two main assumptions utilized in the valuation were the cash flows from operations and the weighted average cost of capital of 18.5%.
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.
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 associated with the self-insured policy years.
Health Insurance Reserves
At the beginning of the first quarter of 2014, we began to self‑insure for our health insurance liabilities, including 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 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
As of December 31, 2018, cash and cash equivalents totaled $1,177, an increase of $1,099 from December 31,
2017. Debt and capital lease obligations at December 31, 2018 totaled $14,876, and we had the ability to borrow up to $10,319 under our Credit Facility (as defined in Note 10, “Debt and Credit Agreement” in the notes to our consolidated financial statements). 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, additional equipment financing, and access to the public or private debt equity markets, including the option to raise capital under the 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 Third Amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated for future periods commencing with the quarter ending June 30, 2018.
On May 3, 2018, we executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), which waived our non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amended the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusted the definition of EBITDA to add back certain restructuring expenses.
On October 26, 2018, we executed the Fifth Amendment to Loan and Security Agreement which, among other changes, removed the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018 and added minimum EBITDA covenants through June 30, 2019.
On January 16, 2019, we executed the Sixth Amendment to Loan and Security Agreement which increased our capability to issue letters of credit.
On February, 25, 2019, we executed an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”) which expanded our Credit Facility to $35,000 and extended the term to February 25, 2022. The Amended and Restated Loan Agreement includes minimum EBITDA covenants through September 30, 2019 and introduces a Fixed Charge Coverage Ratio thereafter. For a more detailed description of the Amended and Restated Loan Agreement refer to Item 9B of this Form 10-K.
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, 2018 net cash provided by operations was $2,045 compared to net cash used in operating activities of $9,350 for the year ended December 31, 2017. The operating cash flow improved versus the prior year due to a significant increase in customer deposits associated with higher scheduled Tower production levels in 2019. Partially offsetting this increase was a greater use of cash for accounts receivable and inventory that supported higher production levels in the current year as compared to the prior year when our largest tower customer reduced orders to correct inventories.
Investing Cash Flows
During the year ended December 31, 2018, net cash used in investing activities was $1,648 compared to net cash used in investing activities of $19,894 for the year ended December 31, 2017. The decrease in net cash used in investing activities as compared to the prior-year period was primarily due to the $16,449 cash paid for the Red Wolf acquisition in February 2017. In addition, we realized a $4,968 decrease in net purchases of property and equipment, primarily driven by the completion of our Abilene, TX tower plant upgrade and expansion project in the prior year, partially offset by the $3,171 liquidation of available-for-sale securities in 2017.
Financing Cash Flows
During the year ended December 31, 2018, net cash provided by financing activities totaled $807 compared to net cash provided by financing activities of $10,660 for the year ended December 31, 2017. The decrease in net cash provided by financing activities as compared to the prior-year period was primarily due to the increased usage of our Credit Facility in 2017, which subsequently flattened in 2018 partially offset by an increase of $842 in net proceeds on long-term debt.
Other
The $2,600 liability associated with the NMTC transaction described further in Note 18, “New Markets Tax Credit Transaction” in the notes to our consolidated financial statements is
included in the line of credit, NMTC and other notes payable line item of our consolidated financial statements as of December 31, 2017. During the third quarter of 2018, the NMTC loan was extinguished and we recorded a gain of $2,249 in other income, net of transaction expenses.
Separately in 2016, we entered into a $570 loan agreement with the Development Corporation of Abilene which is included in long-term debt, less current maturities. The loan is forgivable upon us meeting and maintaining specific employment thresholds. During 2018, $114 of the loan was forgiven. In addition, we have outstanding notes payable for capital expenditures in the amount of $1,882 and $1,146 as of December 31, 2018 and 2017, respectively, with $930 and $804 included in the “Line of credit, NMTC and other notes payable” line item of our consolidated financial statements as of December 31, 2018 and 2017, respectively. The notes payable have monthly payments that range from $3 to $36 and an interest rate of 5%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from April 2020 to May 2021.
Contractual Obligations
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 DAT
A
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 PROCEDURE
S
(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, 2018.
(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.
(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, 2018. 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, 2018.
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.
ITEM 9B. OTHER INFORMATIO
N
On February, 25, 2019, the Company and its subsidiaries Brad Foote Gear Works, Inc. (“Brad Foote”), Broadwind Towers, Inc. (“Broadwind Towers”), Broadwind Services, LLC (“Broadwind Services”), and Red Wolf (each individually, a “Subsidiary” and collectively, the “Subsidiaries”), entered into an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”), with CIBC Bank USA, formerly known as The PrivateBank and Trust Company (“CIBC”), as administrative agent and sole lead arranger and the other financial institutions party thereto (the “Lenders”), providing the Company and its Subsidiaries with a $35 million secured credit facility (the “Credit Facility”).
Under the terms of the Amended and Restated Loan Agreement, the Credit Facility is a three-year asset-based revolving credit facility, pursuant to which the Lenders will advance funds against a borrowing base consisting of approximately (a) 85% of the face value of eligible receivables of the Company and the Subsidiaries, plus (b) the lesser of (i) 50% of the lower of cost or market value of eligible inventory of the Company, (ii) 85% of the orderly liquidation value of eligible inventory and (iii) $12.5 million, plus (c) the lesser of (i) the sum of (A) 75% of the appraised net orderly liquidation value of the Company’s eligible machinery and equipment plus (B) 50% of the fair market value of the Company’s mortgaged property and (ii) $12 million. Subject to certain borrowing base conditions, the aggregate Credit Facility limit under the Amended and Restated Loan Agreement is $35 million with a sublimit for letters of credit of $10 million. Borrowings under the Credit Facility bear interest at a per annum rate equal to, at the option of the Company, the one, two or three-month LIBOR rate or the base rate, plus a margin. The applicable margin is 5.50% for LIBOR rate loans and 3.50% for base rates loans. Upon certain pay downs, a pricing grid based on the Company’s trailing twelve month fixed charge coverage ratio may become effective under which applicable margins would range from 2.25% to 2.75% for LIBOR rate loans and 0.00% to 0.75% for base rate loans. Letter of credit fees are payable on outstanding letters of credit in an amount equal to the applicable LIBOR margin under the pricing grid, plus other customary fees. The Company must also pay an unused facility fee equal to 0.50% per annum on the unused portion of the Credit Facility along with other standard fees. The initial term of the Amended and Restated Loan Agreement ends on February 25, 2022.
The Company is allowed to prepay in whole or in part advances under the Credit Facility without penalty or premium other than customary “breakage” costs with respect to LIBOR loans.
The Amended and Restated Loan Agreement contains customary representations and warranties applicable to the Company and the Subsidiaries. It also contains a requirement that the Company, on a consolidated basis, maintain minimum quarterly EBITDA levels through September 30, 2019 and a minimum quarterly fixed charge coverage ratio thereafter, along with other customary restrictive covenants, certain of which are subject to materiality thresholds, baskets and customary exceptions and qualifications. These restrictive covenants include limitations on the ability of the Company and the Subsidiaries to, among other things, form or acquire subsidiaries, incur indebtedness, create liens, enter into a merger, consolidation, reorganization or recapitalization, dispose of assets, pay dividends, cause or permit a change of control, make investments or enter into affiliate transactions.
The Amended and Restated Loan Agreement also contains customary events of default including, without limitation, non-payment of obligations, non-performance of covenants and obligations, material judgments, bankruptcy or insolvency, default on other material debt, change of control, breaches of representations and warranties, limitation or termination of any guarantee with respect to the Amended and Restated Loan Agreement, impairment of security or invalidity or unenforceability of documentation or liens related to the Amended and Restated Loan Agreement. The occurrence of an event of default could, among other things, result in the acceleration of the obligations under the Amended and Restated Loan Agreement.
The obligations under the Amended and Restated Loan Agreement are secured by, subject to certain exclusions, (i) a first priority security interest in all of the accounts, inventory, equipment, chattel paper, payment intangibles, cash and cash equivalents and other personal property and stock or other equity interest in subsidiaries of the Company and the Subsidiaries and (ii) a first priority mortgage of the real property of Abilene, Texas and Pittsburgh, Pennsylvania.
The Company and the Subsidiaries may use the proceeds from the Credit Facility for working capital purposes, to refinance the debt of the Company and its Subsidiaries and for other business purposes.
The foregoing description of the Amended and Restated Loan Agreement is not intended to be complete and is qualified in its entirety by reference to the Amended and Restated Loan Agreement, which is attached hereto as Exhibit 10-25 to this Annual Report on Form 10-K and is incorporated herein by reference.
PART II
I
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANC
E
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,” “Executive Officers” and “Other Matters—Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement to be filed in connection with our 2019 Annual Meeting of Stockholders (the “2019 Proxy Statement”).
Code of Ethics
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.
ITEM 11. EXECUTIVE COMPENSATIO
N
Information regarding director and executive compensation is incorporated by reference from the discussion under the headings “Directors and Director Compensation” and “Executive Officers and Executive Compensation” in the 2019 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 2019 Proxy Statement.
The following table provides information as of December 31, 2018, 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
|
|
862,706
|
(1)
|
$
|
3.95
|
|
135,192
|
|
Total
|
|
862,706
|
|
$
|
3.95
|
|
135,192
|
|
|
(1)
|
|
Includes outstanding stock options to purchase shares of our common stock and outstanding restricted stock awards pursuant to the Amended and Restated Broadwind Energy, Inc. 2007 Equity Incentive Plan, the Broadwind Energy, Inc. 2012 Equity Incentive Plan, and the Broadwind Energy, Inc. 2015 Equity Incentive Plan. Each of these plans has been approved by our stockholders.
|
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 2019 Proxy Statement.
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 2019 Proxy Statement.
PART I
V
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
1. Financial Statements
The financial statements listed on the Index to Financial Statements (page 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 70 through 72) are filed as part of this Annual Report.
ITEM 16. FORM 10-K SUMMARY
None.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Broadwind Energy, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Broadwind Energy, Inc. (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
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) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
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 Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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.
/s/ RSM US LLP
We have served as the Company's auditor since 2016.
Chicago, Illinois
February 26, 2019
BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
S
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
1,177
|
|
$
|
78
|
|
Accounts receivable, net
|
|
|
|
17,455
|
|
|
13,644
|
|
Inventories, net
|
|
|
|
22,670
|
|
|
19,279
|
|
Prepaid expenses and other current assets
|
|
|
|
1,776
|
|
|
1,798
|
|
Current assets held for sale
|
|
|
|
—
|
|
|
580
|
|
Total current assets
|
|
|
|
43,078
|
|
|
35,379
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
49,087
|
|
|
55,693
|
|
Goodwill
|
|
|
|
—
|
|
|
4,993
|
|
Other intangible assets, net
|
|
|
|
6,602
|
|
|
16,078
|
|
Other assets
|
|
|
|
398
|
|
|
207
|
|
TOTAL ASSETS
|
|
|
$
|
99,165
|
|
$
|
112,350
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Line of credit, NMTC and other notes payable
|
|
|
$
|
11,930
|
|
$
|
14,138
|
|
Current maturities of long-term debt
|
|
|
|
—
|
|
|
114
|
|
Current portions of capital lease obligations
|
|
|
|
967
|
|
|
762
|
|
Accounts payable
|
|
|
|
11,618
|
|
|
11,756
|
|
Accrued liabilities
|
|
|
|
3,806
|
|
|
4,393
|
|
Customer deposits
|
|
|
|
23,507
|
|
|
9,791
|
|
Current liabilities held for sale
|
|
|
|
27
|
|
|
30
|
|
Total current liabilities
|
|
|
|
51,855
|
|
|
40,984
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Long-term debt, net of current maturities
|
|
|
|
1,408
|
|
|
797
|
|
Long-term capital lease obligations, net of current portions
|
|
|
|
571
|
|
|
941
|
|
Other
|
|
|
|
1,969
|
|
|
3,557
|
|
Total long-term liabilities
|
|
|
|
3,948
|
|
|
5,295
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding
|
|
|
|
—
|
|
|
—
|
|
Common stock, $0.001 par value; 30,000,000 shares authorized; 15,982,622 and 15,480,299 shares issued as of December 31, 2018, and December 31, 2017, respectively
|
|
|
|
16
|
|
|
15
|
|
Treasury stock, at cost, 273,937 shares as of December 31, 2018 and December 31, 2017
|
|
|
|
(1,842)
|
|
|
(1,842)
|
|
Additional paid-in capital
|
|
|
|
381,441
|
|
|
380,005
|
|
Accumulated deficit
|
|
|
|
(336,253)
|
|
|
(312,107)
|
|
Total stockholders’ equity
|
|
|
|
43,362
|
|
|
66,071
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
$
|
99,165
|
|
$
|
112,350
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
S
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Revenues
|
|
|
|
|
$
|
125,380
|
|
$
|
146,785
|
|
|
Cost of sales
|
|
|
|
|
|
121,684
|
|
|
138,626
|
|
|
Restructuring
|
|
|
|
|
|
631
|
|
|
—
|
|
|
Gross profit
|
|
|
|
|
|
3,065
|
|
|
8,159
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
|
|
|
13,625
|
|
|
13,828
|
|
|
Impairment charges
|
|
|
|
|
|
12,585
|
|
|
—
|
|
|
Intangible amortization
|
|
|
|
|
|
1,884
|
|
|
1,764
|
|
|
Restructuring
|
|
|
|
|
|
37
|
|
|
—
|
|
|
Total operating expenses
|
|
|
|
|
|
28,131
|
|
|
15,592
|
|
|
Operating loss
|
|
|
|
|
|
(25,066)
|
|
|
(7,433)
|
|
|
OTHER (EXPENSE) INCOME, net:
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
(1,496)
|
|
|
(798)
|
|
|
Other, net
|
|
|
|
|
|
2,355
|
|
|
3
|
|
|
Total other income (expense), net
|
|
|
|
|
|
859
|
|
|
(795)
|
|
|
Net loss before benefit for income taxes
|
|
|
|
|
|
(24,207)
|
|
|
(8,228)
|
|
|
Benefit for income taxes
|
|
|
|
|
|
(205)
|
|
|
(5,045)
|
|
|
LOSS FROM CONTINUING OPERATIONS
|
|
|
|
|
|
(24,002)
|
|
|
(3,183)
|
|
|
LOSS FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
(144)
|
|
|
(458)
|
|
|
NET LOSS
|
|
|
|
|
$
|
(24,146)
|
|
$
|
(3,641)
|
|
|
NET LOSS PER COMMON SHARE—BASIC:
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
$
|
(1.55)
|
|
$
|
(0.21)
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
(0.01)
|
|
|
(0.03)
|
|
|
Net loss
|
|
|
|
|
$
|
(1.56)
|
|
$
|
(0.24)
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC
|
|
|
|
|
|
15,469
|
|
|
15,053
|
|
|
NET LOSS PER COMMON SHARE—DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
|
|
$
|
(1.55)
|
|
$
|
(0.21)
|
|
|
Loss from discontinued operations
|
|
|
|
|
|
(0.01)
|
|
|
(0.03)
|
|
|
Net loss
|
|
|
|
|
$
|
(1.56)
|
|
$
|
(0.24)
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED
|
|
|
|
|
|
15,469
|
|
|
15,053
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT
Y
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Treasury Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Issued
|
|
|
|
Issued
|
|
Additional
|
|
Accumulated
|
|
|
|
|
|
|
|
Issued
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in Capital
|
|
Deficit
|
|
Total
|
|
BALANCE, December 31, 2016
|
|
|
15,175,767
|
|
$
|
15
|
|
(273,937)
|
|
$
|
(1,842)
|
|
$
|
378,876
|
|
$
|
(308,466)
|
|
$
|
68,583
|
|
Stock issued for restricted stock
|
|
|
190,482
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock issued under defined contribution 401(k) retirement savings plan
|
|
|
114,050
|
|
|
—
|
|
—
|
|
|
—
|
|
|
316
|
|
|
—
|
|
|
316
|
|
Share-based compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
813
|
|
|
—
|
|
|
813
|
|
Net loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,641)
|
|
|
(3,641)
|
|
BALANCE, December 31, 2017
|
|
|
15,480,299
|
|
$
|
15
|
|
(273,937)
|
|
$
|
(1,842)
|
|
$
|
380,005
|
|
$
|
(312,107)
|
|
$
|
66,071
|
|
Stock issued for restricted stock
|
|
|
156,472
|
|
|
1
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Stock issued under defined contribution 401(k) retirement savings plan
|
|
|
330,739
|
|
|
—
|
|
—
|
|
|
—
|
|
|
685
|
|
|
—
|
|
|
685
|
|
Share-based compensation
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
803
|
|
|
—
|
|
|
803
|
|
Sale of common stock, net of expenses
|
|
|
15,112
|
|
|
—
|
|
—
|
|
|
—
|
|
|
(52)
|
|
|
—
|
|
|
(52)
|
|
Net loss
|
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(24,146)
|
|
|
(24,146)
|
|
BALANCE, December 31, 2018
|
|
|
15,982,622
|
|
$
|
16
|
|
(273,937)
|
|
$
|
(1,842)
|
|
$
|
381,441
|
|
$
|
(336,253)
|
|
$
|
43,362
|
|
The accompanying notes are an integral part of these consolidated financial statements.
BROADWIND ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
S
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$
|
(24,146)
|
|
$
|
(3,641)
|
|
|
Loss from discontinued operations
|
|
|
|
|
(144)
|
|
|
(458)
|
|
|
Loss from continuing operations
|
|
|
|
|
(24,002)
|
|
|
(3,183)
|
|
|
Adjustments to reconcile net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
|
|
9,183
|
|
|
8,999
|
|
|
Deferred income taxes
|
|
|
|
|
(307)
|
|
|
(5,045)
|
|
|
Impairment charges
|
|
|
|
|
12,585
|
|
|
80
|
|
|
Remeasurement of contingent consideration
|
|
|
|
|
(1,140)
|
|
|
(1,394)
|
|
|
Stock-based compensation
|
|
|
|
|
803
|
|
|
813
|
|
|
Extinguishment of New Markets Tax Credits obligation
|
|
|
|
|
(2,249)
|
|
|
—
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
(35)
|
|
|
37
|
|
|
Common stock issued under defined contribution 401(k) plan
|
|
|
|
|
685
|
|
|
316
|
|
|
Gain on disposal of assets
|
|
|
|
|
(116)
|
|
|
(12)
|
|
|
Changes in operating assets and liabilities, net of acquisition:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
|
|
(3,776)
|
|
|
884
|
|
|
Inventories
|
|
|
|
|
(2,944)
|
|
|
7,057
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
22
|
|
|
651
|
|
|
Accounts payable
|
|
|
|
|
801
|
|
|
(5,287)
|
|
|
Accrued liabilities
|
|
|
|
|
553
|
|
|
(4,921)
|
|
|
Customer deposits
|
|
|
|
|
13,716
|
|
|
(8,219)
|
|
|
Other non-current assets and liabilities
|
|
|
|
|
(1,734)
|
|
|
(126)
|
|
|
Net cash provided by (used in) operating activities of continuing operations
|
|
|
|
|
2,045
|
|
|
(9,350)
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Cash paid in acquisition
|
|
|
|
|
—
|
|
|
(16,449)
|
|
|
Sales of available for sale securities
|
|
|
|
|
—
|
|
|
2,221
|
|
|
Maturities of available for sale securities
|
|
|
|
|
—
|
|
|
950
|
|
|
Purchases of property and equipment
|
|
|
|
|
(2,324)
|
|
|
(6,688)
|
|
|
Proceeds from disposals of property and equipment
|
|
|
|
|
676
|
|
|
72
|
|
|
Net cash used in investing activities of continuing operations
|
|
|
|
|
(1,648)
|
|
|
(19,894)
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
|
|
|
141,414
|
|
|
158,856
|
|
|
Payments on line of credit
|
|
|
|
|
(141,040)
|
|
|
(148,009)
|
|
|
Proceeds from long-term debt
|
|
|
|
|
2,060
|
|
|
457
|
|
|
Payments on long-term debt
|
|
|
|
|
(761)
|
|
|
—
|
|
|
Principal payments on capital leases
|
|
|
|
|
(814)
|
|
|
(644)
|
|
|
Proceeds from sale of common stock, net of expenses
|
|
|
|
|
(52)
|
|
|
—
|
|
|
Net cash provided by financing activities of continuing operations
|
|
|
|
|
807
|
|
|
10,660
|
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows
|
|
|
|
|
(105)
|
|
|
(78)
|
|
|
Net cash used in discontinued operations
|
|
|
|
|
(105)
|
|
|
(78)
|
|
|
Add: Cash balance of discontinued operations, beginning of period
|
|
|
|
|
—
|
|
|
2
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
|
|
1,099
|
|
|
(18,660)
|
|
|
CASH AND CASH EQUIVALENTS beginning of the period
|
|
|
|
|
78
|
|
|
18,738
|
|
|
CASH AND CASH EQUIVALENTS end of the period
|
|
|
|
$
|
1,177
|
|
$
|
78
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
|
$
|
1,168
|
|
$
|
585
|
|
|
Income taxes paid
|
|
|
|
$
|
116
|
|
$
|
44
|
|
|
Non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock grants
|
|
|
|
$
|
803
|
|
$
|
813
|
|
|
Equipment additions via capital lease
|
|
|
|
$
|
650
|
|
$
|
844
|
|
|
Non-cash purchases of property and equipment
|
|
|
|
$
|
64
|
|
$
|
1,003
|
|
|
Contingent consideration related to business acquisition
|
|
|
|
$
|
—
|
|
$
|
2,534
|
|
|
Red Wolf acquisition:
|
|
|
|
|
|
|
|
|
|
|
Assets acquired
|
|
|
|
$
|
—
|
|
$
|
26,602
|
|
|
Liabilities assumed
|
|
|
|
$
|
—
|
|
$
|
7,619
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018 and 2017
(in thousands, except share and per share data)
1. DESCRIPTION OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Broadwind Energy, Inc. (the “Company”) provides technologically advanced high‑value products to energy, mining and infrastructure sector customers, primarily in the United States of America (the “U.S.”). The Company’s most significant presence is within the U.S. wind energy industry, although the Company has increasingly diversified into other industrial markets. Within the U.S. wind energy industry, the Company provides products primarily to turbine manufacturers. The Company also provides precision gearing and heavy fabrications to a broad range of industrial customers for oil and gas (“O&G”), mining, steel and other industrial applications. With the acquisition of Red Wolf Company, LLC (“Red Wolf”), a Sanford, North Carolina-based, privately held fabricator, kitter and assembler of industrial systems primarily supporting the global natural gas turbine (“NGT”) market in February 2017, the Company further diversified into the business of supplying components for natural gas turbines. The Company has three reportable operating segments: Towers and Heavy Fabrications, Gearing, and Process Systems.
Towers and Heavy Fabrications
The Company manufactures towers for wind turbines, specifically the large and heavier wind towers that are designed for multiple megawatt (“MW”) wind turbines. 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 towers sections), sufficient to support turbines generating more than 1,100 MW of power. This product segment also encompasses the manufacture of other heavy fabrications for mining and other industrial customers. 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 segment’s activities.
Gearing
The Company engineers, builds and remanufactures precision gears and gearboxes for O&G, wind energy, mining, steel and other industrial applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment in Neville Island, Pennsylvania.
Process Systems
On February 1, 2017, the Company acquired Red Wolf and as a result, aggregated its Abilene TX based fabrication business with Red Wolf to form the Process Systems reportable segment. This segment provides contract manufacturing services that include build-to-spec, kitting, fabrication and inventory management for customers throughout the U.S. and in foreign countries, primarily supporting the natural gas turbine power generation market.
Liquidity
The Company meets its short term liquidity needs through cash generated from operations, through its available cash balances and through the Company’s Credit Facility (as defined below), first established in October 2016, additional equipment financing and access to the public and private debt equity markets, including the option to raise capital under the Company’s registration statement on Form S-3 (as discussed below). The Company uses the Credit Facility to fund working capital requirements. Under the terms of the Credit Facility, CIBC agreed to advance funds against a borrowing base consisting of up to 85% of the face value of the Company’s eligible accounts receivable (“A/R”), up to 50% of the book value of the Company’s eligible inventory and up to 50% of the appraised value of the Company’s eligible machinery, equipment and certain real property up to $10,000. Under the Credit Facility, borrowings are continuous and all cash receipts are usually applied to the outstanding borrowed balance. As of December 31, 2018, cash and cash equivalents and short-term investments totaled $1,177, an increase of $1,099 from December 31, 2017, and $11,000 was outstanding under the Credit Facility. The Company had the ability to borrow up to $10,319 under the Credit Facility as of December 31, 2018.
The Credit Facility has been periodically amended since the original transaction closed in 2016 to address changes in business conditions. On January 29, 2018, the Company executed the Third Amendment to Loan and Security
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
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 Third Amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated for future periods commencing with the quarter ending June 30, 2018.
On May 3, 2018, the Company executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), waiving the Company’s non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amended the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusted the definition of EBITDA to add back certain restructuring expenses.
On October 26, 2018, the Company executed the Fifth Amendment to Loan and Security Agreement which, among other things, removed the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018 and added minimum EBITDA covenants through June 30, 2019.
On January 16, 2019, the Company executed the Sixth Amendment to Loan and Security Agreement which increased the Company’s capability to issue letters of credit.
On February 25, 2019, the Company executed an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”), which expanded the Credit Facility to $35,000 and extended the term to February 25, 2022. The Amended and Restated Loan Agreement includes minimum EBITDA covenants through September 30, 2019 and introduces a Fixed Charge Coverage Ratio thereafter. For a more detailed description of the Amended and Restated Loan Agreement refer to Item 9B of this Form 10-K.
Debt and capital lease obligations at December 31, 2018 totaled $14,876, which includes current outstanding debt and capital lease obligations totaling $12,897, over the next twelve months. The current outstanding debt includes $11,000 outstanding under the Credit Facility.
On August 11, 2017, the Company filed a “shelf” registration statement on Form S-3, which was declared effective by the SEC on October 10, 2017 (the “Broadwind Form S-3”). This shelf registration statement, which includes a base prospectus, allows the Company at any time to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the Company’s base prospectus, the Company would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes.
On July 31, 2018, the Company entered into an At Market Issuance Sales Agreement (the "ATM Agreement") with Roth Capital Partners, LLC (the “Agent”). Pursuant to the terms of the ATM Agreement, the Company may sell from time to time through the Agent shares of the Company's common stock, par value $0.001 per share with an aggregate sales price of up to $10,000. The Company will pay a commission to the Agent of 3% of the gross proceeds of the sale of the shares sold under the ATM Agreement and reimburse the Agent for the expenses of their counsel. During the year ended December 31, 2018, the Company issued 15,112 shares of the Company’s common stock under the ATM Agreement and the net proceeds (before upfront costs) to the Company from the sale of the Company’s common stock were approximately $33 after deducting commissions paid of approximately $1. As of December 31, 2018, the Company’s common stock having a value of approximately $9,967 remained available for issuance with respect to the ATM Agreement.
The Company anticipates that current cash resources, amounts available under the Credit Facility, cash to be generated from operations, additional equipment financing, and any potential proceeds from access to the public or private debt or equity markets, including the option to raise capital under the Broadwind Form S-3, will be adequate to meet the Company’s liquidity needs for at least the next twelve months. If assumptions regarding the Company’s production, sales and subsequent collections from several of the Company’s large customers, as well as customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, the Company may in the future encounter cash flow and liquidity issues, which could have a material adverse effect on the Company’s business, financial condition and results of operations. If the Company’s operational performance deteriorates significantly, it may be unable to comply with existing financial covenants, and could lose access to the Credit Facility. This could limit the
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Company’s operational flexibility or require a delay in making planned investments. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other restrictions on the Company. While the Company believes that it will continue to have sufficient cash available to operate its businesses and to meet its financial obligations and debt covenants, for at least the next 12 months, there can be no assurances that its operations will generate sufficient cash, or that credit facilities or other resources will be available in an amount sufficient to enable the Company to meet these financial obligations.
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
These consolidated financial statements include the accounts of the Company and entities in which it has a controlling financial interest. All significant intercompany transactions and balances have been eliminated in consolidation. The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity (“VIE”).
When the Company obtains an economic interest in an entity, the Company evaluates the entity to determine if the entity is deemed a VIE, and if the Company is deemed to be the primary beneficiary, in accordance with the accounting standard for the consolidation of VIE’s. The accounting standard for the consolidation of VIE’s requires the Company to qualitatively assess if the Company was the primary beneficiary of the VIE based on whether the Company had (i) the power to direct those matters that most significantly impacted the activities of the VIE and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant. Refer to Note 18, “New Markets Tax Credit Transaction” of these consolidated financial statements for a description of two VIE’s that were included in the Company’s consolidated financial statements.
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 revenue recognition, future tax rates, inventory reserves, warranty reserves, impairment of long-lived assets, allowance for doubtful accounts, workers’ compensation reserves, health insurance reserves, and environmental reserves. Although these estimates are based upon management’s best knowledge of current events and actions that the Company may undertake in the future, actual results could differ from these estimates.
Cash and Cash Equivalents and Short‑Term Investments
Cash and cash equivalents typically comprise cash balances and readily marketable investments with original maturities of three months or less, such as money market funds, short‑term government bonds, Treasury bills, marketable securities and commercial paper. Marketable investments with original maturities between three and twelve months are recorded as short‑term investments. The Company’s treasury policy is to invest excess cash in money market funds or other investments, which are generally of a short‑term duration based upon operating requirements. Income earned on these investments is recorded to interest income in the Company’s consolidated statements of operations. As of December 31, 2018 and December 31, 2017, cash and cash equivalents totaled $1,177 and $78, respectively. For the years ended December 31, 2018 and 2017, interest income was $5.
Revenue Recognition
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. Customer deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are presumed to be classified as reductions of revenue in the Company’s statement of operations.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
In many instances within the Company’s Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition. The Company recognizes revenue under these arrangements only when the buyer requests the arrangement, the ordered goods are segregated from inventory 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.
The Company adopted the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, for the fiscal year beginning January 1, 2018 and elected the modified retrospective approach. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. Based on the Company’s contract evaluation, the Company determined there was no need to record any changes to the opening retained earnings due to the impact of adopting Topic 606. The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial statements.
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 in and depreciation.
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, share‑based compensation and professional services.
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, 2018, the Company’s five largest customers accounted for 78% of its consolidated revenues and 54% of outstanding A/R balances, compared to the year ended December 31, 2017 when the Company’s five largest customers accounted for 85% of its consolidated revenues and 57% of its outstanding A/R balances.
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 write‑off experience to assess whether or not adjustments to its allowance estimates are necessary. Changes in trends in any of the factors that the Company believes may impact the realizability of its A/R, as noted above, or modifications to the Company’s credit standards, collection practices and other related policies may impact its allowance for doubtful accounts and its financial results. Bad debt (recoveries) expense for the years ended December 31, 2018 and 2017 was $(34) and $80, respectively.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Inventories
Inventories are stated at the lower of cost or market and net realizable value. Cost is determined either based on the first‑in, first‑out (“FIFO”) method, or on a standard cost basis that approximates the FIFO method. Market is determined based on net realizable value. Any excess of cost over net realizable value is included in the Company’s inventory allowance. Net realizable value of inventory, and management’s judgment of the need for reserves, encompasses consideration of other business factors including physical condition, inventory holding period, contract terms and usefulness.
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 the Company that will be used to produce final customer products.
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 straight‑line method over the estimated useful lives of the related assets for financial reporting purposes, and generally using an accelerated method for income tax reporting purposes. Depreciation expense related to property and equipment for the years ended December 31, 2018 and 2017 was $7,299 and $7,235, respectively. Expenditures for additions and improvements are capitalized, while replacements, maintenance and repairs that do not improve or extend the useful lives of the respective assets are expensed as incurred. The Company has in the past capitalized interest costs incurred on indebtedness used to construct property and equipment. Capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. There was no interest cost capitalized during the years ended December 31, 2018 or 2017. Property or equipment sold or disposed of is removed from the respective property accounts, with any corresponding gains and losses recorded within operating income (loss) in the Company’s consolidated statement of operations.
The Company reviews property and equipment and other long‑lived assets (“long-lived assets”) for impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. In evaluating the recoverability of long-lived assets, the Company utilizes 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, the Company recognizes an impairment loss.
In evaluating the recoverability of long‑lived assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of such assets. If the Company’s fair value estimates or related assumptions change in the future, the Company may be required to record impairment charges related to property and equipment and other long‑lived assets. Asset recoverability is first measured by comparing the assets’ carrying amounts to their expected future undiscounted net cash flows to determine if the assets are impaired. If such assets are considered to be impaired, the impairment recognized is measured based on the amount by which the carrying amount of the assets exceeds the fair value. To the extent the assumptions used in the Company’s analysis are not achieved, there may be a negative effect on the valuation of these assets.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(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, 2018 and 2017 were as follows, excluding activity related to the discontinued Services segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
Balance, beginning of period
|
|
|
$
|
581
|
|
$
|
671
|
|
|
Addition to (reduction of) warranty reserve
|
|
|
|
(350)
|
|
|
(28)
|
|
|
Warranty claims
|
|
|
|
(5)
|
|
|
(62)
|
|
|
Balance, end of period
|
|
|
$
|
226
|
|
$
|
581
|
|
|
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.
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. In connection with the Tax Act, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law.
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.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Share‑Based Compensation
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 share‑based compensation related to these awards based on the estimated fair value of the equity award and recognizes expense ratably over the required vesting term of the award. The expense associated with PSUs is also based on the probability of achieving embedded targets. See Note 15 “Share‑Based Compensation” of these consolidated financial statements for further discussion of the Company’s share‑based compensation plans, the nature of share‑based awards issued and the Company’s accounting for share‑based compensation.
Net Income (Loss) Per Share
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 options, warrants and convertible securities. Diluted net income (loss) per share is based upon the weighted average number of common shares and common‑share equivalents outstanding during the year excluding those common‑share equivalents where the impact to basic net income (loss) per share would be anti‑dilutive.
2. REVENUES
On January 1, 2018, the Company adopted ASU 2014-09 and 2015-14, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606 while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. Based on the Company’s contract evaluation, the Company determined there was no need to record any changes to the opening retained earnings due to the impact of adopting Topic 606. The adoption of Topic 606 did not have a material impact on the Company’s consolidated financial statements.
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 years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2018
|
|
2017
(1)
|
Towers and Heavy Fabrications
|
$
|
68,815
|
$
|
103,389
|
Gearing
|
|
38,376
|
|
26,006
|
Process Systems
|
|
18,319
|
|
17,390
|
Eliminations
|
|
(130)
|
|
-
|
Consolidated
|
$
|
125,380
|
$
|
146,785
|
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
(1)
As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Revenue within the Company’s Gearing and Process Systems segments is recognized at a point in time, typically when control of the promised goods or services is transferred to its customers in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. A performance obligation is a promise in a contract to transfer a distinct product or service to the customer. The Company measures revenue based on the consideration specified in the purchase order and revenue is recognized when the performance obligations are satisfied. If applicable, the transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation.
For many transactions within the Company’s Towers and Heavy Fabrications segment, products are sold under terms included in bill and hold sales arrangements that result in different timing for revenue recognition. The Company recognizes revenue under these arrangements only when there is a substantive reason for the arrangement, the ordered goods are segregated from inventory 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.
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. 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, 2018 and 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Basic earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$
|
(24,146)
|
|
$
|
(3,641)
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
15,468,975
|
|
|
15,053,049
|
|
|
Basic net (loss) income per share
|
|
|
|
$
|
(1.56)
|
|
$
|
(0.24)
|
|
|
Diluted earnings per share calculation:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
$
|
(24,146)
|
|
$
|
(3,641)
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
15,468,975
|
|
|
15,053,049
|
|
|
Common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
Stock options and non-vested stock awards
(1)
|
|
|
|
|
—
|
|
|
—
|
|
|
Weighted average number of common shares outstanding
|
|
|
|
|
15,468,975
|
|
|
15,053,049
|
|
|
Diluted net loss per share
|
|
|
|
$
|
(1.56)
|
|
$
|
(0.24)
|
|
|
(1) Stock options and restricted stock units granted and outstanding of 862,706 and 579,330 are excluded from the computation of diluted earnings for the years ended December 31, 2018 and 2017 due to the anti‑dilutive effect as a result of the Company’s net loss for those respective periods.
4. DISCONTINUED OPERATIONS
The Company’s former Services segment had substantial continued operating losses for several years, due to low capacity utilization in our gearbox remanufacturing facility and an increasingly competitive environment for field services due in part to increased in-sourcing of service functions by customers. In July, 2015 the Company’s Board of Directors (the
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
“Board”) directed management to evaluate potential strategic alternatives with respect to the Services segment. In September 2015 the Board authorized management to sell substantially all of the assets of the Services segment to one or more third-party purchasers, and thereafter to liquidate or otherwise dispose of any such assets remaining unsold. The Company began negotiations to sell substantially all the assets of the Services segment in the third quarter of 2015. The exit of this business was a strategic shift that had a major effect on the Company; therefore, the Company reclassified the related assets and liabilities of the Services segment as held for sale, which the divestiture was substantially completed in December 2015.
Results of Discontinued Operations
Results of operations associated with the Services segment, which are reflected as discontinued operations in the Company’s consolidated statements of income for the twelve months ended December 31, 2018 and 2017, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2018
|
|
2017
|
Revenues
|
|
|
|
|
$
|
3
|
|
$
|
151
|
Cost of sales
|
|
|
|
|
|
(132)
|
|
|
(391)
|
Selling, general and administrative
|
|
|
|
|
|
(15)
|
|
|
(57)
|
Impairment of held for sale assets and liabilities and gain on sale of assets
|
|
|
|
|
|
—
|
|
|
(161)
|
Loss from discontinued operations
|
|
|
|
|
$
|
(144)
|
|
$
|
(458)
|
Assets and Liabilities Held for Sale
Assets and liabilities classified as held for sale in the Company’s consolidated balance sheets as of December 31, 2018 and 2017 include the following:
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Assets:
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
—
|
|
$
|
11
|
Inventories, net
|
|
|
—
|
|
|
9
|
Total Assets Held For Sale Related To Discontinued Operations
|
|
$
|
—
|
|
$
|
20
|
Liabilities:
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
26
|
|
$
|
27
|
Customer deposits and other current obligations
|
|
|
1
|
|
|
3
|
Total Liabilities Held For Sale Related To Discontinued Operations
|
|
$
|
27
|
|
$
|
30
|
5. 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 statements, except as discussed below.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is intended to improve financial reporting about leasing transactions. This ASU will require organizations (“lessees”) that lease assets with lease terms of more than twelve months to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Organizations that own the assets leased by lessees (“lessors”) will remain largely unchanged from current guidance. In addition, this ASU will require disclosures to help investors and other financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. This ASU became effective for annual reporting periods beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt this guidance for leases existing at the date of adoption and expects to recognize a liability and corresponding asset associated with in-scope leases. The Company has commenced identifying its lease population, but is still in the process of determining those amounts to be recognized as liabilities and right of use assets.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which clarifies the definition of a business. The amendments in this ASU provide a screen to determine when a set (group of assets and activities) is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This ASU became effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this ASU had no material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the test for goodwill impairment. To simplify the subsequent measurement of goodwill, the FASB eliminated Step 2, which compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill, from the goodwill impairment test. Under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This ASU will be effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years, with early adoption permitted. The Company early adopted this ASU during the second quarter of 2018 and recorded a $4,993 impairment charge as discussed in Note 8 “Long-Lived Assets” of these consolidated financial statements.
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The activity in the A/R allowance from operations for the years ended December 31, 2018 and 2017 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
Balance at beginning of period
|
|
|
$
|
225
|
|
$
|
145
|
(Recoveries) bad debt expense
|
|
|
|
(34)
|
|
|
80
|
Write-offs
|
|
|
|
(1)
|
|
|
—
|
Balance at end of period
|
|
|
$
|
190
|
|
$
|
225
|
7. INVENTORIES
The components of inventories from operations as of December 31, 2018 and 2017 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
Raw materials
|
|
$
|
16,394
|
|
$
|
11,945
|
|
Work-in-process
|
|
|
5,426
|
|
|
6,305
|
|
Finished goods
|
|
|
2,958
|
|
|
3,538
|
|
|
|
|
24,778
|
|
|
21,788
|
|
Less: Reserve for excess and obsolete inventory
|
|
|
(2,108)
|
|
|
(2,509)
|
|
Net inventories
|
|
$
|
22,670
|
|
$
|
19,279
|
|
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
8. LONG-LIVED ASSETS
The cost basis and estimated lives of property and equipment from continuing operations as of December 31, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Life
|
|
Land
|
|
$
|
1,423
|
|
$
|
1,423
|
|
|
|
|
|
|
Buildings
|
|
|
20,747
|
|
|
22,998
|
|
39
|
years
|
|
|
|
Machinery and equipment
|
|
|
107,469
|
|
|
103,878
|
|
2
|
-
|
10
|
years
|
|
Office furniture and equipment
|
|
|
4,387
|
|
|
4,202
|
|
3
|
-
|
7
|
years
|
|
Leasehold improvements
|
|
|
8,974
|
|
|
9,095
|
|
Asset life or life of lease
|
|
|
|
|
Construction in progress
|
|
|
172
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
143,172
|
|
|
145,734
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(94,085)
|
|
|
(90,041)
|
|
|
|
|
|
|
Total property and equipment
|
|
$
|
49,087
|
|
$
|
55,693
|
|
|
|
|
|
|
As of December 31, 2018 and December 31, 2017, the Company had commitments of $80 and $132, respectively, related to the completion of projects within construction in progress.
As a result of the Red Wolf acquisition, the Company added $4,993 of goodwill, which was included in the Process Systems segment. See Note 16, “Segment Reporting” of these consolidated financial statements for further discussion of the Company’s segments. The goodwill represented the excess of the purchase price over the fair value of assets acquired, including identifiable intangibles and liabilities as part of the Company’s acquisition of Red Wolf.
During the second quarter of 2018, the Company identified triggering events associated with the release of Red Wolf’s final earn-out reserve, Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, the Company evaluated the recoverability of the Red Wolf asset group. In accordance with GAAP, the Company compared the carrying value of the Red Wolf asset group to the forecast undiscounted cash flows associated with this asset group. Based on the analysis performed, the forecast undiscounted cash flows exceeded the carrying value and no impairment of this group was indicated or recorded.
The Company next compared the carrying value of the Red Wolf reporting unit to the fair value of the Red Wolf reporting unit. The fair value was determined using significant unobservable inputs, or level 3 in the fair value hierarchy. The two main assumptions utilized in the forecast discounted cash flow analysis were the cash flows from operations and the weighted average cost of capital of 18.6%. Based on the analysis performed, the Company determined that the carrying amount of the reporting unit exceeded the fair value and recorded a $4,993 goodwill impairment charge in the second quarter of 2018. The Company utilized a third-party appraisal to validate the results of the analysis.
During the fourth quarter of 2018, the Company identified triggering events associated with Red Wolf’s recent operating results, a reduction in Red Wolf’s major customer’s performance and the delay of new initiatives being implemented. As a result, the Company tested the long‑lived assets associated with Red Wolf for impairment. The carrying value of the asset group was found to exceed both its undiscounted cash flows and its fair value determined using the asset accumulation approach. The Company relied upon a third-party valuation and determined that the customer relationship intangible asset was impaired, and recorded a corresponding $7,592 impairment charge during the fourth quarter of 2018. The two main assumptions utilized in the valuation were the cash flows from operations and the weighted average cost of capital of 18.5%.
During 2018 and 2017, the Company continued to experience triggering events associated with the Gearing segment’s history of operating losses. As a result, the Company evaluated the recoverability of certain of its long‑lived
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
assets associated with the Gearing segment. The Company relied upon a third-party appraisal and determined that there were no significant changes to the inputs or assumptions used previously. The Company concluded that no impairment to this asset group was indicated as of December 31, 2018 or 2017.
Other intangible assets represent the fair value assigned to definite-lived assets such as trade names and customer relationships as part of the Company’s acquisition of Brad Foote completed in 2007 as well as the noncompetition agreements, trade names and customer relationships that were part of the Company’s acquisition of Red Wolf. See Note 21, “Business Combinations” of these consolidated financial statements for further discussion of the Red Wolf acquisition. Other intangible assets are amortized on a straight-line basis over their estimated useful lives, with a remaining life range from 4 to 10 years.
As of December 31, 2018 and 2017, the cost basis, accumulated amortization and net book value of intangible assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
Average
|
|
|
|
|
|
|
|
Net
|
|
Average
|
|
|
|
|
|
|
|
|
Accumulated
|
|
Impairment
|
|
Book
|
|
Amortization
|
|
|
|
|
Accumulated
|
|
Book
|
|
Amortization
|
|
|
|
|
|
Cost
|
|
Amortization
|
|
Charge
|
|
Value
|
|
Period
|
|
Cost
|
|
Amortization
|
|
Value
|
|
Period
|
Goodwill and other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
$
|
4,993
|
|
$
|
—
|
|
$
|
(4,993)
|
|
$
|
-
|
|
|
|
$
|
4,993
|
|
$
|
—
|
|
$
|
4,993
|
|
|
Noncompete agreements
|
|
|
|
|
|
170
|
|
|
(54)
|
|
|
—
|
|
|
116
|
|
4.1
|
|
|
170
|
|
|
(26)
|
|
|
144
|
|
5.1
|
Customer relationships
|
|
|
|
|
|
15,979
|
|
|
(6,369)
|
|
|
(7,592)
|
|
|
2,018
|
|
6.8
|
|
|
15,979
|
|
|
(4,992)
|
|
|
10,987
|
|
8.0
|
Trade names
|
|
|
|
|
|
9,099
|
|
|
(4,631)
|
|
|
—
|
|
|
4,468
|
|
9.5
|
|
|
9,099
|
|
|
(4,152)
|
|
|
4,947
|
|
10.5
|
Other intangible assets
|
|
|
|
|
$
|
25,248
|
|
$
|
(11,054)
|
|
$
|
(7,592)
|
|
$
|
6,602
|
|
6.5
|
|
$
|
25,248
|
|
$
|
(9,170)
|
|
$
|
16,078
|
|
8.8
|
Intangible assets are amortized on a straight‑line basis over their estimated useful lives, which range from 6 to 20 years. Amortization expense was $1,884 and $1,764 for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, estimated future amortization expense is as follows:
|
|
|
|
2019
|
|
$
|
812
|
2020
|
|
|
812
|
2021
|
|
|
812
|
2022
|
|
|
812
|
2023
|
|
|
786
|
2024 and thereafter
|
|
|
2,568
|
Total
|
|
$
|
6,602
|
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
9. ACCRUED LIABILITIES
Accrued liabilities as of December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Accrued payroll and benefits
|
|
$
|
2,126
|
|
$
|
1,797
|
|
Accrued property taxes
|
|
|
—
|
|
|
144
|
|
Income taxes payable
|
|
|
66
|
|
|
77
|
|
Accrued professional fees
|
|
|
101
|
|
|
40
|
|
Accrued warranty liability
|
|
|
226
|
|
|
581
|
|
Accrued self-insurance reserve
|
|
|
374
|
|
|
812
|
|
Accrued other
|
|
|
913
|
|
|
942
|
|
Total accrued liabilities
|
|
$
|
3,806
|
|
$
|
4,393
|
|
10. DEBT AND CREDIT AGREEMENTS
The Company’s outstanding debt balances as of December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Line of credit
|
|
$
|
11,000
|
|
$
|
10,733
|
|
NMTC note payable
|
|
|
—
|
|
|
2,600
|
|
Other notes payable
|
|
|
1,882
|
|
|
1,146
|
|
Long-term debt
|
|
|
456
|
|
|
570
|
|
Less: Current portion
|
|
|
(11,930)
|
|
|
(14,252)
|
|
Long-term debt, net of current maturities
|
|
$
|
1,408
|
|
$
|
797
|
|
As of December 31, 2018, future annual principal payments on the Company’s outstanding debt obligations were as follows:
|
|
|
|
|
2019
|
|
$
|
12,045
|
|
2020
|
|
|
913
|
|
2021
|
|
|
266
|
|
2022
|
|
|
114
|
|
Total
|
|
$
|
13,338
|
|
Credit Facilities
On October 26, 2016, the Company established a $20,000 three-year secured revolving line of credit (the “Credit Facility”) with CIBC Bank USA, formerly known as The PrivateBank and Trust Company (“CIBC”). The Credit Facility was subsequently increased to $25,000 in March of 2017 pursuant to a Second Amendment to Loan and Security Agreement and an Amended and Restated Revolving Note. Under the Credit Facility, CIBC advances funds when requested against a borrowing base consisting of up to 85% of the face value of the Company’s eligible A/R, up to 50% of the book value of eligible inventory and up to 50% of the appraised value of eligible machinery, equipment and certain real property up to $10,000. Borrowings under the Credit Facility bear interest at a per annum rate equal to the applicable LIBOR plus a margin ranging from 2.25% to 3.00%, or the applicable base rate plus a margin ranging from 0.00% to 1.00%, both of which are based on the trailing twelve-month EBITDA. The Company also pays an unused facility fee to CIBC equal to 0.50% per annum on the unused portion of the Credit Facility, along with other standard fees. The Credit Facility contains customary representations and warranties. It also contains a requirement that the Company, on a consolidated basis, maintain a Fixed Charge Coverage Ratio Covenant, along with other customary restrictive covenants. The obligations under the Credit Facility are secured by, subject to certain exclusions, (i) a first priority security interest in all accounts receivable, inventory, equipment, cash and investment property, and (ii) a mortgage on the Abilene, Texas tower facility.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
On January 29, 2018, the Company executed the Third Amendment to Loan and Security Agreement (the “Third Amendment”), which waived the Company’s non-compliance with the Fixed Charge Coverage Ratio Covenant as of December 31, 2017 and added new minimum EBITDA and capital expenditure covenants through June 30, 2018. The amendment also revised the Fixed Charge Coverage Ratio Covenant to be recalculated for future periods commencing with the quarter ending June 30, 2018.
On May 3, 2018, the Company executed the Fourth Amendment to Loan and Security Agreement (the “Fourth Amendment”), which waived the Company’s non-compliance with the minimum EBITDA covenant through March 31, 2018. The Fourth Amendment, among other changes, amended the minimum EBITDA thresholds for the period ending June 30, 2018 and adjusted the definition of EBITDA to add back certain restructuring expenses.
On October 26, 2018, the Company executed the Fifth Amendment to Loan and Security Agreement which, among other changes, removed the Fixed Charge Coverage Ratio and capital expenditure covenants as of the period ending December 31, 2018 and added minimum EBITDA covenants through June 30, 2019.
On January 16, 2019, the Company executed the Sixth Amendment to Loan and Security Agreement which increased the Company’s capability to issue letters of credit.
On February, 25, 2019, the Company executed an Amended and Restated Loan and Security Agreement (the “Amended and Restated Loan Agreement”), which expanded the Credit Facility to $35,000 and extended the term to February 25, 2022. The Amended and Restated Loan Agreement includes minimum EBITDA covenants through September 30, 2019 and introduces a Fixed Charge Coverage Ratio thereafter. For a more detailed description of the Amended and Restated Loan Agreement refer to Item 9B of this Form 10-K.
As of December 31, 2018, there was $11,000 outstanding under the Credit Facility. The Company had the ability to borrow up to $10,319 under the Credit Facility as of December 31, 2018.
Other
The $2,600 liability associated with the NMTC transaction described further in Note 18, “New Markets Tax Credit Transaction” of these consolidated financial statements is included in the “Line of credit, NMTC and other notes payable” line item of the Company’s consolidated financial statements as of December 31, 2017. During the third quarter of 2018, the loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses.
Separately, in 2016, the Company entered into a $570 loan agreement with the Development Corporation of Abilene which is included in long-term debt, less current maturities. The loan is forgivable upon the Company meeting and maintaining specific employment thresholds. During 2018, $114 of the loan was forgiven. In addition, the Company has outstanding notes payable for capital expenditures in the amount of $1,882 and $1,146 as of December 31, 2018 and 2017, respectively, with $930 and $804 included in the “Line of credit, NMTC and other notes payable” line item of the Company’s consolidated financial statements as of December 31, 2018 and 2017, respectively. The notes payable have monthly payments that range from $3 to $36 and an interest rate of 5%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable have maturity dates that range from April 2020 to May 2021.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
11. LEASES
The Company leases various property and equipment under operating lease arrangements. Lease terms generally range from 3 to 15 years with renewal options for extended terms. 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 straight‑line basis over the minimum lease term. Any lease concessions received by the Company are deferred and recognized as an adjustment to rent expense ratably over the minimum lease term. The Company is required to make additional payments under certain property leases for taxes, insurance and other operating expenses incurred during the operating lease period. Rental expense for the years ended December 31, 2018 and 2017 was $3,654 and $3,378, respectively.
In addition, the Company has entered into capital lease arrangements to finance property and equipment and assumed capital lease obligations in connection with certain acquisitions. The cost basis and accumulated depreciation of assets recorded under capital leases, which are included in property and equipment, are as follows as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Cost
|
|
$
|
4,354
|
|
$
|
2,460
|
|
Accumulated depreciation
|
|
|
(951)
|
|
|
(424)
|
|
Net book value
|
|
$
|
3,403
|
|
$
|
2,036
|
|
Depreciation expense recorded in connection with assets recorded under capital leases was $527 and $295 for the years ended December 31, 2018 and 2017, respectively.
As of December 31, 2018, future minimum lease payments under capital leases and operating leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
Leases
|
|
Total
|
|
2019
|
|
$
|
1,057
|
|
$
|
3,524
|
|
$
|
4,581
|
|
2020
|
|
|
376
|
|
|
2,784
|
|
|
3,160
|
|
2021
|
|
|
252
|
|
|
2,334
|
|
|
2,586
|
|
2022
|
|
|
—
|
|
|
2,333
|
|
|
2,333
|
|
2023
|
|
|
—
|
|
|
2,213
|
|
|
2,213
|
|
2024 and thereafter
|
|
|
—
|
|
|
6,340
|
|
|
6,340
|
|
Total
|
|
$
|
1,685
|
|
$
|
19,528
|
|
$
|
21,213
|
|
Less—portion representing interest at a weighted average annual rate of 5.0%
|
|
|
(147)
|
|
|
|
|
|
|
|
Principal
|
|
|
1,538
|
|
|
|
|
|
|
|
Less—current portion
|
|
|
(967)
|
|
|
|
|
|
|
|
Capital lease obligations, noncurrent portion
|
|
$
|
571
|
|
|
|
|
|
|
|
12. COMMITMENTS AND CONTINGENCIES
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, 2018, the Company is not aware of any material pending legal proceedings or threatened litigation that would have a material adverse effect on the Company’s results of operations, financial condition or cash flows, although no assurance can be given with respect to the ultimate outcome of pending actions. Refer to Note 20, “Legal Proceedings” of these consolidated financial statements for further discussion of legal proceedings.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
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.
In connection with the Company’s restructuring initiatives, during the third quarter of 2012, the Company identified a liability associated with the planned sale of one of the Company’s facilities located in Cicero, Illinois (the “Cicero Avenue Facility”). The liability is associated with environmental remediation costs that were identified while preparing the site for sale. During 2013, the Company applied for and was accepted into the Illinois Environmental Protection Agency (“IEPA”) voluntary site remediation program. In the first quarter of 2014, the Company completed a comprehensive review of remedial options for the Cicero Avenue Facility and selected a preferred remediation technology. In the fourth quarter of 2017, the Company completed the remediation of the Cicero Avenue Facility which was subsequently sold for $583, net of expenses, in the third quarter of 2018.
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 2018 and 2017, the Company incurred no liquidated damages and there was no reserve for liquidated damages as of December 31, 2018.
Workers’ Compensation Reserves
As of December 31, 2018 and 2017, respectively, the Company had $374 and $812 accrued for self‑insured workers’ compensation liabilities. At the beginning of the third quarter of 2013, the Company began to self‑insure for its workers’ compensation liabilities, including reserves for self‑retained losses. The Company entered into a guaranteed workers’ compensation cost program at the beginning of the third quarter of 2016, but still maintains a liability for the trailing claims for the self-insured policy periods. Although the ultimate outcome of these matters may exceed the amounts recorded and additional losses may be incurred, the Company does not believe that any additional potential exposure for such liabilities will have a material adverse effect on the Company’s consolidated financial position or results of operations.
Other
As of December 31, 2018, approximately 23% of the Company’s employees were covered by two collective bargaining agreements with local unions at the Company’s Cicero, Illinois and Neville Island, Pennsylvania locations. The
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
current five-year collective bargaining agreement with the Neville Island union is expected to remain in effect through October 2022. During the third quarter of 2018, a new collective bargaining agreement was negotiated and ratified with the Cicero Union. The new four-year collective bargaining agreement with the Cicero union is expected to remain in effect through February 2022.
See Note 18, “New Markets Tax Credit Transaction” of these consolidated financial statements for a discussion of a strategic financing transaction (the “NMTC Transaction”) which originally related to the Company’s drivetrain service center in in Abilene, Texas (the “Abilene Gearbox Facility”), and was amended in August 2015 to also include the activities of the Company’s heavy industries business conducted in the same building in Abilene, Texas (the “Abilene Heavy Industries Facility”). The Abilene Heavy Industries Facility focuses on Heavy Fabrications for industries including those related to compressed natural gas distribution. Pursuant to the NMTC Transaction, the gross loan and investment in the Abilene Heavy Industries Facility and the Abilene Gearbox Facility of $10,000 is expected to generate $3,900 in tax credits over a period of seven years, which the NMTC Transaction makes available to Capital One, National Association (“Capital One”). The Abilene Heavy Industries Facility and/or the Abilene Gearbox Facility operated and remained in compliance with the terms and conditions of the NMTC Transaction during the seven year compliance period ending in the third quarter of 2018, allowing Capital One to capture up to $3,900 in tax credits. At the end of the seven year compliance period, Capital One exercised its right to put the investment back to the Company in exchange for $130. The loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses.
13. FAIR VALUE MEASUREMENTS
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. The Company used market negotiations to value the Gearing segments assets.
The following tables represent the fair values of the Company’s financial assets measured as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Customer relationships
|
|
|
|
|
|
|
|
|
|
1,852
|
|
|
1,852
|
|
Total assets at fair value
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,852
|
|
$
|
1,852
|
|
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets measured on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gearing Cicero Ave. facility
|
|
$
|
—
|
|
$
|
—
|
|
$
|
560
|
|
$
|
560
|
|
Services assets
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
20
|
|
Total assets at fair value
|
|
$
|
—
|
|
$
|
—
|
|
$
|
580
|
|
$
|
580
|
|
Fair value of financial instruments
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, restricted cash, A/R, accounts payable and customer deposits, approximate their respective fair values due to the relatively short-term nature of these instruments. Based upon interest rates currently available to the Company for debt with similar terms, the carrying value of the Company’s long-term debt is approximately equal to its fair value.
Assets measured at fair value on a nonrecurring basis
The fair value measurement approach for long lived assets utilizes a number of significant unobservable inputs or Level 3 assumptions. To the extent assumptions used in the Company’s evaluations are not achieved, there may be a negative effect on the valuation of these assets.
The carrying value of the land and building comprising the Cicero Avenue Facility of $560 reflected the expected proceeds associated with selling this facility. During 2017, the Company reclassified the Cicero Avenue Facility as Assets Held for Sale upon completion of general site remediation activities. See Note 12, “Commitments and Contingencies” of these consolidated financial statements for additional detail of the Cicero Avenue Facility. During the third quarter of 2018, the Company sold the Cicero Avenue Facility and recognized a gain of $23 on the sale. The gain is included in operating income in these consolidated financial statements.
Following the Board’s approval of a plan to divest the Company’s Services segment, the Company has been able to evaluate the value of the segment’s assets on the open market; therefore, the Company has utilized this measurement to determine the fair value of the Services segment assets.
14. INCOME TAXES
The provision for income taxes for the years ended December 31, 2018 and 2017 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2018
|
|
2017
|
|
|
Current provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
—
|
|
|
Foreign
|
|
|
—
|
|
|
—
|
|
|
State
|
|
|
98
|
|
|
5
|
|
|
Total current benefit
|
|
|
98
|
|
|
5
|
|
|
Deferred credit
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(3,978)
|
|
|
31,614
|
|
|
State
|
|
|
(2,963)
|
|
|
468
|
|
|
Total deferred credit
|
|
|
(6,941)
|
|
|
32,082
|
|
|
Increase (decrease) in deferred tax valuation allowance
|
|
|
6,638
|
|
|
(37,132)
|
|
|
Total benefit for income taxes
|
|
$
|
(205)
|
|
$
|
(5,045)
|
|
|
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. With the Tax Act, the Securities and
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Exchange Commission issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information, prepared or analyzed in reasonable detail to complete its accounting for the change in tax law.
During the year ended December 31, 2018, the Company recorded a benefit for income taxes of $205, compared to a benefit for income taxes of $5,045 during the year ended December 31, 2017. The income tax benefit during the year ended December 31, 2017 included an income tax benefit of $5,060 from the partial release of the valuation allowance, net of Red Wolf’s current state taxes, resulting from the consolidation of the Company’s deferred tax assets with Red Wolf’s deferred tax liabilities upon acquisition.
The total change in the deferred tax valuation allowance was $6,638 and ($37,132) for the years ended December 31, 2018 and 2017, respectively. The changes in the deferred tax valuation allowances in 2018 and 2017 were primarily the result of (decreases) increases to the deferred tax assets pertaining to federal and state NOLs.
The tax effects of the temporary differences and NOLs that give rise to significant portions of deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2018
|
|
2017
|
|
Noncurrent deferred income tax assets:
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
63,906
|
|
$
|
56,619
|
|
Intangible assets
|
|
|
7,261
|
|
|
6,889
|
|
Accrual and reserves
|
|
|
2,502
|
|
|
2,402
|
|
Other
|
|
|
19
|
|
|
88
|
|
Total noncurrent deferred tax assets
|
|
|
73,688
|
|
|
65,998
|
|
Valuation allowance
|
|
|
(73,129)
|
|
|
(66,491)
|
|
Noncurrent deferred tax assets, net of valuation allowance
|
|
|
559
|
|
|
(493)
|
|
Noncurrent deferred income tax liabilities:
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
593
|
|
|
(152)
|
|
Intangible assets
|
|
|
—
|
|
|
—
|
|
Total noncurrent deferred tax liabilities
|
|
|
593
|
|
|
(152)
|
|
Net deferred income tax liability
|
|
$
|
(34)
|
|
$
|
(341)
|
|
Valuation allowances of $73,129 and $66,491 have been provided for deferred income tax assets for which realization is uncertain as of December 31, 2018 and 2017, respectively. A reconciliation of the beginning and ending amounts of the valuation is as follows:
|
|
|
|
|
Valuation allowance as of December 31, 2017
|
|
$
|
(66,491)
|
|
Gross increase for current year activity
|
|
|
(6,638)
|
|
Valuation allowance as of December 31, 2018
|
|
$
|
(73,129)
|
|
As of December 31, 2018, the Company had federal and unapportioned state NOL carryforwards of approximately $248,717 of which $228,787 will begin to expire in 2026. The majority of the NOL carryforwards will expire in various years from 2028 through 2037. NOLs generated after January 1, 2018 will not expire.
The reconciliation between the statutory U.S. federal income tax rate and the Company’s effective income tax rate is as follows:
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2018
|
|
2017
|
|
Statutory U.S. federal income tax rate
|
|
21.0
|
%
|
34.0
|
%
|
State and local income taxes, net of federal income tax benefit
|
|
3.2
|
|
3.4
|
|
Permanent differences
|
|
(4.4)
|
|
(1.2)
|
|
Change in valuation allowance
|
|
(18.7)
|
|
446.7
|
|
Change in uncertain tax positions
|
|
0.0
|
|
0.5
|
|
Other
|
|
(0.3)
|
|
0.1
|
|
Effect of U.S. tax rate change
|
|
0.0
|
|
(422.6)
|
|
Effective income tax rate
|
|
0.8
|
%
|
60.9
|
%
|
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 changes in the Company’s uncertain income tax positions for the years ended December 31, 2018 and 2017 consisted of the following:
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
|
December 31,
|
|
|
|
2018
|
|
2017
|
|
Beginning balance
|
|
$
|
1
|
|
$
|
27
|
|
Tax positions related to current year:
|
|
|
|
|
|
|
|
Additions
|
|
|
—
|
|
|
—
|
|
Reductions
|
|
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
—
|
|
Tax positions related to prior years:
|
|
|
|
|
|
|
|
Additions
|
|
|
—
|
|
|
—
|
|
Reductions
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
|
—
|
|
|
—
|
|
Lapses in statutes of limitations
|
|
|
(1)
|
|
|
(26)
|
|
Additions from current year acquisitions
|
|
|
—
|
|
|
—
|
|
|
|
|
(1)
|
|
|
(26)
|
|
Ending balance
|
|
$
|
—
|
|
$
|
1
|
|
The amount of unrecognized tax benefits at December 31, 2018 that would affect the effective tax rate if the tax benefits were recognized was $0.
It is the Company’s policy to include interest and penalties in tax expense. During the years ended December 31, 2018 and 2017, the Company recognized and accrued approximately $0 of interest and penalties.
The Company files income tax returns in the U.S. federal and state jurisdictions. As of December 31, 2018, open tax years in the federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust NOL carryforwards. The Company’s 2008 and 2009 federal tax returns were examined in 2011 and no material adjustments were identified related to any of the Company’s tax positions. Although these periods have been audited, they continue to remain open until all NOLs generated in those tax years have either been utilized or expire.
Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), generally imposes an annual limitation on the amount of NOL carryforwards and associated built‑in losses that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. The Company’s ability to utilize NOL carryforwards and built‑in losses may be limited, under this section or otherwise, by the Company’s issuance of common stock or by other changes in stock ownership. Upon completion of the Company’s analysis of IRC Section 382, the Company has determined
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
that aggregate changes in stock ownership have resulted in an annual limitation of $14,284 on NOLs and built‑in losses available for utilization based on the triggering event in 2010. To the extent the Company’s use of NOL carryforwards and associated built‑in losses is significantly limited in the future due to additional changes in stock ownership, the Company’s income could be subject to U.S. corporate income tax earlier than it would if the Company were able to use NOL carryforwards and built‑in losses without such annual limitation, which could result in lower profits and the loss of the majority of the benefits from these attributes.
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 IRC Section 382. On February 7, 2019, the Board of Directors (the “Board”) approved an amendment extending the Rights Plan for an additional three years. The amendment is subject to approval by our stockholders at our 2019 Annual Meeting of Stockholders.
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 non‑taxable dividend of one preferred share purchase right (a “Right”) for each outstanding share of the Company’s common stock to the Company’s stockholders of record as of the close of business on February 22, 2013. Each Right entitles its holder to purchase from the Company one one‑thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at an exercise price of $4.25 per Right, subject to adjustment. As a result of the Rights Plan, any person or group that acquires beneficial ownership of 4.9% or more of the Company’s common stock without the approval of the Board would be subject to significant dilution in the ownership interest of that person or group. Stockholders who owned 4.9% or more of the outstanding shares of the Company’s common stock as of February 12, 2013 will not trigger the preferred share purchase rights unless they acquire additional shares after that date.
As of December 31, 2018, the Company had $0 of unrecognized tax benefits, which would have a favorable impact on income tax expense. The Company recognizes interest and penalties related to uncertain tax positions as income tax expense. The Company had accrued interest and penalties of $0 as of December 31, 2018. As of December 31, 2017, the Company had unrecognized tax benefits of $1, of which $1 represented accrued interest and penalties.
15. SHARE‑BASED COMPENSATION
Overview of Share‑Based Compensation Plan
2007 Equity Incentive Plan
The Company has granted incentive stock options and other equity awards pursuant to the Amended and Restated Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “2007 EIP”), which was approved by the Board in October 2007 and by the Company’s stockholders in June 2008. The 2007 EIP has been amended periodically since its original approval.
The 2007 EIP reserved 691,051 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates depends to a large degree. As of December 31, 2018, the Company had reserved 22,733 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of RSU awards outstanding. As of December 31, 2018, 253,659 shares of common stock reserved for stock options and RSU awards under the 2007 EIP have been issued in the form of common stock.
2012 Equity Incentive Plan
The Company has granted incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2012 Equity Incentive Plan (the “2012 EIP”), which was approved by the Board in March 2012 and by the Company’s stockholders in May 2012.
The 2012 EIP reserved 1,200,000 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
degree. As of December 31, 2018, the Company had reserved 34,129 shares for issuance upon the exercise of stock options outstanding and no shares for issuance upon the vesting of RSU awards outstanding. As of December 31, 2018, 635,089 shares of common stock reserved for stock options and RSU awards under the 2012 EIP have been issued in the form of common stock.
2015
Equity Incentive Plan
The Company has granted equity awards pursuant to the Broadwind Energy, Inc. 2015 Equity Incentive Plan (the “2015 EIP;” together with the 2007 EIP and the 2012 EIP, the “Equity Incentive Plans”), which was approved by the Board in February 2015 and by the Company’s stockholders in April 2015. The Company announced on February 8, 2019 that the Board had approved an Amended and Restated 2015 Equity Incentive Plan, which is subject to approval by the Company’s stockholders at the 2019 Annual Meeting of Stockholders.
The purposes of the 2015 EIP are (i) to align the interests of the Company’s stockholders and recipients of awards under the 2015 EIP by increasing the proprietary interest of such recipients in the Company’s growth and success; (ii) to advance the interests of the Company by attracting and retaining officers, other employees, non-employee directors and independent contractors; and (iii) to motivate such persons to act in the long-term best interests of the Company and its stockholders. Under the 2015 EIP, the Company may grant (i) non-qualified stock options; (ii) “incentive stock options” (within the meaning of IRC Section 422); (iii) stock appreciation rights; (iv) restricted stock and RSUs; and (v) PSUs.
The 2015 EIP reserves 1,100,000 shares of the Company’s common stock for grants to officers, directors, employees, consultants and advisors upon whose efforts the success of the Company and its affiliates will depend to a large degree. As of December 31, 2018, the Company had reserved 805,844 shares for issuance upon the vesting of RSU awards outstanding. As of December 31, 2018, a total of 343,429 shares of common stock reserved for RSU awards under the 2015 EIP had been issued in the form of common stock.
Stock Options.
The exercise price of stock options granted under the Equity Incentive Plans is equal to the closing price of the Company’s common stock on the date of grant. Stock options generally become exercisable on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. Additionally, stock options expire ten years after the date of grant. The fair value of stock options granted is expensed ratably over their vesting term.
Restricted Stock Units (RSUs).
The granting of RSUs is provided for under the Equity Incentive Plans. RSUs generally vest on the anniversary of the grant date, with vesting terms that may range from one to five years from the date of grant. The fair value of each RSU granted is equal to the closing price of the Company’s common stock on the date of grant and is generally expensed ratably over the vesting term of the RSU award.
Performance Awards (PSUs).
The granting of PSUs is provided for under the Equity Incentive Plans. PSUs generally vest upon the Company meeting performance measures as of the vesting date over the period of the plan. The fair value of each PSU granted is equal to the closing price of the Company’s common stock on the date of grant and is generally expensed ratably over the term of the PSU award plan.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Stock option activity during the year ended December 31, 2018 under the Equity Incentive Plans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Aggregate Intrinsic
|
|
|
|
|
|
|
Weighted Average
|
|
Remaining
|
|
Value
|
|
|
|
|
Options
|
|
Exercise Price
|
|
Contractual Term
|
|
(in thousands)
|
|
Outstanding as of December 31, 2017
|
|
|
67,188
|
|
$
|
24.65
|
|
3.39
|
|
|
|
|
Expired
|
|
|
(10,326)
|
|
|
77.47
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
|
|
56,862
|
|
$
|
15.06
|
|
2.72
|
|
$
|
—
|
|
Exercisable as of December 31, 2018
|
|
|
56,862
|
|
$
|
15.06
|
|
2.72
|
|
$
|
—
|
|
The following table summarizes information with respect to all outstanding and exercisable stock options under the Equity Incentive Plans as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
Number of options
|
|
Weighted Average
|
|
Remaining
|
|
|
Number
|
|
Weighted Average
|
|
Exercise Price or Range
|
|
outstanding
|
|
Exercise Price
|
|
Contractual Term
|
|
|
Exercisable
|
|
Exercise Price
|
|
$3.39
|
-
|
$13.50
|
|
49,039
|
|
$
|
6.47
|
|
2.99
|
years
|
|
49,039
|
|
$
|
6.47
|
|
$54.40
|
-
|
$99.90
|
|
7,823
|
|
|
68.94
|
|
0.99
|
years
|
|
7,823
|
|
|
68.94
|
|
|
|
|
|
56,862
|
|
$
|
15.06
|
|
2.72
|
years
|
|
56,862
|
|
$
|
15.06
|
|
The fair value of each stock option award is estimated on the date of grant using the Black‑Scholes option pricing model. The determination of the fair value of each stock option is affected by the Company’s stock price on the date of grant, as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected stock price volatility over the expected life of the awards and actual and projected stock option exercise behavior. There were no stock options granted during the twelve months ended December 31, 2018.
The following table summarizes information with respect to outstanding RSU’s and PSU’s as of December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant-Date Fair Value
|
|
|
|
|
Number of Shares
|
|
Per Share
|
|
Unvested as of December 31, 2017
|
|
|
512,142
|
|
$
|
4.57
|
|
Granted
|
|
|
565,964
|
|
$
|
2.42
|
|
Vested
|
|
|
(202,713)
|
|
$
|
4.41
|
|
Forfeited
|
|
|
(69,549)
|
|
$
|
3.85
|
|
Unvested as of December 31, 2018
|
|
|
805,844
|
|
$
|
3.16
|
|
During the years ended December 31, 2018 and 2017, the Company utilized a forfeiture rate of 25% for estimating the forfeitures of stock compensation granted.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
The following table summarizes share‑based compensation expense, net of taxes withheld, included in the Company’s consolidated statements of operations for the years ended December 31, 2018 and 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
2017
|
|
Share-based compensation expense:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
$
|
99
|
|
$
|
101
|
|
Selling, general and administrative
|
|
|
|
704
|
|
|
712
|
|
Net effect of share-based compensation expense on net income
|
|
|
$
|
803
|
|
$
|
813
|
|
Reduction in earnings per share:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
$
|
0.05
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
$
|
0.05
|
|
$
|
0.05
|
|
|
(1)
|
|
Income tax benefit is not illustrated because the Company is currently in a full tax valuation allowance position and an actual income tax benefit was not realized for the years ended December 31, 2018 and 2017. The result of the income (loss) situation creates a timing difference, resulting in a deferred tax asset, which is fully reserved for in the Company’s valuation allowance.
|
As of December 31, 2018, the Company estimates that pre‑tax compensation expense for all unvested share‑based awards, including both stock options and RSUs, in the amount of approximately $1,132 will be recognized through the year 2020. 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. 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, and Red Wolf is being operated as a wholly-owned subsidiary, as more fully described in Note 21, “Business Combinations” of these consolidated financial statements. The Red Wolf acquisition aligns with the Company’s growth strategy approved by our Board in late 2016 to expand and diversify our business through organic growth and strategic bolt-on acquisitions. Red Wolf’s operations is being reported in the “Process Systems” segment.
As a result of the 2017 Red Wolf acquisition, the Company 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 of 2017, the segment changed its name from “Towers and Weldments” to “Towers and Heavy Fabrications” to more accurately reflect the nature of the segment’s activities. The Company’s segments and their product offerings are summarized below:
Towers and Heavy Fabrications
The Company manufactures towers for wind turbines, specifically the large and heavier wind towers that are designed for multiple MW wind turbines. 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 facilities have a combined annual tower production capacity of up to approximately 550 tower 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 for mining and other industrial customers.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
Gearing
The Company engineers, builds and remanufactures precision gears and gearing systems for oil and gas, wind, mining, steel and other industrial applications. The Company uses an integrated manufacturing process, which includes machining and finishing processes in Cicero, Illinois, and heat treatment in Neville Island, Pennsylvania.
Process Systems
The Company acquired Red Wolf on February 1, 2017 and as a result, aggregated its Abilene, TX fabrication business with Red Wolf to form the Process Systems reportable segment. This segment provides contract manufacturing services that include build-to-spec, kitting, fabrication and inventory management for customers throughout the U.S. and in foreign countries, primarily supporting the natural gas turbine market.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Towers and
|
|
|
|
|
Process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Fabrications
|
|
Gearing
|
|
Systems
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
For the Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
|
|
$
|
68,773
|
|
$
|
38,376
|
|
$
|
18,231
|
|
$
|
—
|
|
$
|
—
|
|
$
|
125,380
|
|
Intersegment revenues
|
|
|
|
42
|
|
|
—
|
|
|
88
|
|
|
—
|
|
|
(130)
|
|
|
—
|
|
Net revenues
|
|
|
|
68,815
|
|
|
38,376
|
|
|
18,319
|
|
|
—
|
|
|
(130)
|
|
|
125,380
|
|
Operating (loss) profit
|
|
|
|
(4,346)
|
|
|
51
|
|
|
(16,442)
|
|
|
(4,329)
|
|
|
—
|
|
|
(25,066)
|
|
Depreciation and amortization
|
|
|
|
4,986
|
|
|
2,255
|
|
|
1,709
|
|
|
233
|
|
|
—
|
|
|
9,183
|
|
Capital expenditures
|
|
|
|
1,441
|
|
|
706
|
|
|
31
|
|
|
146
|
|
|
—
|
|
|
2,324
|
|
Total assets
|
|
|
|
32,866
|
|
|
37,028
|
|
|
13,731
|
|
|
243,867
|
|
|
(228,327)
|
|
|
99,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Towers and
|
|
|
|
|
Process
|
|
|
|
|
|
|
|
|
|
|
|
|
Heavy Fabrications
|
|
Gearing
|
|
Systems
|
|
Corporate
|
|
Eliminations
|
|
Consolidated
|
|
For the Year Ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
The Company generates revenues entirely from transactions completed in the U.S. and its long‑lived assets are all located in the U.S. All intercompany revenue is eliminated in consolidation. During 2018, two customers accounted for more than 10% of total net revenues. These two customers accounted for revenues of $72,851 for fiscal year 2018, with one reported within the Towers and Heavy Fabrications segment and one reported within the Gearing segment. During 2017, one customer accounted for more than 10% of total net revenues or $100,413 in revenue for fiscal year 2017, which was reported within the Towers and Heavy Fabrications segment. During the years ended December 31, 2018 and 2017, five customers accounted for 78% and 85%, respectively, of total net revenues.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
17. EMPLOYEE BENEFIT PLANS
Retirement Savings and Profit Sharing Plans
Retirement Savings and Profit Sharing Plans
The Company offers a 401(k) retirement savings plan to all eligible employees who may elect to contribute a portion of their salary on a pre‑tax basis, subject to applicable statutory limitations. All participating non‑union employees are 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. For 2018, in accordance with the collective bargaining agreements in place at its two union locations, the Company’s Illinois‑based union employees were 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 were 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 safe harbor matching contribution was extended to all union employees, beginning in 2019, following the extension of the Company’s collective bargaining agreements during 2018. 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. In the third quarter of 2017, the Company began funding the matching contributions primarily 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, 2018 and 2017, the Company recorded expense under these plans of approximately $812 and $765, 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‑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 expense associated with the deferred compensation plan recorded during the years ended December 31, 2018 and 2017 was $(13) and $(12). 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, 2018 and 2017, the fair value of plan liability to the Company was $12 and $24, 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 tax credits, which the Company has made available under the structure by passing them through to Capital One. The proceeds
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
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. Capital One exercised its option to put its investment to the Company and receive $130 from the Company at that time. The Capital One contribution other than the amount allocated to the put obligation was recognized as income only after the put/call was exercised and when Capital One had no ongoing interest.
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 were 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 was included in “Line of credit, NMTC, and other notes payable” line item of the Company’s consolidated balance sheet at December 31, 2017. Incremental costs to maintain the transaction structure during the compliance period will be recognized as they are incurred. At the end of the seven year compliance period, Capital One exercised its right to put the investment back to the Company in exchange for $130. The loan was extinguished and the Company recorded a gain of $2,249 in other income, net of transaction expenses. As the NMTC loan was extinguished, the VIEs were dissolved.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(in thousands, except share and per share data)
19. QUARTERLY FINANCIAL SUMMARY (UNAUDITED)
The following table provides a summary of selected financial results of operations by quarter for the years ended December 31, 2018 and 2017 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Revenues
|
|
$
|
29,967
|
|
$
|
36,781
|
|
$
|
31,445
|
|
$
|
27,187
|
|
Gross (loss) profit
|
|
|
(132)
|
|
|
2,223
|
|
|
1,486
|
|
|
(512)
|
|
Operating loss
|
|
|
(4,537)
|
|
|
(5,736)
|
|
|
(2,612)
|
|
|
(12,181)
|
|
Loss from continuing operations, net of tax
|
|
|
(4,811)
|
|
|
(6,083)
|
|
|
(750)
|
|
|
(12,358)
|
|
Net loss
|
|
|
(4,838)
|
|
|
(6,116)
|
|
|
(783)
|
|
|
(12,409)
|
|
Loss from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32)
|
|
$
|
(0.40)
|
|
$
|
(0.05)
|
|
$
|
(0.79)
|
|
Diluted
|
|
$
|
(0.32)
|
|
$
|
(0.40)
|
|
$
|
(0.05)
|
|
$
|
(0.79)
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.32)
|
|
$
|
(0.40)
|
|
$
|
(0.05)
|
|
$
|
(0.79)
|
|
Diluted
|
|
$
|
(0.32)
|
|
$
|
(0.40)
|
|
$
|
(0.05)
|
|
$
|
(0.79)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (loss) profit
|
|
|
1,603
|
|
|
(516)
|
|
|
(1,831)
|
|
|
(6,689)
|
|
(Loss) income from continuing operations, net of tax
|
|
|
6,482
|
|
|
(688)
|
|
|
(2,049)
|
|
|
(6,928)
|
|
Net (loss) income
|
|
|
6,327
|
|
|
(780)
|
|
|
(2,207)
|
|
|
(6,981)
|
|
(Loss) income from continuing operations per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.43
|
|
$
|
(0.05)
|
|
$
|
(0.14)
|
|
$
|
(0.45)
|
|
Diluted
|
|
$
|
0.43
|
|
$
|
(0.05)
|
|
$
|
(0.14)
|
|
$
|
(0.45)
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.42
|
|
$
|
(0.05)
|
|
$
|
(0.15)
|
|
$
|
(0.46)
|
|
Diluted
|
|
$
|
0.42
|
|
$
|
(0.05)
|
|
$
|
(0.15)
|
|
$
|
(0.46)
|
|
20. 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 litigation 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 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, for approximately $18,983, subject to certain adjustments. The transaction closed on February 1, 2017, and Red Wolf is being operated as a wholly-owned subsidiary of the Company.
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(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. During the second quarter of 2018, the Company released the final contingent earn-out liability of $1,140 into operating income as the Company does not expect Red Wolf to achieve the targeted profitability benchmark for the second year of ownership. The release of the earn-out is reflected in the selling, general, and administrative line item in the consolidated statements of operations.
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, 2017 and December 31, 2017 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Allocation as of 3/31/2017
|
|
Measurement Period Adjustments
|
|
Allocation as of 12/31/2017
|
Assets acquired and liabilities assumed:
|
|
|
|
|
|
|
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
|
Table of Contents
BROADWIND ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2018 and 2017
(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. The Company has not shown the pro forma results of Red Wolf because it is not significant.
NOTE 22 — RESTRUCTURING
During the first quarter of 2018, the Company conducted a review of its business strategies and product plans given the outlook of the industries it serves and its business environment. As a result, the Company began to execute a restructuring plan to rationalize its facility capacity and management structure, and to consolidate and increase the efficiencies of its Abilene operations. The Company exited the CNG and Fabrication Manufacturing location in Abilene, TX in 2018 as soon as it fully complied with the requirements established as part of the NMTC Transaction agreement and consolidate these manufacturing activities into other locations. All remaining costs associated with this facility have been recorded as restructuring expenses. All costs will be incurred solely within the Process Systems segment.
The Company expects that any additional costs related to the 2018 restructuring initiative will be immaterial. The Company anticipates annual cost savings going forward of approximately $575 in facility expenses related to the restructuring.
The Company’s total net restructuring charges for the year ended December 31, 2018 consist of the following:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2018
|
|
Cost of sales:
|
|
|
|
|
Facility costs
|
|
$
|
249
|
|
Moving and remediation
|
|
|
33
|
|
Salary and severance
|
|
|
17
|
|
Depreciation
|
|
|
332
|
|
Total cost of sales
|
|
|
631
|
|
Selling, general, and administrative expenses:
|
|
|
|
|
Salary and severance
|
|
|
37
|
|
Total selling, general, and administrative expenses
|
|
|
37
|
|
Grand Total
|
|
$
|
668
|
|
INDEX TO EXHIBITS
|
|
Exhibit
Number
|
|
Description
|
2.1
|
|
Membership Interest Purchase Agreement dated as of February 1, 2017, by and among the Company, Christopher J. Brice , Lewis J. Hendrix and Kimberley M. Sutton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed February 1, 2017)
|
3.1
|
|
Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended June 30, 2008)
|
3.2
|
|
Certificate of Amendment to the Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8‑K filed August 23, 2012)
|
3.3
|
|
Second Amended and Restated Bylaws of the Company, adopted as of May 20, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8‑K filed May 23, 2014)
|
4.1
|
|
Section 382 Rights Agreement dated as of February 12, 2013 between the Company and Equiniti Trust Company, as rights agent, which includes the Form of Rights Certificate as Exhibit B thereto (incorporated by reference to Exhibit 1 to the Company’s Registration Statement on Form 8‑A filed February 13, 2013)
|
4.2
|
|
Certificate of Designation of Series A Junior Participating Preferred Stock of the Company (incorporated by reference to Exhibit 2 to the Company’s Registration Statement on Form 8‑A filed February 13, 2013)
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4.3
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First Amendment to Section 382 Rights Agreement dated as of February 2, 2016 between the Company and Equiniti Trust Company, as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 8, 2016)
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4.4
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Second Amendment to Section 382 Rights Agreement dated as of February 7, 2019 between the Company and Equiniti Trust Company, as rights agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 12, 2019)
|
10.1
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Lease Agreement dated December 26, 2007 between Tower Tech Systems Inc. and City Centre, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10‑KSB for the fiscal year ended December 31, 2007)
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10.2
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Amended and Restated Lease for Industrial/Manufacturing Space dated as of May 1, 2010 between Tower Tech Systems Inc. and City Centre, LLC (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2010)
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10.3†
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Severance and Non‑Competition Agreement, dated as of December 15, 2011 between the Company and Robert R. Rogowski (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014)
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10.4†
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Severance and Non‑Competition Agreement, dated as of July 8, 2014 between the Company and Erik W. Jensen (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014)
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10.5†
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Form of Indemnification Agreement (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2010)
|
10.6†
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Broadwind Energy, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit A to the Company’s Schedule 14A filed on March 12, 2015)
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10.7†
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|
Form of Executive Incentive Stock Option Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended June 30, 2010)
|
10.8†
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Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2012)
|
10.9†
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Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2012)
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|
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10.10†
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Form of Stock Option Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10‑Q for the quarterly period ended March 31, 2012)
|
10.11†
|
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Form of Restricted Stock Unit Award Agreement (Non-Employee Directors) (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015)
|
10.12†
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|
Form of Restricted Stock Unit Award Agreement (Extended Executive Team) (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015)
|
10.13†
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|
Form of Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015)
|
10.14†
|
|
Broadwind Energy, Inc. 2015 Equity Incentive Plan Restricted Stock Unit Award Notice (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018)
|
10.15†
|
|
Second Amended and Restated Employment Agreement, dated May 20, 2016, between the Company and Stephanie K. Kushner (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 24, 2016)
|
10.16
|
|
Loan and Security Agreement, dated October 26, 2016, among the Company, Brad Foote Gear Works, Inc., Broadwind Services, LLC, and Broadwind Towers, Inc. and The PrivateBank and Trust Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10 Q for the quarterly period ended September 30, 2016)
|
10.17†
|
|
First Amendment to Loan and Security Agreement, dated February 10, 2017, among the Company, Brad Foote Gear Works, Inc., Broadwind Services, LLC, Broadwind Towers, Inc. and The PrivateBank and Trust Company (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016)
|
10.18
|
|
Joinder to Loan and Security Agreement, dated February 10, 2017, executed by Red Wolf Company, LLC (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016)
|
10.19
|
|
Second Amendment to Loan and Security Agreement and Waiver, dated March 27, 2017, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc. and The PrivateBank and Trust Company (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017)
|
10.20
|
|
Amended and Restated Revolving Note, dated March 27, 2017 among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc. and The PrivateBank and Trust Company (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017)
|
10.21
|
|
Third Amendment to Loan and Security Agreement, dated January 29, 2018, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC and CIBC Bank USA (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 2, 2018)
|
10.22
|
|
Fourth Amendment to Loan and Security Agreement, dated May 3, 2018, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC and CIBC Bank USA (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018)
|
10.23
|
|
Fifth Amendment to Loan and Security Agreement, dated October 26, 2018, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC and CIBC Bank USA (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018)
|
|
|
10.24
|
|
Sixth Amendment to Loan and Security Agreement, dated January 26, 2019, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC and CIBC Bank USA (filed herewith)
|
10.25
|
|
Amended and Restated Loan and Security Agreement, dated February 25, 2019, among the Company, Brad Foote Gearworks, Inc., Broadwind Services, LLC, Broadwind Towers, Inc., Red Wolf Company, LLC, the other Loan Parties and Lenders party thereto, and CIBC Bank USA, as Administrative Agent and Sole Lead Arranger (filed herewith)
|
10.26†
|
|
Severance and Non-Competition Agreement, dated October 23, 2017, between the Company and Jason L. Bonfigt (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed November 28, 2017)
|
10.27†
|
|
Severance and Non-Competition Agreement, dated as of May 4, 2018, between the Company and Eric Blashford (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 3, 2018)
|
10.28
|
|
At Market Issuance Sales Agreement, dated July 31, 2018, by and among the Company and Roth Capital Partners, LLC (incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed July 31, 2018)
|
21
|
|
Subsidiaries of the Registrant (filed herewith)
|
23
|
|
Consent of RSM LLP (filed herewith
)
|
31.1
|
|
Rule 13a‑14(a) Certification of Chief Executive Officer (filed herewith)
|
31.2
|
|
Rule 13a‑14(a) Certification of Chief Financial Officer (filed herewith)
|
32.1
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (filed herewith)
|
32.2
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002 (filed herewith)
|
†
Indicates management contract or compensation plan or arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 26
th
day of February, 2019.
|
|
|
|
BROADWIND ENERGY, INC.
|
|
|
|
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By:
|
/s/ Stephanie K. Kushner
|
Stephanie K. Kushner
President and Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Stephanie K. Kushner
|
|
President, Chief Executive Officer, and Director (Principal Executive Officer)
|
|
February 26, 2019
|
Stephanie K. Kushner
|
|
|
|
|
|
/s/ Jason L. Bonfigt
|
|
Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
February 26, 2019
|
Jason L. Bonfigt
|
|
|
|
|
|
/s/ David P. Reiland
|
|
Director and Chairman of the Board
|
|
February 26, 2019
|
David P. Reiland
|
|
|
|
|
|
/s/ Philip J. Christman
|
|
Director
|
|
February 26, 2019
|
Philip J. Christman
|
|
|
|
|
|
/s/ Terence P. Fox
|
|
Director
|
|
February 26, 2019
|
Terence P. Fox
|
|
|
|
|
|
/s/ Thomas A. Wagner
|
|
Director
|
|
February 26, 2019
|
Thomas A. Wagner
|
|
|
|
|
|
/s/ Cary B. Wood
|
|
Director
|
|
February 26, 2019
|
Cary B. Wood
|
|
|
|
|
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