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EX-32.2 - EX-32.2 - BROADWIND ENERGY, INC.a10-12919_1ex32d2.htm
EX-10.6 - EX-10.6 - BROADWIND ENERGY, INC.a10-12919_1ex10d6.htm
EX-32.1 - EX-32.1 - BROADWIND ENERGY, INC.a10-12919_1ex32d1.htm
EX-10.5 - EX-10.5 - BROADWIND ENERGY, INC.a10-12919_1ex10d5.htm
EX-10.4 - EX-10.4 - BROADWIND ENERGY, INC.a10-12919_1ex10d4.htm
EX-10.3 - EX-10.3 - BROADWIND ENERGY, INC.a10-12919_1ex10d3.htm
EX-10.2 - EX-10.2 - BROADWIND ENERGY, INC.a10-12919_1ex10d2.htm
EX-10.7 - EX-10.7 - BROADWIND ENERGY, INC.a10-12919_1ex10d7.htm
EX-31.2 - EX-31.2 - BROADWIND ENERGY, INC.a10-12919_1ex31d2.htm
EX-10.1 - EX-10.1 - BROADWIND ENERGY, INC.a10-12919_1ex10d1.htm
EX-31.1 - EX-31.1 - BROADWIND ENERGY, INC.a10-12919_1ex31d1.htm

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2010

 

OR

 

 o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to         

 

Commission file number 0-31313

 

 

BROADWIND ENERGY, INC.

 (Exact name of registrant as specified in its charter)

 

Delaware

 

88-0409160

(State or other jurisdiction
of incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

47 East Chicago Avenue, Suite 332, Naperville, IL 60540

(Address of principal executive offices)

 

(630) 637-0315

(Registrant’s telephone number, including area code)

 

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Number of shares of registrant’s common stock, par value $0.001, outstanding as of August 6, 2010: 106,915,026.

 

 

 



Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

 

INDEX

 

 

 

 

Page No.

 

 

 

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

1

 

Condensed Consolidated Balance Sheets

 

1

 

Condensed Consolidated Statements of Operations

 

2

 

Condensed Consolidated Statements of Cash Flows

 

3

 

Notes to Condensed Consolidated Financial Statements

 

4

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

30

Item 4.

Controls and Procedures

 

30

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

 

31

Item 1A.

Risk Factors

 

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

31

Item 3.

Defaults Upon Senior Securities

 

31

Item 4.

Removed and Reserved

 

31

Item 5.

Other Information

 

31

Item 6.

Exhibits

 

31

Signatures

 

32

 



Table of Contents

 

PART I.    FINANCIAL INFORMATION

 

Item 1.    Financial Statements

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

11,579

 

$

4,829

 

Short-term investments

 

1,683

 

 

Restricted cash

 

 

2,010

 

Accounts receivable, net of allowance for doubtful accounts of $196 and $1,641 as of June 30, 2010 and December 31, 2009, respectively

 

23,785

 

21,920

 

Inventories, net

 

12,566

 

9,039

 

Prepaid expenses and other current assets

 

3,430

 

5,688

 

Total current assets

 

53,043

 

43,486

 

Property and equipment, net

 

131,740

 

136,249

 

Goodwill

 

5,154

 

9,715

 

Intangible assets, net

 

35,098

 

37,248

 

Other assets

 

2,075

 

3,338

 

TOTAL ASSETS

 

$

227,110

 

$

230,036

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Lines of credit and notes payable

 

$

 

$

10,717

 

Current maturities of long-term debt

 

2,676

 

9,021

 

Current portions of capital lease obligations

 

1,154

 

1,130

 

Accounts payable

 

14,895

 

14,710

 

Accrued liabilities

 

5,428

 

6,965

 

Deferred revenue

 

4,438

 

10,199

 

Total current liabilities

 

28,591

 

52,742

 

 

 

 

 

 

 

LONG-TERM LIABILITIES:

 

 

 

 

 

Long-term debt, net of current maturities

 

11,655

 

15,778

 

Long-term capital lease obligations, net of current portions

 

2,729

 

3,286

 

Interest rate swap agreements

 

 

253

 

Deferred income tax liabilities

 

420

 

403

 

Other

 

1,677

 

1,979

 

Total long-term liabilities

 

16,481

 

21,699

 

 

 

 

 

 

 

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; 150,000,000 shares authorized; 106,841,085 and 96,701,127 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively

 

107

 

97

 

Additional paid-in capital

 

355,519

 

300,779

 

Accumulated other comprehensive loss

 

(2

)

 

Accumulated deficit

 

(173,586

)

(145,281

)

Total stockholders’ equity

 

182,038

 

155,595

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

227,110

 

$

230,036

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

1



Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

36,629

 

$

52,313

 

$

58,799

 

$

105,375

 

Cost of sales

 

37,025

 

49,162

 

63,679

 

97,539

 

Gross (loss) profit

 

(396

)

3,151

 

(4,880

)

7,836

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

7,467

 

10,525

 

15,681

 

19,441

 

Goodwill impairment

 

4,561

 

 

4,561

 

 

Intangible amortization

 

1,074

 

2,906

 

2,149

 

5,812

 

Total operating expenses

 

13,102

 

13,431

 

22,391

 

25,253

 

Operating loss

 

(13,498

)

(10,280

)

(27,271

)

(17,417

)

 

 

 

 

 

 

 

 

 

 

OTHER (EXPENSE) INCOME, net:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(361

)

(557

)

(723

)

(1,099

)

Other, net

 

(394

)

5,574

 

(262

)

5,667

 

Total (expense) income, net

 

(755

)

5,017

 

(985

)

4,568

 

 

 

 

 

 

 

 

 

 

 

Net loss before (benefit) provision for income taxes

 

(14,253

)

(5,263

)

(28,256

)

(12,849

)

(BENEFIT) PROVISION FOR INCOME TAXES

 

(72

)

163

 

49

 

(273

)

NET LOSS

 

$

(14,181

)

$

(5,426

)

$

(28,305

)

$

(12,576

)

 

 

 

 

 

 

 

 

 

 

NET LOSS PER COMMON SHARE - Basic and diluted

 

$

(0.13

)

$

(0.06

)

$

(0.27

)

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - Basic and diluted

 

106,782

 

96,547

 

105,571

 

96,520

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

2



Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(In thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

 

$

(28,305

)

$

(12,576

)

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

 

 

 

 

 

Depreciation and amortization expense

 

9,682

 

13,433

 

Goodwill impairment

 

4,561

 

 

Change in fair value of interest rate swap agreements

 

(253

)

(198

)

Deferred income taxes

 

17

 

(220

)

Stock-based compensation

 

606

 

979

 

Allowance for doubtful accounts

 

(1,445

)

(798

)

Loss (gain) on disposal of assets

 

68

 

(46

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(420

)

10,792

 

Inventories

 

(3,489

)

6,621

 

Prepaid expenses and other current assets

 

2,258

 

1,252

 

Accounts payable

 

1,114

 

(8,650

)

Accrued liabilities

 

(1,836

)

(2,166

)

Deferred revenues

 

(5,761

)

(8,301

)

Other non-current assets and liabilities

 

1,029

 

 

Net cash (used in) provided by operating activities

 

(22,174

)

122

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(3,952

)

(9,064

)

Purchases of available-for-sale investments

 

(1,683

)

 

Proceeds from disposals of property and equipment

 

9

 

29

 

Decrease (increase) in restricted cash

 

2,010

 

(2,003

)

Net cash used in investing activities

 

(3,616

)

(11,038

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Net proceeds from issuance of stock

 

53,341

 

445

 

Common stock issued under defined contribution 401(k) plan

 

341

 

 

Payments on lines of credit and notes payable

 

(21,070

)

(7,134

)

Proceeds from lines of credit and notes payable

 

 

6,079

 

Proceeds from sale-leaseback transactions

 

 

3,641

 

Proceeds from deposits on equipment

 

 

665

 

Principal payments on capital leases

 

(533

)

(585

)

Issuance of restricted stock grants

 

463

 

386

 

Net cash provided by financing activities

 

32,542

 

3,497

 

 

 

 

 

 

 

Effect of foreign exchange rates

 

(2

)

 

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

6,750

 

(7,419

)

CASH AND CASH EQUIVALENTS, beginning of the period

 

4,829

 

15,253

 

CASH AND CASH EQUIVALENTS, end of the period

 

$

11,579

 

$

7,834

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

649

 

$

1,214

 

Income taxes paid

 

$

38

 

$

535

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Non-cash purchase accounting allocation charges

 

$

 

$

3,030

 

Common stock issued under defined contribution 401(k) plan

 

$

341

 

$

 

Issuance of restricted stock grants

 

$

463

 

$

386

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


 


Table of Contents

 

BROADWIND ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands, except share and per share data)

 

NOTE 1 — BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the twelve months ending December 31, 2010. The December 31, 2009 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. This financial information should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

 

The unaudited condensed consolidated financial statements presented herein include the accounts of Broadwind Energy, Inc. and its wholly owned subsidiaries. As of June 30, 2010, the Company had four operating subsidiaries, which consisted of Brad Foote Gear Works, Inc. (“Brad Foote”), Tower Tech Systems Inc. (“Tower Tech”), Energy Maintenance Service, LLC (“EMS”) and Badger Transport, Inc. (“Badger”). All inter-company transactions and balances have been eliminated. Additionally, certain reclassifications have been made to prior period financial statements to conform to the current period presentation.

 

Business Overview

 

As used in this Quarterly Report on Form 10-Q, the terms we, us, our, Broadwind, and the Company, refer to Broadwind Energy, Inc., a Delaware corporation headquartered in Naperville, Illinois, and its wholly owned subsidiaries. The Company is an independent, horizontally integrated supplier of customized products and services to the U.S. wind energy industry. The Company’s product and service portfolio provides its customers, including wind turbine manufacturers, wind farm developers and wind farm operators, with access to a broad array of wind component and service offerings. The Company manufactures gearing systems and wind towers for the wind industry, and provides technical service, precision repair and engineering and specialized logistics to the wind industry in the United States.

 

In December 2009, the Company revised its reporting segment presentation into four reportable operating segments: Towers, Gearing, Technical and Engineering Services, and Logistics. Accordingly, all prior period financial results have been reclassified to reflect these changes. See Note 14, “Segment Reporting,” of the notes to these condensed consolidated financial statements for further discussion of the Company’s reportable segments.

 

Towers

 

The Company manufactures wind towers, specifically the larger and heavier wind towers that are designed for 2 megawatt (“MW”) and larger wind turbines. The Company’s production facilities are strategically located in close proximity to the primary U.S. wind resource regions, sited in Wisconsin and Texas, including a recently constructed third wind tower manufacturing facility in Brandon, South Dakota, which will become operational as business warrants and pending the installation of certain additional equipment. The Company also manufactures other specialty weldments and structures for industrial customers.

 

Gearing

 

The Company manufactures precision gearing systems for the wind industry in North America and products for industrial markets including mining and oilfield equipment, with facilities in Illinois and Pennsylvania. The Company uses an integrated manufacturing process, which includes a machining process in Cicero, Illinois, a heat treatment process in Neville Island, Pennsylvania and a finishing process in the Company’s Cicero factory.

 

Technical and Engineering Services

 

The Company is an independent service provider of construction support and operations and maintenance services to the wind industry. The Company’s specialty services include oil change-out, up-tower tooling for gearing systems, drive-train and blade repairs and component replacement. The Company’s construction support capabilities include assembly of towers, nacelles, blades

 

4



Table of Contents

 

and other components. The Company also provides customer support, preventive maintenance and wind technician training. The Company’s technicians utilize regional service centers for storage and repair of parts as well as for training. Through its precision repair and engineering services, the Company repairs and refurbishes complex wind components, including control systems, gearboxes and blades. The Company also conducts warranty inspections, commissions turbines and provides technical assistance.

 

Logistics

 

The Company offers specialized transportation, permitting and logistics management to the wind industry for oversize and overweight machinery and equipment. The Company delivers complete turbines to the installation site, including blades, nacelles and tower sections for final erection. The Company focuses on the project management of the delivery of complete wind turbine farms.

 

Financing and Liquidity

 

As of June 30, 2010, the Company had cash and cash equivalents totaling $11,579 and short-term investments of $1,683. The Company’s management anticipates that the Company will be able to satisfy the cash requirements associated with, among other things, working capital needs, capital expenditures and debt and lease commitments through at least the next 12 months primarily with current cash on hand, receipts of deposits from customer to fund steel purchases and cash generated by operations or other financing arrangements.

 

The Company’s ability to make scheduled payments on debt and other financial obligations will depend on future financial and operating performance. However, if sales and subsequent collections from several of the Company’s large customers, as well as revenues generated from new customer orders, are not materially consistent with management’s expectations, the Company may encounter cash flow and liquidity issues. Additional funding may not be available when needed or on terms acceptable to the Company. Furthermore, if the Company is unable to obtain additional capital, the Company will likely be required to delay, reduce the scope of or eliminate the Company’s plans for expansion and growth, and this could affect the Company’s overall operations. Any additional equity financing, if available, may be dilutive to stockholders, and additional debt financing, if available, will likely require financial covenants or other restrictions on the Company.

 

NOTE 2 — EARNINGS PER SHARE

 

The following table presents a reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009 as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Basic earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss to common stockholders

 

$

(14,181

)

$

(5,426

)

$

(28,305

)

$

(12,576

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

106,782,014

 

96,547,386

 

105,571,347

 

96,520,211

 

Basic net loss per share

 

$

(0.13

)

$

(0.06

)

$

(0.27

)

$

(0.13

)

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share calculation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss to common stockholders

 

$

(14,181

)

$

(5,426

)

$

(28,305

)

$

(12,576

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

106,782,014

 

96,547,386

 

105,571,347

 

96,520,211

 

Common stock equivalents:

 

 

 

 

 

 

 

 

 

Stock options and unvested restricted stock units (1)

 

 

 

 

 

Weighted average number of common shares outstanding

 

106,782,014

 

96,547,386

 

105,571,347

 

96,520,211

 

Diluted net loss per share

 

$

(0.13

)

$

(0.06

)

$

(0.27

)

$

(0.13

)

 


(1) 

Stock options and unvested restricted stock units granted and outstanding of 1,694,136 and 1,886,245 as of June 30, 2010 and 2009, respectively, are excluded from the computation of diluted earnings per share due to the anti-dilutive effect as a result of the Company’s net loss for these respective periods.

 

5



Table of Contents

 

NOTE 3 — INVENTORIES

 

Inventories are stated at the lower of cost or market value and primarily consist of raw material, work-in-process, and finished goods. 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.

 

The components of inventories as of June 30, 2010 and December 31, 2009 are summarized as follows:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Raw materials

 

$

6,751

 

$

4,957

 

Work-in-process

 

5,995

 

2,921

 

Finished goods

 

1,375

 

3,338

 

 

 

14,121

 

11,216

 

Less: Reserve for excess and obsolete inventory

 

(1,555

)

(2,177

)

Net inventories

 

$

12,566

 

$

9,039

 

 

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

 

Goodwill represents the excess of cost over fair market value of identifiable net assets acquired through business purchases. The Company performs an annual impairment test through the application of a fair-value based test as of October 31 of each year, or more frequently when events or circumstances indicate that the carrying value of its assets may not be recoverable. The Company’s estimate of fair value for each of the Company’s operating segments is based primarily on projected future results, cash flows and other assumptions.

 

During the second quarter of 2010, the Company identified a triggering event associated with a continued deterioration in financial performance within its Technical and Engineering Services segment. This triggering event required a subsequent revision in the Company’s projection of future operating results and cash flows for this segment in light of the continued economic weakness in the wind energy industry. The Company’s analysis indicated that the projected fair value of the Technical and Engineering Services segment assets did not exceed the carrying value of these assets. The method in determining the fair value was based upon the Company’s estimate of the projected future discounted cash flows of its reporting unit. As a result, the Company recorded a goodwill impairment charge of $4,561 during the second quarter and the impairment charge was recorded to operating expenses in its consolidated statement of operations for the three and six months ended June 30, 2010.

 

As of June 30, 2010, the carrying value of goodwill was as follows:

 

 

 

Towers

 

Gearing

 

Technical and
Engineering
Services

 

Logistics

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill balance as of December 31, 2009

 

$

 

$

 

$

4,561

 

$

5,154

 

$

9,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Impairment charge

 

 

 

(4,561

)

 

(4,561

)

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill balance as of June 30, 2010

 

$

 

$

 

$

 

$

5,154

 

$

5,154

 

 

Intangible assets represent the fair value assigned to definite-lived assets such as trade names, customer relationships, and noncompete agreements as part of acquisitions completed by the Company during 2007 and 2008. Intangible assets are amortized on a straight-line basis over their estimated useful lives, which range from 3 to 20 years. The Company tests intangible assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. As a result of the reduction in the Company’s revenues during the second quarter of this year compared to original projections, the Company evaluated the recoverability of certain of its identifiable intangible assets. Based upon the Company’s assessment, no impairment to these assets was identified as of June 30, 2010.

 

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Table of Contents

 

As of June 30, 2010 and December 31, 2009, the cost basis, accumulated amortization and net book value of intangible assets were as follows:

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Adjusted

 

 

 

Net

 

 

 

 

 

 

 

Net

 

 

 

Cost

 

Accumulated

 

Book

 

Cost

 

Accumulated

 

Impairment

 

Book

 

 

 

Basis

 

Amortization

 

Value

 

Basis

 

Amortization

 

Charge

 

Value

 

Intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer relationships

 

$

33,059

 

$

(7,235

)

$

25,824

 

$

106,638

 

$

(21,332

)

$

(57,835

)

$

27,471

 

Trade names

 

10,159

 

(1,340

)

8,819

 

10,279

 

(1,099

)

(107

)

9,073

 

Noncompete agreements

 

1,490

 

(1,035

)

455

 

1,490

 

(786

)

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets

 

$

44,708

 

$

(9,610

)

$

35,098

 

$

118,407

 

$

(23,217

)

$

(57,942

)

$

37,248

 

 

Intangible investments associated with customer relationships, trade names and noncompete agreements are amortized ratably over the estimated life of the related intangible assets. Amortization expense was $1,074 and $2,149 for the three and six months ended June 30, 2010, respectively, compared to $2,906 and $5,812 for the three and six months ended June 30, 2009, respectively.

 

NOTE 5 — ACCRUED LIABILITIES

 

Accrued liabilities as of June 30, 2010 and December 31, 2009 consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Accrued operating expenditures

 

$

788

 

$

954

 

Accrued payroll and benefits

 

2,241

 

2,295

 

Accrued professional fees

 

89

 

1,067

 

Accrued warranty

 

659

 

918

 

Accrued other

 

1,651

 

1,731

 

Total accrued liabilities

 

$

5,428

 

$

6,965

 

 

NOTE 6 — DEBT AND CREDIT AGREEMENTS

 

The Company’s outstanding debt balances as of June 30, 2010 and December 31, 2009 consisted of the following:

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Lines of credit

 

$

 

$

10,601

 

Term loans and notes payable

 

12,011

 

22,595

 

Related party note

 

2,320

 

2,320

 

 

 

14,331

 

35,516

 

Less - Current maturities

 

(2,676

)

(19,738

)

Long-term debt, net of current maturities

 

$

11,655

 

$

15,778

 

 

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Table of Contents

 

Credit Facilities

 

Brad Foote

 

In connection with the Company’s acquisition of Brad Foote in October 2007, the Company assumed outstanding debt and available lines of credit totaling approximately $25,500 under various secured debt facilities (the “BOA Debt Facilities”) with Bank of America.  On January 22, 2010, Brad Foote repaid all of the outstanding principal and interest under the BOA Debt Facilities in the aggregate amount of $16,076, and the BOA Debt Facilities were terminated.

 

Tower Tech

 

ICB Line

 

In October 2007, Tower Tech obtained a secured line of credit (the “ICB Line”) from Investors Community Bank in the amount of $2,500, which was subsequently increased to $5,500 on March 21, 2008. On March 13, 2009, Investors Community Bank agreed to extend the maturity date of the ICB Line to March 13, 2010. Pursuant to a Master Amendment dated as of December 30, 2009 among Investors Community Bank, Tower Tech and Broadwind (as guarantor), the amount of the ICB Line was increased to $6,500, subject to borrowing base availability. On January 26, 2010, Tower Tech repaid all of the outstanding indebtedness under the ICB Line in the amount of $3,066 and allowed the ICB Line to expire on March 13, 2010.

 

ICB Notes

 

On April 7, 2008, the Company’s wholly owned subsidiary R.B.A., Inc. (“RBA”) executed four (4) promissory notes with Investors Community Bank (the “ICB Notes”), in the aggregate principal amount of approximately $3,781, as follows: (i) a term note in the maximum principal amount of approximately $421, bearing interest at a per annum rate of 6.85%, with a maturity date of October 5, 2012; (ii) a term note in the maximum principal amount of $700, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; (iii) a term note in the maximum principal amount of $928, bearing interest at a per annum rate of 5.65%, with a maturity date of April 25, 2013; and (iv) a line of credit note in the maximum principal amount of $1,732, bearing interest at a per annum rate of 4.48% until May 1, 2008 and thereafter at the London Interbank Offered Rate (“LIBOR”) plus 1.75%, with a maturity date of April 5, 2009 (the “Line of Credit Note”). The Line of Credit Note was subsequently modified on March 13, 2009 to extend the maturity date to March 13, 2010 and to change the interest rate to the greater of (A) 5% or (B) prime. The ICB Notes provide for multiple advances, and were secured by substantially all of the assets of RBA.

 

Pursuant to the merger of RBA into Tower Tech on December 31, 2009, Tower Tech became the successor by merger to RBA’s interest in the loans from Investors Community Bank to RBA evidenced by the ICB Notes (other than the Line of Credit Note, which was repaid in full in January 2010). As of June 30, 2010, (i) the total amount of outstanding indebtedness under the remaining ICB Notes was $1,500, (ii) the effective per annum interest rate of the remaining ICB Notes was 5.84%, and (iii) Tower Tech was in compliance with all applicable financial covenants related to the remaining ICB Notes.

 

Great Western Loan

 

On April 28, 2009, Tower Tech entered into a Construction Loan Agreement with Great Western Bank, pursuant to which Great Western Bank agreed to provide up to $10,000 in financing (the “Construction Loan”) to fund construction of Tower Tech’s wind tower manufacturing facility in Brandon, South Dakota (the “Facility”).  Pursuant to a Change in Terms Agreement dated April 5, 2010 between Great Western and Tower Tech, the Construction Loan was converted to a term loan (the “Great Western Term Loan”) providing for monthly payments of principal plus interest, extending the maturity date to November 5, 2016, reducing the principal amount to $6,500, and changing the per annum interest rate to 8.5%. Tower Tech was required to pay a 1.0% origination fee upon the conversion.

 

The Great Western Term Loan is secured by a first mortgage on the Facility and all fixtures, accounts and proceeds relating thereto, pursuant to a Mortgage and a Commercial Security Agreement, each between Tower Tech and Great Western, and by a Commercial Guaranty from the Company. In addition, the Company has agreed to subordinate all intercompany debt with Tower Tech to the Great Western Term Loan. The Great Western Term Loan contains representations, warranties and covenants that are customary to a term financing arrangement and contains no financial covenants. As of June 30, 2010, the total outstanding indebtedness under the Great Western Term Loan was $6,250.

 

Badger

 

On March 13, 2009, Badger obtained a term loan (the “FNB Term Loan”) from First National Bank in the principal amount of $1,538. A portion of the proceeds from the FNB Term Loan was used to pay off Badger’s existing term loan and revolving line of credit with First National Bank, with the remainder available for working capital. The FNB Term Loan is secured by the inventory,

 

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Table of Contents

 

accounts receivable and certain equipment of Badger, and is guaranteed by the Company. The FNB Term Loan bears interest at a rate of 6.75% per annum, matures on March 13, 2013, and requires monthly payments of principal and interest. The FNB Term Loan contains no financial covenants. As of June 30, 2010, the total amount of outstanding indebtedness under the FNB Term Loan was $1,101.

 

On September 30, 2009, Badger obtained a term loan (the “GE Capital Term Loan”) from General Electric Capital Corporation in the principal amount of approximately $1,000. The GE Capital Term Loan is secured by certain equipment of Badger, and is guaranteed by the Company. The GE Capital Term Loan bears interest at a rate of 7.76% per annum, matures on September 30, 2014, and requires monthly payments of principal and interest. The GE Capital Term Loan contains no financial covenants. As of June 30, 2010, the total amount of outstanding indebtedness under the GE Capital Term Loan was $865.

 

Selling Shareholder Notes

 

On May 26, 2009, the Company entered into a settlement agreement (the “Settlement Agreement”) with the former owners of Brad Foote (the “Selling Shareholders”), including J. Cameron Drecoll, the Company’s Chief Executive Officer and a member of its Board of Directors, related to the post-closing escrow established in connection with the Company’s acquisition of Brad Foote. Under the terms of the Settlement Agreement, among other terms, the Company issued three promissory notes to the Selling Shareholders in the aggregate principal amount of $3,000 (the “Selling Shareholder Notes”). The Selling Shareholder Notes mature on May 28, 2012 and bear interest at a rate of 7% per annum, with interest payments due quarterly. The Selling Shareholder Note issued to Mr. Drecoll in the principal amount of $2,320 and pursuant to the terms of the Settlement Agreement is deemed by the Company to be a related party transaction. As of June 30, 2010, principal of $3,000 and accrued interest of $52 were outstanding under the Selling Shareholder Notes. The Company has accounted for the Selling Shareholder Notes as long-term debt in its condensed consolidated balance sheets.

 

NOTE 7 — CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

 

Cash and cash equivalents comprise cash balances and readily marketable investments with maturities of three months or less, such as money market funds, short-term government bonds, Treasury bills, marketable securities and commercial paper. The Company’s treasury policy is to invest excess cash in money market funds or other short-term 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 condensed consolidated statements of operations. As of June 30, 2010, cash and cash equivalents totaled $11,579 and consisted of cash balances and investments in municipal bonds with maturities of three months or less, compared to cash and cash equivalents of $4,829 which consisted of cash and money market funds at December 31, 2009.

 

As of June 30, 2010, the Company had $1,683 in investments in municipal bonds with maturities greater than three months, but less than one year. These financial instruments are categorized as available-for-sale securities and classified as short-term investments in the Company’s condensed consolidated balance sheet as of June 30, 2010.

 

Cash and cash equivalents and short-term investments consisted of the following as of June 30, 2010 and December 31, 2009:

 

 

 

June 30, 2010

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

Cost

 

Gain

 

(Loss)

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

3,253

 

$

 

$

 

$

3,253

 

Municipal bonds

 

8,326

 

 

 

8,326

 

Total cash and cash equivalents

 

11,579

 

 

 

11,579

 

 

 

 

 

 

 

 

 

 

 

Short-term investments (available-for-sale):

 

 

 

 

 

 

 

 

 

Municipal bonds

 

1,683

 

 

 

1,683

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents and short-term investments

 

$

13,262

 

$

 

$

 

$

13,262

 

 

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Table of Contents

 

 

 

December 31, 2009

 

 

 

 

 

Gross Unrealized

 

 

 

 

 

Cost

 

Gain

 

(Loss)

 

Fair Value

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

 

Cash

 

$

4,240

 

$

 

$

 

$

4,240

 

Money market funds

 

589

 

 

 

589

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

$

4,829

 

$

 

$

 

$

4,829

 

 

NOTE 8 — 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. 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.

 

Level 3—Valuations are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Inputs reflect management’s best estimate of what market participants would use in valuing the asset or liability at the measurement date.

 

Fair value of financial instruments

 

The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued liabilities 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. As of June 30, 2010, the Company held short-term investments in municipal bonds, which are required to be measured at fair value. The following table presents the Company’s fair value measurements valued on a recurring basis as of June 30, 2010:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Municipal bonds

 

$

1,683

 

$

 

$

 

$

1,683

 

Total

 

$

1,683

 

$

 

$

 

$

1,683

 

 

The following table represents the fair values of the Company’s financial liabilities as of December 31, 2009:

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

$

 

$

253

 

$

 

$

253

 

Total

 

$

 

$

253

 

$

 

$

253

 

 

10


 


Table of Contents

 

Assets measured at fair value on a nonrecurring basis

 

The Company reviews its goodwill balances for impairment on at least an annual basis based on the carrying value of these assets as of October 31 or whenever events or changes in circumstances indicate that its carrying value may not be recoverable. During the second quarter of 2010, the Company identified a triggering event associated with a continued deterioration in financial performance within its Technical and Engineering Services segment. This triggering event required a subsequent revision in the Company’s projections of future operating results and cash flows for this segment in light of the continued economic weakness in the wind energy industry. The Company’s analysis indicated that the projected fair value of the Technical and Engineering Services segment assets did not exceed the carrying value of these net assets. The method in determining the fair value was based upon the Company’s estimate of the projected future discounted cash flows of its reporting unit. As a result, the Company recorded a goodwill impairment charge of $4,561 during the second quarter of 2010 to properly reflect the carrying value of these assets.

 

The fair value measurement approach utilizes a number of significant unobservable inputs or Level 3 assumptions. These assumptions include, among others, projections of our future operating results, the implied fair value of these assets using an income approach by preparing a discounted cash flow analysis and other subjective assumptions.

 

The following table presents the fair value measurements of the Company’s nonrecurring assets as of June 30, 2010:

 

 

 

Fair Value Measurments Using

 

Description

 

Six Months
Ended
6/30/10

 

Prices in
Active
Markets for
Identical
Assets (Level
1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs (Level 3)

 

Impairment
Charge

 

Goodwill

 

$

 

$

 

$

 

$

 

$

4,561

 

 

NOTE 9 — TOTAL COMPREHENSIVE LOSS

 

The components of total comprehensive loss are net loss and the change in cumulative currency translation adjustments.  The following table sets forth the components of total comprehensive loss for the three and six months ended June 30, 2010 and 2009:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(14,181

)

$

(5,426

)

$

(28,305

)

$

(12,576

)

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(2

)

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive loss

 

$

(14,183

)

$

(5,426

)

$

(28,307

)

$

(12,576

)

 

In May 2010, the Company opened a sales office in Hamburg, Germany. The Euro is the functional currency in Germany.  All related expenses have been translated into U.S. dollars using an average exchange rate for the period. The assets and liabilities for this location have been translated into U.S. dollars using the spot rate at the end of the period with a currency translation loss of $2 included in accumulated other comprehensive loss for the period.

 

NOTE 10 — STOCKHOLDERS’ EQUITY

 

On January 21, 2010, the Company completed a public offering of its common stock, par value $0.001 per share, at an offering price of $5.75 per share. In the offering, the Company sold 10,000,000 newly issued shares of its common stock for approximately $54,625 in proceeds after deducting underwriting discounts, but before deducting other offering related costs. In connection with the offering, the Company incurred $1,284 in costs associated with professional and other offering related expenses, which have been netted against the proceeds received in additional paid-in capital in the Company’s condensed consolidated balance sheets as of June 30, 2010.

 

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Table of Contents

 

On March 26, 2010, the Company issued 32,761 shares of its common stock for an aggregate fair value of $172 in connection with matching contributions made under its defined contribution 401(k) safe harbor plan.

 

On June 29, 2010, the Company issued 72,218 shares of its common stock for an aggregate fair value of $169 in connection with matching contributions made under its defined contribution 401(k) safe harbor plan.

 

NOTE 11 — 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.

 

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2010 and December 31, 2009, the Company had accrued interest or penalties related to uncertain tax positions totaling $16 and $10, respectively.

 

The Company files income tax returns in U.S. federal and state jurisdictions. As of June 30, 2010, open tax years in federal and some state jurisdictions date back to 1996 due to the taxing authorities’ ability to adjust operating loss carryforwards. No changes in settled tax years have occurred through June 30, 2010. The Company does not anticipate there will be a material change in the total amount of unrecognized tax benefits within the next 12 months.

 

The following table presents the income tax (benefit) provision for the three and six months ended June 30, 2010 and 2009 as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net loss before (benefit) provision for income taxes

 

$

(14,253

)

$

(5,263

)

$

(28,256

)

$

(12,849

)

(Benefit) provision for income taxes

 

(72

)

163

 

49

 

(273

)

Net loss

 

$

(14,181

)

$

(5,426

)

$

(28,305

)

$

(12,576

)

 

Effective tax rates differ from federal statutory income tax rates primarily due to changes in the Company’s valuation allowance, permanent differences and provisions for state and local income taxes. As of June 30, 2010, the Company had a net deferred income tax liability of $420 primarily related to temporary differences in indefinite-lived assets. These indefinite-lived assets consist of tax deductible goodwill from business acquisitions completed during 2007 and 2008. During the three months ended June 30, 2010, the Company recorded a benefit for income taxes of $72, compared to a provision for income taxes of $163 during the three months ended June 30, 2009. The decrease in income taxes during the three months ended June 30, 2010 was primarily attributable to the increase in the estimated full year projected net loss for the current year. During the six months ended June 30, 2010, the Company recorded a provision for income taxes of $49, compared to a benefit for income taxes of $273 during the six months ended June 30, 2009. The increase in income taxes during the six months ended June 30, 2010 related to a benefit recorded during the prior year associated with a reduction in state income taxes and deferred state income tax liabilities as a result of a favorable change in the state of Wisconsin’s method of calculating state income taxes.

 

NOTE 12 — SHARE-BASED COMPENSATION

 

Overview of Share-Based Compensation Plan

 

The Company grants incentive stock options and other equity awards pursuant to the Broadwind Energy, Inc. 2007 Equity Incentive Plan (the “EIP”), which was approved by the Company’s Board of Directors in October 2007 and by the Company’s stockholders in June 2008. The EIP was subsequently amended in August 2008 by the Company’s Board of Directors to include certain non-material amendments to clarify the terms and conditions of restricted stock awards and to provide that the administrator of the EIP has the authority to authorize future amendments to the EIP. The EIP was further amended by the Company’s stockholders in June 2009 to increase the number of shares of common stock authorized for issuance under the EIP. As amended, the EIP reserves

 

12



Table of Contents

 

5,500,000 shares of 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 June 30, 2010, the Company had reserved 1,322,110 shares for the exercise of stock options outstanding, 372,026 shares for restricted stock unit awards outstanding and 3,474,161 additional shares for future stock awards under the EIP. As of June 30, 2010, 331,703 shares of common stock reserved for stock options and restricted stock unit awards under the EIP have been issued in the form of common stock.

 

Stock Options.   The exercise price of stock options granted under the EIP 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. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to unvested stock option awards.

 

Restricted Stock Units.   The granting of restricted stock units is provided for under the EIP. Restricted stock units generally vest on the anniversary of the grant date, with vesting terms that range from immediate vesting to five years from the date of grant. The fair value of each unit granted is equal to the closing price of the Company’s common stock on the date of grant and is expensed ratably over the vesting term of the restricted stock award. If a plan participant’s employment is terminated during the vesting period, he or she forfeits the right to any unvested portion of the restricted stock units.

 

The following table summarizes stock option activity during the six months ended June 30, 2010 under the EIP as follows:

 

 

 

Options

 

Weighted Average
Exercise Price

 

Outstanding as of December 31, 2009

 

1,402,163

 

$

11.08

 

Granted

 

244,828

 

$

5.34

 

Exercised

 

 

$

 

Forfeited

 

(257,421

)

$

11.90

 

Expired

 

(67,460

)

$

15.67

 

Outstanding as of June 30, 2010

 

1,322,110

 

$

9.62

 

 

 

 

 

 

 

Exercisable as of June 30, 2010

 

383,287

 

$

10.03

 

 

The following table summarizes restricted stock unit activity during the six months ended June 30, 2010 under the EIP as follows:

 

 

 

Number of Units

 

Weighted Average
Grant-Date Fair Value
Per Unit

 

Outstanding as of December 31, 2009

 

279,151

 

$

8.76

 

Granted

 

280,741

 

$

4.42

 

Vested

 

(113,735

)

$

4.69

 

Forfeited

 

(74,131

)

$

7.75

 

Outstanding as of June 30, 2010

 

372,026

 

$

6.93

 

 

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. The weighted average fair value per share of stock option awards granted during the six months ended June 30, 2010 and

 

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Table of Contents

 

2009, and assumptions used to value stock options, are as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Dividend yield

 

 

 

Risk-free interest rate

 

3.1

%

2.6

%

Weighted average volatility

 

85.0

%

85.0

%

Expected life (in years)

 

6.5

 

6.5

 

Weighted average grant date fair value per share of options granted

 

$

3.96

 

$

5.31

 

 

Dividend yield is zero as the Company currently does not pay a dividend.

 

Risk-free rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life of the award.

 

During the six months ended June 30, 2010 and 2009, the Company utilized a standard volatility assumption of 85% for estimating the fair value of stock options awarded based on comparable volatility averages for the energy related sector.

 

The expected life of each stock option award granted is derived using the “simplified method” for estimating the expected term of a “vanilla-option” in accordance with Staff Accounting Bulletin (“SAB”) No. 107, “Share-Based Payment,” as amended by SAB No. 110, “Share-Based Payment.” The fair value of each unit of restricted stock is equal to the fair market value of the Company’s common stock as of the date of grant.

 

During the six months ended June 30, 2010 and 2009, the Company utilized a forfeiture rate of 25% and 10%, respectively, for estimating the forfeitures of stock options granted. During the second quarter of 2010, the Company revised its forfeiture rate to 25% based upon the Company’s historical forfeiture rates. The revision to the Company’s forfeiture was applied to stock options and restricted stock units outstanding as of June 30, 2010.

 

The following table summarizes share-based compensation expense included in the Company’s condensed consolidated statements of operations for the six months June 30, 2010 and 2009, as follows:

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Share-based compensation expense:

 

 

 

 

 

Selling, general and administrative

 

$

1,069

 

$

1,365

 

Income tax benefit (1)

 

 

 

Net effect of share-based compensation expense on net loss

 

$

1,069

 

$

1,365

 

 

 

 

 

 

 

Reduction in earnings per share:

 

 

 

 

 

Basic and diluted earnings per share (2)

 

$

0.01

 

$

0.01

 

 


(1) Income tax benefit is not illustrated because the Company is currently operating at a loss and an actual income tax benefit was not realized for the six months ended June 30, 2010 and 2009. The result of the loss situation creates a timing difference, resulting in a deferred tax asset, which is fully reserved for in the Company’s valuation allowance.

 

(2) Diluted earnings per share for the six months ended June 30, 2010 and 2009 does not include common stock equivalents due to their anti-dilutive nature as a result of the Company’s net losses for these respective periods. Accordingly, basic earnings per share and diluted earnings per share are identical for all periods presented.

 

As of June 30, 2010, the Company estimates that pre-tax compensation expense for all unvested share-based awards, including both stock options and restricted stock units, in the amount of approximately $5,268 will be recognized through the year 2014. 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.

 

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NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

 

The following is a listing of recent accounting standards issued by the Financial Accounting Standards Board (“FASB”) and their effect on the Company.

 

In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820).  ASU 2010-06 provides additional disclosure requirements related to fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements.  Disclosure requirements applicable to Level 3 transactions are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years, with early adoption permitted.  The portion of ASU 2010-06 that was effective beginning after December 15, 2009 did not have a material effect on the financial position, results of operations or cash flows of the Company. Additionally, the Company does not anticipate that the disclosure requirements applicable to Level 3 transactions that are effective for fiscal years beginning after December 15, 2010 will have a material effect on the financial position, results of operations or cash flows of the Company.

 

In October 2009, the FASB issued ASU 2009-13, Revenue Recognition (Topic 605). ASU 2009-13 provides additional guidance related to the accounting for multiple-deliverable arrangements to account for products or services (deliverables) separately rather than as a combined unit and eliminates the residual method of allocation.  ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. The Company does not anticipate that the provisions of ASU 2009-13 will have a material effect on the financial position, results of operations or cash flows of the Company.

 

NOTE 14 — SEGMENT REPORTING

 

In December 2009, the Company revised its reporting segments. The revised reporting structure includes four reportable segments: “Towers” (formerly “Products”), “Gearing” (formerly “Products”), “Technical and Engineering Services” (formerly “Services”) and “Logistics”(formerly “Services”). Accordingly, all prior period segment information has been reclassified to properly reflect the Company’s current reportable segments.

 

The Company’s segments and their product and service offerings are summarized below:

 

Towers

 

The Company manufactures wind towers, specifically the larger and heavier wind towers that are designed for 2 MW and larger wind turbines. The Company’s production facilities are strategically located in close proximity to the primary U.S. wind resource regions, sited in Wisconsin and Texas, including a recently constructed third wind tower manufacturing facility in Brandon, South Dakota, which will become operational as business warrants and pending the installation of certain additional equipment. The Company also manufactures other specialty weldments and structures for industrial customers.

 

Gearing

 

The Company manufactures precision gearing systems for the wind industry in North America and products for industrial markets including mining and oilfield equipment, with facilities in Illinois and Pennsylvania. The Company uses an integrated manufacturing process, which includes a machining process in Cicero, Illinois, a heat treatment process in Neville Island, Pennsylvania and a finishing process in the Company’s Cicero factory.

 

Technical and Engineering Services

 

The Company is an independent service provider of construction support and operations and maintenance services to the wind industry. The Company’s specialty services include oil change-out, up-tower tooling for gearing systems, drive-train and blade repairs and component replacement. The Company’s construction support capabilities include assembly of towers, nacelles, blades and other components. The Company also provides customer support, preventive maintenance and wind technician training. The Company’s technicians utilize regional service centers for storage and repair of parts as well as for training. Through its precision repair and engineering services, the Company repairs and refurbishes complex wind components, including control systems, gearboxes and blades. The Company also conducts warranty inspections, commissions turbines and provides technical assistance. The Company’s service locations are in Illinois, California, South Dakota, Texas and Colorado.

 

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Logistics

 

The Company offers specialized transportation, permitting and logistics management to the wind industry for oversize and overweight machinery and equipment. The Company delivers complete turbines to the installation site, including blades, nacelles and tower sections for final erection. The Company focuses on the project management of the delivery of complete wind turbine farms.

 

Corporate and Other

 

“Corporate and Other” is comprised of selling, general and administrative expenses for the Company’s corporate office and European sales office and adjustments to reconcile segment results to consolidated results, which primarily include intercompany eliminations.

 

Summary financial information by reportable segment for the three and six months ended June 30, 2010 and 2009 was as follows:

 

 

 

Revenues

 

Operating (Loss) Profit

 

 

 

For the Three Months Ended June 30,

 

For the Three Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

$

16,514

 

$

22,364

 

$

(595

)

$

(690

)

Gearing

 

14,277

 

17,528

 

(2,822

)

(5,035

)

Technical and Engineering Services

 

2,893

 

7,901

 

(6,474

)

575

 

Logistics

 

3,059

 

4,585

 

(1,301

)

(432

)

Corporate and Other (1)

 

(114

)

(65

)

(2,306

)

(4,698

)

 

 

$

36,629

 

$

52,313

 

$

(13,498

)

$

(10,280

)

 

 

 

Depreciation and Amortization

 

Capital Expenditures

 

 

 

For the Three Months Ended June 30,

 

For the Three Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

$

844

 

$

921

 

$

596

 

$

1,463

 

Gearing

 

2,477

 

4,277

 

132

 

459

 

Technical and Engineering Services

 

836

 

794

 

590

 

78

 

Logistics

 

649

 

827

 

25

 

206

 

Corporate and Other (1)

 

42

 

7

 

13

 

115

 

 

 

$

4,848

 

$

6,826

 

$

1,356

 

$

2,321

 

 

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Revenues

 

Operating (Loss) Profit

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

$

28,560

 

$

42,468

 

$

(1,873

)

$

(757

)

Gearing

 

21,993

 

40,559

 

(7,949

)

(8,901

)

Technical and Engineering Services

 

4,915

 

15,311

 

(8,924

)

598

 

Logistics

 

3,519

 

7,403

 

(3,008

)

(1,383

)

Corporate and Other (1)

 

(188

)

(366

)

(5,517

)

(6,974

)

 

 

$

58,799

 

$

105,375

 

$

(27,271

)

$

(17,417

)

 

 

 

Depreciation and Amortization

 

Capital Expenditures

 

 

 

For the Six Months Ended June 30,

 

For the Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Towers

 

$

1,698

 

$

1,669

 

$

1,848

 

$

8,388

 

Gearing (2)

 

4,925

 

8,522

 

1,238

 

(175

)

Technical and Engineering Services

 

1,653

 

1,535

 

818

 

160

 

Logistics

 

1,323

 

1,666

 

31

 

574

 

Corporate and Other (1)

 

83

 

41

 

17

 

117

 

 

 

$

9,682

 

$

13,433

 

$

3,952

 

$

9,064

 

 

 

 

Total Assets as of

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Segments:

 

 

 

 

 

 

 

 

 

 

 

Towers

 

$

81,900

 

$

80,146

 

Gearing

 

86,334

 

92,665

 

Technical and Engineering Services

 

28,967

 

36,417

 

Logistics

 

21,327

 

21,259

 

Corporate and Other (3)

 

8,582

 

(451

)

 

 

$

227,110

 

$

230,036

 

 


(1) “Corporate and Other” includes selling, general and administrative expenses of the Company’s corporate office and European sales office in addition to intercompany eliminations.

 

(2) Gearing segment capital expenditures during the six months ended June 30, 2009 reflects cash amounts received in connection with the return of certain capital equipment expenditures made during 2008.

 

(3) “Corporate and Other” includes assets of the Company’s corporate office and European sales office in addition to intercompany eliminations.

 

NOTE 15 — COMMITMENTS AND CONTINGENCIES

 

Purchase Commitments

 

During 2010, the Company issued purchase orders in connection with equipment purchases for the Company’s MW gearbox refurbishment center. As of June 30, 2010, total outstanding purchase orders totaled approximately $3,159.

 

During 2009 and 2010, the Company issued purchase orders in connection with equipment purchases for the Company’s wind tower manufacturing facility located in Brandon, South Dakota. As of June 30, 2010, outstanding purchase orders totaled approximately $1,269.

 

During 2008, the Company issued purchase orders to two equipment manufacturers in connection with equipment purchases totaling $4,888. Under the terms of the purchase orders, the Company was required to make deposits totaling $1,324. During the

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second quarter of 2010, the Company informed one of the manufacturers of the Company’s election to cancel one of the equipment purchase orders, which resulted in the forfeiture of a non-refundable deposit in the amount of $650. As of June 30, 2010, outstanding purchase orders totaled $1,600.

 

Legal Proceedings

 

From time to time, the Company is subject to legal proceedings or claims arising from its normal course of operations. The Company accrues for costs related to loss contingencies when such costs are probable and reasonably estimable. As of June 30, 2010, 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 financial condition or results of operations, although no assurance can be given with respect to the ultimate outcome of pending actions.

 

Customer Disputes

 

From time to time, the Company may be involved in disputes with its customers regarding matters such as warranty liability, pricing and contract performance. During the third quarter of 2009, the Company became involved in a contract dispute with a customer, pursuant to which it reserved a total of $1,900 related to the settlement of this matter. The Company and the customer are currently in negotiations to resolve this dispute. During the second quarter of 2010, the Company wrote off $2,100 in accounts receivable balances which were previously reserved for and which are related to this dispute.

 

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 owner or operator 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.

 

Warranty Liability

 

The Company provides warranty terms that range from two to seven years for various products relating to workmanship and materials supplied by the Company. From time to time, customers may submit warranty claims against the Company. In certain contracts, the Company has recourse provisions for items that would enable recovery from third parties for amounts paid to customers under warranty provisions. As of June 30, 2010 and December 31, 2009, estimated product warranty liability was $659 and $918, respectively, and is recorded within accrued liabilities in the Company’s condensed consolidated balance sheets.

 

The changes in the carrying amount of the Company’s total product warranty liability as of and for the six months ended June 30, 2010 and 2009 were as follows:

 

 

 

 

As of

 

 

 

June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Balance, beginning of period

 

$

918

 

$

890

 

Warranty expense

 

250

 

952

 

Warranty claims

 

(509

)

(577

)

Balance, end of period

 

$

659

 

$

1,265

 

 

Sale-Leaseback Transactions

 

During 2009, the Company entered into sale-leaseback agreements whereby certain owned equipment was sold to a third party financing company in exchange for cash and subsequently entered into an equipment lease agreement with the purchaser. The primary purpose of these arrangements was to provide additional liquidity to meet working capital requirements. Depending on the terms of the lease agreement, the lease may be classified as an operating or capital lease. In addition, the sale of the assets may result in a gain or loss, which must be amortized to other income or loss in the Company’s statement of operations over the life of the operating lease. As of June 30, 2010, the minimum monthly payments due under these lease agreements totaled $98.

 

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Table of Contents

 

Other

 

As of June 30, 2010, approximately 26% of the Company’s employees were covered by two collective bargaining agreements with local unions in Cicero, Illinois and Neville Island, Pennsylvania. Collective bargaining agreements with the Company’s Cicero and Neville Island unions were ratified by the local unions in the fourth quarter of 2009 and the first quarter of 2010, respectively, and are scheduled to remain in effect through October 2012 and February 2014, respectively.

 

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, 2009. 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.

 

(Dollars are presented in thousands except share data or unless otherwise stated)

 

OUR BUSINESS

 

Second Quarter Overview

 

During the second quarter of 2010, the Company continued to be affected by the ongoing economic slowdown in the wind energy industry. Although our financial results for the second quarter were consistent with our expectations and represented a gradual improvement in our results relative to the prior quarter of this year, capital investment in new wind farm development projects continued to trend downward in comparison to prior years. According to a report published by the American Wind Energy Association (“AWEA”) for the first half of 2010, there was a decline of approximately 71% in new wind farm installation projects completed compared to the prior year. Although we anticipate that our revenues and operating profits will improve during the second half of the year based upon an increase in our quoting activity, the relatively high number of wind farm installation projects currently underway and fulfillment of our backlog, we cannot provide reasonable assurance that improved market conditions within the wind energy industry will occur or that we will be able to capitalize on these opportunities.

 

On a consolidated basis, revenues for the three months ended June 30, 2010 decreased 30% compared to revenues during the comparable period in the prior year. The reduction in revenues was attributable to fewer blade service, maintenance and transportation contracts as compared to the prior year, a 25% reduction in wind tower production, lower average selling price of wind turbine towers as a result of commodity prices, a continuation in the delay and curtailment of gearing production orders and a reduction in non-wind gearing related revenues. These factors continued to create production and volume inefficiencies within our operations, which negatively affected our gross margins and operating profits.

 

Due to the continued economic slowdown in the wind energy industry, which has negatively affected our financial results in comparison to our original projections, we evaluated the recoverability of certain identifiable intangible assets and evaluated our goodwill balances using a fair-value based test. Based upon our assessment, we determined that there was no impairment related to our intangible assets, but goodwill associated with our Technical and Engineering Services segment was impaired as a result of a subsequent revision in our projections of future operating results and cash flows for this segment. Accordingly, we recorded a goodwill impairment charge of $4,561 during the second quarter of 2010 to properly reflect the carrying value of these assets. While we anticipate a gradual recovery of economic conditions within the wind energy industry during the second half of 2010, a continued or prolonged economic slowdown in the wind energy industry or other unfavorable market factors could result in further revisions to our expectations with respect to future financial results and cash flows. These factors may require management to reassess its estimates of the fair value of our reportable segments and could result in further review of our goodwill and intangible assets, which could indicate additional impairment to the carrying value of our assets.

 

RESULTS OF OPERATIONS

 

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

 

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 three months ended June 30, 2010 compared to the three months ended June 30, 2009.

 

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Three Months Ended June 30,

 

2010 vs. 2009

 

 

 

2010

 

% of Total
Revenue

 

2009

 

% of Total
Revenue

 

$ Change

 

% Change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

36,629

 

100.0

%

$

52,313

 

100.0

%

$

(15,684

)

-30.0

%

Cost of sales

 

37,025

 

101.1

%

49,162

 

94.0

%

(12,137

)

-24.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross (loss) profit

 

(396

)

-1.1

%

3,151

 

6.0

%

(3,547

)

-112.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

7,467

 

20.4

%

10,525

 

20.1

%

(3,058

)

-29.1

%

Goodwill impairment

 

4,561

 

12.5

%

 

0.0

%

4,561

 

100.0

%

Intangible amortization

 

1,074

 

2.9

%

2,906

 

5.6

%

(1,832

)

-63.0

%

Total operating expenses

 

13,102

 

35.8

%

13,431

 

25.7

%

(329

)

-2.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(13,498

)

-36.9

%

(10,280

)

-19.7

%

(3,218

)

31.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(361

)

-1.0

%

(557

)

-1.0

%

196

 

-35.2

%

Other, net

 

(394

)

-1.1

%

5,574

 

10.6

%

(5,968

)

-107.1

%

Other (expense) income, net

 

(755

)

-2.1

%

5,017

 

9.6

%

(5,772

)

-115.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before (benefit) provision for income taxes

 

(14,253

)

-39.0

%

(5,263

)

-10.1

%

(8,990

)

170.8

%

(Benefit) provision for income taxes

 

(72

)

-0.2

%

163

 

0.3

%

(235

)

144.2

%

Net loss

 

$

(14,181

)

-38.8

$

(5,426

)

-10.4

$

(8,755

)

161.4

%

 

Consolidated

 

Revenues decreased $15,684 or 30%, from $52,313 during the three months ended June 30, 2009, to $36,629 during the three months ended June 30, 2010. The decrease in revenues was primarily attributable to a decline in wind farm installation projects during the current quarter, which resulted in fewer technical and service technicians deployed as well as a reduction in wind towers manufactured and gearing sets shipped. Additionally, the reduction in revenues was the result of a lower average selling price of wind towers manufactured due to lower steel prices and due to a general decline in non-wind gearing related revenues.

 

Gross profit decreased $3,547, from $3,151 during the three months ended June 30, 2009, to a gross loss of $396 during the three months ended June 30, 2010. The decrease in gross profit was primarily attributable to the overall reduction in revenues, which created production and volume inefficiencies. The reduction in wind tower and gearing orders led to the under absorption of overhead costs, and the reduction in maintenance and repair services and transportation contracts negatively affected our utilization. As a result, our gross margin declined from 6.0% during the three months ended June 30, 2009, to (1.1%) during the three months ended June 30, 2010.

 

Selling, general and administrative expenses decreased from $10,525 during the three months ended June 30, 2009, to $7,467 during the three months ended June 30, 2010. The decrease was primarily attributable to the realization of cost savings associated with cost reduction initiatives to mitigate the effects of the overall decline in production volumes. Additionally, lower professional and audit related fees associated with certain regulatory reporting requirements and other compliance activities contributed to the reduction in selling, general and administrative expenses in the current period.

 

During the three months ended June 30, 2010, we recorded a goodwill impairment charge of $4,561 associated with our Technical and Engineering Services segment. During the second quarter, we identified a triggering event due to the continued deterioration in financial performance of this segment, which required us to reassess our projections of future operating results and cash flows and test these assets for impairment. Accordingly, our analysis indicated that the projected fair value of the Technical and Engineering Services segment assets did not exceed the carrying value of these net assets. As a result, the Company recorded a goodwill impairment charge of $4,561 during the second quarter.

 

Intangible amortization expense decreased from $2,906 during the three months ended June 30, 2009, to $1,074 during the three months ended June 30, 2010. The decrease in amortization expense was due to an intangible asset impairment charge taken during the fourth quarter of 2009, which reduced amortization expense by approximately 63% and will continue to provide a favorable reduction to amortization expense on a prospective basis.

 

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Total other income, net, decreased from $5,017 during the three months ended June 30, 2009, to other expense, net, of $755 during the three months ended June 30, 2010. The decrease was primarily attributable to the recognition of $5,082 in income during the prior year related to an escrow settlement agreement with the former owners of Brad Foote. The decrease in other income was partially offset by a favorable reduction in interest expense associated with the repayment of outstanding debt under our Bank of America and Investors Community Bank debt agreements in January 2010.

 

During the three months ended June 30, 2009, we reported a provision for income taxes of $163, compared to a benefit for income taxes of $72 during the three months ended June 30, 2010. The reduction in income taxes was primarily attributable to a revision in our income tax provision based upon an increase in the estimated full year net operating losses.

 

Net loss increased from $5,426 during the three months ended June 30, 2009, to $14,181 during the three months ended June 30, 2010, primarily as a result of the factors described above.

 

Towers Segment

 

The following table summarizes the Towers segment operating results for the three months ended June 30, 2010 and 2009:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenues

 

$

16,514

 

$

22,364

 

Operating loss

 

(595

)

(690

)

Operating margin

 

-3.6

%

-3.1

%

 

Towers segment revenues decreased $5,850, from $22,364 during the three months ended June 30, 2009, to $16,514 during the three months ended June 30, 2010.  The reduction in revenues was attributable to an approximate decline of 31% in the average selling price of wind towers manufactured and due to a 25% decline in production volume of wind turbine towers manufactured. The decline in the average selling price was primarily attributable to lower steel prices, which are included in the selling price of wind towers manufactured under the majority of our customer agreements.

 

Towers segment operating loss decreased $95, from $690 during the three months ended June 30, 2009, to $595 during the three months ended June 30, 2010. The decrease in operating loss was attributable to the absence of start-up costs incurred at our wind tower manufacturing facility in Abilene, Texas during the prior year in addition to operating efficiency improvements at our wind tower manufacturing facility in Manitowoc, Wisconsin. Operating margin decreased from (3.1%) during the three months ended June 30, 2009, to (3.6%) during the three months ended June 30, 2010.

 

Gearing Segment

 

The following table summarizes the Gearing segment operating results for the three months ended June 30, 2010 and 2009:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenues

 

$

14,277

 

$

17,528

 

Operating loss

 

(2,822

)

(5,035

)

Operating margin

 

-19.8

%

-28.7

%

 

Gearing segment revenues decreased $3,251, from $17,528 during the three months ended June 30, 2009, to $14,277 during the three months ended June 30, 2010.  The decrease in revenues was attributable to an approximate reduction of 16% and 24% in our wind gearing and industrial sales, respectively. Lower wind gearing revenues continued to reflect reduced customer demand and the delay in production fulfillment of our backlog orders. The decrease in industrial revenues reflected a softening in demand from our industrial customers in the oil and mining industries.

 

Gearing segment operating loss decreased $2,213, from $5,035 during the three months ended June 30, 2009, to $2,822 during the three months ended June 30, 2010. The decrease in operating loss was primarily due to a reduction in intangible amortization expense as a result of an impairment charge recorded during the fourth quarter of 2009, which subsequently reduced our amortization expense on a prospective basis, and improvements in costs associated with reduced product scrap and other

 

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manufacturing process efficiencies. As a result of the factors described above, operating margin improved from (28.7%) during the three months ended June 30, 2009, to (19.8%) during the three months ended June 30, 2010.

 

Technical and Engineering Services Segment

 

The following table summarizes the Technical and Engineering Services segment operating results for the three months ended June 30, 2010 and 2009:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenues

 

$

2,893

 

$

7,901

 

Operating (loss) income

 

(6,474

)

575

 

Operating margin

 

-223.8

%

7.3

%

 

Technical and Engineering Services segment revenues decreased $5,008, from $7,901 during the three months ended June 30, 2009, to $2,893 during the three months ended June 30, 2010.  The decrease in revenues was primarily attributable to reductions of approximately 79% and 11% in technical and engineering service revenues, respectively. The reduction in technical service revenues related to a decline in the number of maintenance and service technicians deployed as several of our key customers have chosen to reduce outsourcing of their maintenance activities. The reduction in engineering service revenues was primarily due to the absence of a large blade refurbishment contract as compared to the prior year.

 

Technical and Engineering Services segment operating income decreased $7,049, from $575 during the three months ended June 30, 2009, to an operating loss of $6,474 during the three months ended June 30, 2010. The operating loss incurred during the second quarter was primarily attributable to a goodwill impairment charge of $4,561 recorded during the current quarter and a reduction in maintenance and service technicians deployed. As a result, operating margin decreased from 7.3% during the three months ended June 30, 2009, to (223.8%) during the three months ended June 30, 2010.

 

Logistics Segment

 

The following table summarizes the Logistics segment operating results for the three months ended June 30, 2010 and 2009:

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Revenues

 

$

3,059

 

$

4,585

 

Operating loss

 

(1,301

)

(432

)

Operating margin

 

-42.5