BROADWIND, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto in Item 1, “Financial Statements,” of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2023. The discussion below contains forward-looking statements that are based upon our current expectations and are subject to uncertainty and changes in circumstances including, but not limited to, those identified in “Cautionary Note Regarding Forward-Looking Statements” at the end of Item 2. Actual results may differ materially from these expectations due to inaccurate assumptions and known or unknown risks and uncertainties. As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” and the “Company” refer to Broadwind, Inc., a Delaware corporation headquartered in Cicero, Illinois, and its subsidiaries, as appropriate. (Dollars are presented in thousands except share, per share and per employee data or unless otherwise stated) KEY METRICS USED BY MANAGEMENT TO MEASURE PERFORMANCE In addition to measures of financial performance presented in our consolidated financial statements in accordance with GAAP, we use certain other financial measures to analyze our performance. These non-GAAP financial measures primarily consist of adjusted EBITDA (as defined below) and free cash flow which help us evaluate growth trends, establish budgets, assess operational efficiencies, oversee our overall liquidity, and evaluate our overall financial performance. Key Financial Measures Three Months Ended March 31, 2024 2023 Net revenues $ 37,616 $ 48,873 Net income $ 1,510 $ 769 Adjusted EBITDA (1) $ 4,170 $ 4,098 Capital expenditures $ 1,744 $ 1,065 Free cash flow (2) $ (2,452 ) $ (23,335 ) Operating working capital (3) $ 24,286 $ 26,843 Total debt $ 7,690 $ 24,952 Total orders $ 28,996 $ 39,602 Backlog at end of period (4) $ 159,912 $ 287,808 Book-to-bill (5) 0.8 0.8 (1) We provide non-GAAP adjusted EBITDA (earnings before interest, income taxes, depreciation, amortization, share based compensation and other stock payments, restructuring costs, impairment charges, proxy contest-related expenses, and other non-cash gains and losses) as supplemental information regarding our business performance. Our management uses adjusted EBITDA when it internally evaluates the performance of our business, reviews financial trends and makes operating and strategic decisions. We believe that this non-GAAP financial measure is useful to investors because it provides a better understanding of our past financial performance and future results, and it allows investors to evaluate our performance using the same methodology and information as used by our management. Our definition of adjusted EBITDA may be different from similar non-GAAP financial measures used by other companies and/or analysts. (2) We define free cash flow as adjusted EBITDA plus or minus changes in operating working capital less capital expenditures net of any proceeds from disposals of property and equipment. We believe free cash flow is a useful measure for investors because it portrays our ability to generate cash from our business for purposes such as repaying maturing debt and funding future investments. (3) We define operating working capital as accounts receivable and inventory net of accounts payable and customer deposits. (4) Our backlog at March 31, 2024 and 2023 is net of revenue recognized over time. Backlog as of March 31, 2024 has been adjusted to reflect updated assumptions related to raw material pricing (which is a customer passthrough) and other variables. (5) We define the book-to-bill as the ratio of new orders we received, net of cancellations, to revenue during a period. 16 Table of Contents The following table reconciles our non-GAAP key financial measures to the most directly comparable GAAP measure: Three Months Ended March 31, 2024 2023 Net income $ 1,510 $ 769 Interest expense 532 488 Income tax provision 39 23 Depreciation and amortization 1,596 1,605 Share-based compensation and other stock payments 503 493 Proxy contest-related expenses (10 ) 720 Adjusted EBITDA 4,170 4,098 Changes in operating working capital (4,878 ) (26,368 ) Capital expenditures (1,744 ) (1,065 ) Free Cash Flow $ (2,452 ) $ (23,335 ) OUR BUSINESS First Quarter Overview We received $28,996 in new orders in the first quarter of 2024, down from $39,602 in the first quarter of 2023. Within our Heavy Fabrications segment, wind tower orders decreased compared to the prior year quarter primarily due to the timing of tower orders. Partially offsetting this decrease was an 18% increase in industrial fabrication orders primarily due to improved demand from mining customers. Gearing segment orders decreased 16% from the prior year period primarily due to reduced demand from oil and gas (“O&G”) customers, partially offset by increased demand from mining customers and the timing of orders from aftermarket wind customers. Orders within our Industrial Solutions segment increased 5% as compared to the prior year quarter primarily due to an increase in orders associated with new gas turbine projects, partially offset by reduced orders associated with aftermarket projects. We recognized revenue of $37,616 in the first quarter of 2024, down 23% compared to the first quarter of 2023. Within the Heavy Fabrications segment wind tower revenue decreased 40% from the prior year period primarily due to a 44% decrease in tower sections sold as a global wind turbine manufacturer shifted approximately half of its contracted tower section orders initially planned for 2024 into 2025. Gearing segment revenue decreased 30% relative to the comparable prior year period primarily due to reduced shipments for industrial, mining, and O&G customers . Industrial Solutions segment revenue increased by 47% from the prior year period primarily due to the timing of shipments of new and aftermarket gas turbine content. We recorded net income of $1,510 or $0.07 per share in the first quarter of 2024, compared to net income of $769 or $0.04 per share in the first quarter of 2023. This increase in net income was primarily attributable to a more profitable mix of product sold, the absence of proxy-contest related expenses that were recognized in the prior year quarter and higher sales within our Industrial Solutions segment. Partially offsetting this increase was the impact of lower sales within our Gearing and Heavy Fabrication segments. 17 Table of Contents RESULTS OF OPERATIONS Three months ended March 31, 2024, Compared to Three months ended March 31, 2023 The condensed consolidated statement of operations table below should be read in connection with a review of the following discussion of our results of operations for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. Three Months Ended March 31, 2024 vs. 2023 % of Total % of Total 2024 Revenue 2023 Revenue $ Change % Change Revenues $ 37,616 100.0 % $ 48,873 100.0 % $ (11,257 ) (23.0 )% Cost of sales 30,979 82.4 % 41,897 85.7 % (10,918 ) (26.1 )% Gross profit 6,637 17.6 % 6,976 14.3 % (339 ) (4.9 )% Operating expenses Selling, general and administrative expenses 4,394 11.7 % 5,526 11.3 % (1,132 ) (20.5 )% Intangible amortization 165 0.4 % 168 0.3 % (3 ) (1.8 )% Total operating expenses 4,559 12.1 % 5,694 11.7 % (1,135 ) (19.9 )% Operating income 2,078 5.5 % 1,282 2.6 % 796 62.1 % Other expense, net Interest expense, net (532 ) (1.4 )% (488 ) (1.0 )% (44 ) (9.0 )% Other, net 3 0.0 % (2 ) (0.0 )% 5 250.0 % Total other expense, net (529 ) (1.4 )% (490 ) (1.0 )% (39 ) (8.0 )% Net income before provision for income taxes 1,549 4.1 % 792 1.6 % 757 95.6 % Provision for income taxes 39 0.1 % 23 0.0 % 16 69.6 % Net income $ 1,510 4.0 % $ 769 1.6 % $ 741 96.4 % Consolidated Revenues decreased by $ 11,257 as compared to the prior year period primarily due to lower sales within the Heavy Fabrications and Gearing segments, partially offset by increased sales within the Industrial Solutions segment. Wind tower revenue decreased 40% from the prior year period primarily due to a 44% decrease in tower sections sold as a global wind turbine manufacturer shifted approximately half of its contracted tower section orders initially planned for 2024 into 2025. Industrial Solutions segment revenue increased 47% from the prior year period primarily due to the timing shipments of new and aftermarket gas turbine content. Gearing segment revenue decreased 30% relative to the comparable prior year period primarily due to reduced shipments for industrial, mining and O&G customers. Gross profit decreased by $339 when compared to the prior year period, primarily due to lower sales, partially offset by a more profitable mix of product sold. Operating expenses decreased from the prior year period primarily as a result of the absence of proxy-contest related expenses that were recognized in the prior year quarter. Net income was $1,510 during the three months ended March 31, 2024, compared to net income of $769 during the three months ended March 31, 2023. This increase in net income was primarily due to the factors described above. 18 Table of Contents Heavy Fabrications Segment Three Months Ended March 31, 2024 2023 Orders $ 11,221 $ 20,236 Tower sections sold 78 140 Revenues 22,016 31,593 Operating income 2,046 2,790 Operating margin 9.3 % 8.8 % Within our Heavy Fabrications segment, wind tower orders decreased significantly compared to the prior year period primarily due to the timing of tower orders. Partially offsetting this decrease in wind tower orders was an 18% increase in industrial fabrication orders in the current year quarter primarily due to higher demand from mining customers. Segment revenues decreased by 30% during the three months ended March 31, 2024 primarily due to a 40% decrease in wind tower revenue as a result of a 44% decrease in tower sections sold as a global wind turbine manufacturer shifted approximately half of its contracted tower section orders initially planned for 2024 into 2025. Partially offsetting the impact of lower tower sales were higher shipments of our Pressure Reducing Systems (“PRS”) units in the current year quarter. Heavy Fabrications segment operating results decreased by $744 as compared to the prior year period. The decrease in operating performance was primarily a result of lower tower sales and the corresponding reduction in Advanced Manufacturing Production tax credits (“AMP credits”) recognized. This was partially offset by higher shipments of PRS units in the current year quarter. Operating margin was 9.3% during the three months ended March 31, 2024 compared to 8.8% during the three months ended March 31, 2023 primarily due to the factors described above. Gearing Segment Three Months Ended March 31, 2024 2023 Orders $ 10,446 $ 12,393 Revenues 8,337 11,965 Operating income 25 581 Operating margin 0.3 % 4.9 % Gearing segment orders decreased 16% from the prior year period primarily due to reduced demand from O&G customers, partially offset by increased demand from mining customers and the timing of orders from aftermarket wind customers. Gearing revenue was down 30% relative to the comparable prior year period primarily due to reduced shipments for industrial, mining, and O&G customers. Gearing segment operating income decreased by $556 from the prior year period. This decrease was primarily attributable to lower sales, partially offset by a more profitable product mix sold. Operating margin was 0.3% during the three months ended March 31, 2024, a decrease from 4.9% during the three months ended March 31, 2023, driven primarily by the items identified above. Industrial Solutions Segment Three Months Ended March 31, 2024 2023 Orders $ 7,329 $ 6,973 Revenues 7,994 5,423 Operating income 1,767 622 Operating margin 22.1 % 11.5 % 19 Table of Contents Industrial Solutions segment orders increased from the prior year period primarily due to an increase in orders associated with new gas turbine projects, partially offset by reduced orders associated with aftermarket projects. Segment revenues increased from the prior year period primarily due to the timing of shipments of new and aftermarket gas turbine content. Operating income increased versus the prior-year period primarily as a result of higher sales and a more profitable mix of product sold. Corporate and Other Corporate and Other expenses during the three months ended March 31, 2024 decreased from the prior year period primarily due to the professional fees associated with the contested proxy election recognized in the prior year quarter and lower medical costs. LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES On August 4, 2022, we entered into a credit agreement (the “2022 Credit Agreement”) with Wells Fargo Bank, National Association, as lender (“Wells Fargo”), providing the Company and its subsidiaries with a $35,000 senior secured revolving credit facility (which may be further increased by up to an additional $10,000 upon the request of the Company and at the sole discretion of Wells Fargo) and a $7,578 senior secured term loan (collectively, the “2022 Credit Facility”). The proceeds of the 2022 Credit Facility are available for general corporate purposes, including strategic growth opportunities. As of March 31, 2024, cash totaled $1,073, a decrease of $26 from December 31, 2023. Debt and finance lease obligations at March 31, 2024 totaled $13,628. As of March 31, 2024, we had the ability to borrow up to an additional $21,326 un der the 2022 Credit Facility. In addition to the 2022 Credit Facility, we also utilize supply chain financing arrangements as a component of our funding for working capital, which accelerates receivable collections and helps to better manage cash flow. Under these agreements, we have agreed to sell certain of our accounts receivable balances to banking institutions who have agreed to advance amounts equal to the net accounts receivable balances due, less a discount as set forth in the respective agreements. The balances under these agreements are accounted for as sales of accounts receivable, as they are sold without recourse. Cash proceeds from these agreements are reflected as operating activities included in the change in accounts receivable in the consolidated statements of cash flows. Fees incurred in connection with the agreements are recorded as interest expense. We also have outstanding notes payable for capital expenditures in the amount of $1,826 and $1,361 as of March 31, 2024 and December 31, 2023, respectively, with $345 and $163 included in the “Line of Credit and current maturities of long-term debt” line item of our condensed consolidated financial statements as of March 31, 2024 and December 31, 2023, respectively. The notes payable have monthly payments that range from $3 to $20 and an interest rate of approximately 6%. The equipment purchased is utilized as collateral for the notes payable. The outstanding notes payable mature in September 2028. On September 22, 2023, the Company filed a shelf registration statement on Form S-3, which was declared effective by the Securities and Exchange Commission (the “SEC”) on October 12, 2023 (the “Form S-3”), replacing a prior shelf registration statement which expired on October 12, 2023. This shelf registration statement, which includes a base prospectus, allows us to offer any combination of securities described in the prospectus in one or more offerings. Unless otherwise specified in the prospectus supplement accompanying the base prospectus, we would use the net proceeds from the sale of any securities offered pursuant to the shelf registration statement for general corporate purposes. On September 12, 2022, we entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC and HC Wainwright & Co., LLC (collectively, the “Agents”). Pursuant to the terms of the Sales Agreement, we may sell from time to time through the Agents shares of our common stock with an aggregate sales price of up to $12,000. We will pay a commission to the Agents of 2.75% of the gross proceeds of the sale of the shares sold under the Sales Agreement and reimburse the Agents for the expenses incident to the performance of their obligations under the Sales Agreement. During the year ended December 31, 2022, we issued 100,379 shares of our common stock under the Sales Agreement and the net proceeds (before upfront costs) to us from the sale of our common stock were approximately $323 after deducting commissions paid of approximately $9. No shares of the Company’s common stock were issued under the Sales Agreement during the year ended December 31, 2023 or three months ended March 31, 2024. As of March 31, 2024, shares of our common stock having a value of approximately $11,667 remained available for issuance under the Sales Agreement. Any additional shares offered and sold under the Sales Agreement are to be issued pursuant to the Form S-3 and a 424(b) prospectus supplement. We anticipate that current cash resources, amounts available under the 2022 Credit Facility, cash to be generated from operations and equipment financing, potential proceeds from the sale of securities under the Sales Agreement, access to the public or private debt and/or equity markets including any potential proceeds from the sale of further securities under the Form S-3, and proceeds from sales of AMP credits will be adequate to meet our liquidity needs for at least the next twelve months. 20 Table of Contents If assumptions regarding our production, sales and subsequent collections from certain of our large customers, our ability to finalize the terms of the remaining obligations under a supply agreement with a leading global wind turbine manufacturer, as well as receipt of customer deposits and revenues generated from new customer orders, are materially inconsistent with management’s expectations, we may in the future encounter cash flow and liquidity issues. If our operational performance deteriorates, we may be unable to comply with existing financial covenants, and could lose access to the 2022 Credit Facility. This could limit our operational flexibility, require a delay in making planned investments and/or require us to seek additional equity or debt financing. Any attempt to raise equity through the public markets could have a negative effect on our stock price, making an equity raise more difficult or more dilutive. Any additional equity financing or equity-linked financing, if available, will be dilutive to stockholders, and additional debt financing, if available, would likely require new financial covenants or impose other operating and financial restrictions on us. While we believe that we will continue to have sufficient cash available to operate our businesses and to meet our financial obligations and debt covenants, there can be no assurances that our operations will generate sufficient cash, or that credit facilities or equity or equity-linked financings will be available in an amount sufficient to enable us to meet these financial obligations. Sources and Uses of Cash The following table summarizes our cash flows from operating, investing, and financing activities for the three months ended March 31, 2024 and 2023: Three Months Ended March 31, 2024 2023 Total cash provided by (used in): Operating activities $ 5,857 $ (25,984 ) Investing activities (1,744 ) (1,065 ) Financing activities (4,139 ) 16,046 Net decrease in cash $ (26 ) $ (11,003 ) Operating Cash Flows During the three months ended March 31, 2024, net cash provided by operating activities totaled $5,857 compared to net cash used in operating activities of $25,984 during the prior year period. The increase in net cash provided by operating activities during the current year period was primarily attributable to a decrease in accounts receivable, proceeds from the sale of the 2023 AMP credits received during the current year period. In addition, customer deposits decreased more significantly during the prior year period. Investing Cash Flows During the three months ended March 31, 2024, net cash used in investing activities tot aled $1,744, comp ared to net cash used in investing activities of $1,065 during the prior year period. The increase in net cash used in investing activities as compared to the prior-year period was primarily due to a net increase in purchases of property and equipment. Financing Cash Flows During the three months ended March 31, 2024, net cash used in financing activities tot aled $4,139, co mpared to net cash provided by financing activities of $16,046 during the prior year period. The decrease was primarily due to decreased net borrowings under the 2022 Credit Facility in the current year period. CRITICAL ACCOUNTING ESTIMATES There have been no material changes in our critical accounting estimates during the three months ended March 31, 2024 as compared to the critical accounting estimates described in our Annual Report on Form 10-K for the year ended December 31, 2023. 21 Table of Contents CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The preceding discussion and analysis should be read in conjunction with our condensed consolidated financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2023. Portions of this Quarterly Report on Form 10-Q, including the discussion and analysis in this Part I, Item 2, contain “forward looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), that reflect our current expectations regarding our future growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities, as well as assumptions made by, and information currently available to, our management. We have tried to identify forward looking statements by using words such as “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “may,” “plan” and similar expressions, but these words are not the exclusive means of identifying forward looking statements. Forward-looking statements include any statement that does not directly relate to a current or historical fact. Our forward-looking statements may include or relate to our beliefs, expectations, plans and/or assumptions with respect to the following: (i) the impact of global health concerns on the economies and financial markets and the demand for our products; (ii) state, local and federal regulatory frameworks affecting the industries in which we compete, including the wind energy industry, and the related extension, continuation or renewal of federal tax incentives and grants, including the advanced manufacturing tax credits (which remain subject to further technical guidance and regulations), and state renewable portfolio standards as well as new or continuing tariffs on steel or other products imported into the United States; (iii) our customer relationships and our substantial dependency on a few significant customers and our efforts to diversify our customer base and sector focus and leverage relationships across business units; (iv) our ability to operate our business efficiently, comply with our debt obligations, manage capital expenditures and costs effectively, and generate cash flow; (v) the economic and operational stability of our significant customers and suppliers, including their respective supply chains, and the ability to source alternative suppliers as necessary; (vi) our ability to continue to grow our business organically and through acquisitions; (vii) the production, sales, collections, customer deposits and revenues generated by new customer orders and our ability to realize the resulting cash flows; (viii) information technology failures, network disruptions, cybersecurity attacks or breaches in data security; (ix) the sufficiency of our liquidity and alternate sources of funding, if necessary; (x) our ability to realize revenue from customer orders and backlog (including our ability to finalize the terms of the remaining obligations under a supply agreement with a leading global wind turbine manufacturer); (xi) the economy and the potential impact it may have on our business, including our customers; (xii) the state of the wind energy market and other energy and industrial markets generally, including the availability of tax credits, and the impact of competition and economic volatility in those markets; (xiii) the effects of market disruptions and regular market volatility, including fluctuations in the price of oil, gas and other commodities; (xiv) competition from new or existing industry participants including, in particular, increased competition from foreign tower manufacturers; (xv) the effects of the change of administrations in the U.S. federal government; (xvi) our ability to successfully integrate and operate acquired companies and to identify, negotiate and execute future acquisitions; (xvii) the potential loss of tax benefits if we experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended; (xviii) the limited trading market for our securities and the volatility of market price for our securities; (xix) our outstanding indebtedness and its impact on our business activities (including our ability to incur additional debt in the future); and (xx) the impact of future sales of our common stock or securities convertible into our common stock on our stock price. These statements are based on information currently available to us and are subject to various risks, uncertainties and other factors that could cause our actual growth, results of operations, financial condition, cash flows, performance, business prospects and opportunities to differ materially from those expressed in, or implied by, these statements including, but not limited to, those set forth under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023. We are under no duty to update any of these statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties or other factors that could cause our current beliefs, expectations, plans and/or assumptions to change. Accordingly, forward-looking statements should not be relied upon as a predictor of actual results. 22 Table of Contents Item 3. Quantitative and Qualitative Disclosures About Market Risk We are a smaller reporting company as defined by Item 10(f)(1) of Regulation S-K under the Securities Act and as such are not required to provide information under this Item pursuant to Item 305I of Regulation S-K.