Broadwind, Inc.

improved plant utilization in our heavy fabrication segment, which benefited from increased tower demand, were reproduced for three wind turbine OEMs in the quarter. Our TTM consolidated sales was $207.4 million exiting the third quarter, which now includes approximately $63 million of non-wind revenue. Since launching our revenue diversification initiative, we've made significant progress into non-wind markets. and continued to focus building that book of business. Compared to the prior year quarter, gross margins declined 190 basis points to 6.8% in the third quarter. The supply chain and staffing disruptions, which drives labor inefficiencies because we were working out of optimal process, impacted gross profit by approximately $600,000 to $700,000. Several customer project delays into future periods which we announced in early August, also weighed on margins during the quarter. The year-over-year change in gearing performance drove a 270 basis point decline in gross margin. Operating expenses of percent of sales was approximately 8% and below our long-term target of 10%, primarily due to improved plant utilization, effective cost management, and higher material content on the product mix sold. we are prudently managing operating expenses as evidenced by flat expenses year over year on an 18% revenue increase. Within OPEX, increased self-insured medical expenses were offset by lower incentive compensation expenses. An interest expense declined to $500,000 from $600,000 in the prior year quarter due to lower debt levels. Notwithstanding the pandemic headwinds, we generated $1.3 million of adjusted EBITDA in the third quarter, a decrease of $600,000 versus the prior year period. On a TTM basis, we've generated $9.5 million of EBITDA, a $5.8 million improvement when compared with the performance in the previous 12-month period. Over that period of time, adjusted EBITDA margins improved 220 basis points to 4.6%. Moving on to our heavy fabrication segment. Third quarter sales were $43.4 million, a 28% increase on a year-over-year basis, primarily due to increased demand as the industry ramped up activity levels to support higher expected US wind turbine installations. Third quarter orders were $31.4 million compared to $65.6 million in the prior year quarter. As a reminder, Prior year order levels were abnormally high as turbine OEMs were securing capacity well in advance of historical lead times due to expectations of surging wind tower installations in 2020. Our backlog provides visibility to our remaining 2020 production, and we are in discussions with our customers regarding 2021 production. Subsequent to quarter end, we have booked $13 million of tower orders for multiple OEMs for 2021 production. And as of this call, we have approximately 35% of our 2021 optimal tower production capacity sold. We sold 312 sections in the quarter, our fourth consecutive quarter in which we have sold more than 300 sections. To support this level of demand, our tower plants operated near peak utilization during the third quarter compared to approximately 75% in the prior year quarter. Average selling prices per unit were higher in the quarter, primarily driven by a stronger commercial environment when the orders were placed in the prior year, together with the benefit associated with the production of larger, more complex tower designs. Segment adjusted EBITDA increased 63% year-over-year to $3 million, given the increased plant utilization and higher ASPs. Although we met our revenue target and customer commitments during the quarter, adjusted EBITDA margins declined sequentially by 280 basis points. The complexity of multiple design changeovers, supply chain, and labor disruptions weighed on margins throughout the quarter, and they also continue into the fourth quarter. Notwithstanding the aforementioned challenges, segment performance was dramatically improved on a TTM basis, with adjusted EBITDA increasing from $3 million to $14 million this year. Shifting to our gearing segment, gearing segment orders declined from $5.9 million in the prior quarter to $3.2 million. Order activity remains below prior levels and is constrained by lower capital spending by our customers since the onset of the pandemic, together with lower oil and gas activity as reflected by a sharp year-over-year decline in the North American rig count. Importantly, we are beginning to see some green shoots in the oil and gas market, with the North American rig count now having increased for eight consecutive weeks. Despite this optimism for a future oil and gas market recovery, we remain focused on executing our strategy of diversifying our customers and products. We are beginning to see increased levels of quoting in many of our end markets, and we'll continue to focus our commercial efforts in other markets, even when oil and gas markets recover. Our backlog was $15 million as of 9-30, flat on a year-over-year basis. Third quarter segment sales declined to $7.1 million from $8 million in the prior year due to lower demand from oil and gas and mining customers. As a result of the operating leverage profile of the business, the reduction in sales resulted in a $500,000 EBITDA loss during the quarter. We have and will continue to take actions to preserve margins in cash including right-sizing labor and deferring capital purchases while we are in this challenging environment. Industrial Solutions recorded $4.9 million of new orders in Q3, down slightly compared to the prior year period. TTM segment orders are approximately $19.5 million, up roughly 21% over the prior year period due to our customer regaining share higher aftermarket activities, and our progress expanding share within our primary customer. Segment backlog has grown 38% year over year, ending at $10.3 million, offering solid visibility to revenue over the next several quarters. Third quarter segment sales decreased to $4.1 million from $4.3 million in the prior year, mostly driven by supply chain delays on just-in-time deliveries, and customer driven project delays to Q4. Segment adjusted EBITDA was $200,000. The operating leverage associated with increased volume and effective cost management has resulted in TTM EBITDA of $1 million, a significant increase over the comparable TTM period. At September 30th, 2020, operating working capital was $13.5 million, for 6.2% of sales, and nearly $7 million sequential improvement, primarily due to increases in inventory turns to eight times in timing of receipts. DSO continues to trend favorable at 40 days. We are continuing to manage AR aggressively and new credit responsibly, and as a result, we have not experienced significant write-offs following the onset of the downturn. Deposits and AP were modestly lower, resulting in a cash conversion cycle of roughly 23 days. Total cash and availability under our credit facility remains above historical levels, with nearly $22 million of liquidity at quarter end. We had approximately $8 million drawn under our credit facility and had $2.5 million of cash on our balance sheet. We generated $7 million of free cash flow during the quarter positioning us to reduce debt by approximately $5 million. With low ongoing CapEx requirements, our capital allocation strategy continues to focus on repayment of debt, which should position us well to make future investments as our non-wind and markets recover. Subsequent to quarter end, we executed an amendment to our loan and security agreement. This amendment extended our line of credit maturity date to July of 2023, And more importantly, lowered our borrowing costs by approximately 300 basis points. Reduction in borrowing costs reflects a strengthened credit profile, a result of our improved operating performance over the last 18 months. As we highlighted on previous calls this year, we received approximately $9 million of proceeds under the Paycheck Protection Program. We believe we met all the requirements set forth by the Treasury to apply for the loans and did so in good faith, and ultimately ensuring continued employment for our employees during the period of widespread economic uncertainty, which continues today. For reference, these loans can be forgiven by the Small Business Administration if borrowers can demonstrate that they use the funds on eligible expenses such as payroll, rent, mortgage interest, and utility obligations over a 24-week period. We utilize 100% of the loan proceeds on these eligible expenses, and we are planning to submit our forgiveness application to our lender and the SBA in Q4. The US Treasury previously announced that all borrowers that receive PPP loans in excess of $2 million will be audited. However, the timeline for that audit is unclear at this time. To the extent the PPP loans are not forgiven, the company is required to repay the loans over a two-year period at a 1% interest rate. Our net leverage declined to the lowest level seen in several years, ending the quarter at 0.9 times trailing 12-month EBITDA after netting out the PPP loans. We believe we are positioned well to manage through the COVID-19 challenges given our low leverage profile and strong liquidity position. We've received proceeds of $300,000 during the quarter under our now-expired ATM program. This $10 million ATM was largely unused during the three-year period, and at this point, we do not have plans to reintroduce this program in the future. As we look at Q4, we are continuing to see similar challenges like we did in Q3 in our production facilities, stemming from the spread of COVID in the communities we operate in and ongoing supply chain disruptions, both of which will weigh on margins in the quarter. We expect revenue to be approximately $43 million to $46 million and EBITDA to be approximately half a million dollars to $1 million. And lastly, we anticipate providing full year 2021 guidance on our Q4 conference call. That concludes my remarks. I'll turn the call back over to Eric for an overview of conditions within our end markets in addition to some concluding remarks. Thanks, Jason.

Our country has been hit with a series of historic challenges this year. During this period of widespread volatility, our leadership team remains focused on positioning the business for profitable growth. In application, this means continuing to grow market share in both our legacy onshore wind and non-wind markets, while continuing to explore potential entrance into the offshore wind space. As for our response to the COVID-19 pandemic, we're continually monitoring the potential impact of the virus on our operations, customers, and supply chain. We've implemented all necessary and appropriate protocols as recommended by the U.S. CDC to ensure the continued well-being of our team. Our businesses are considered essential and critical infrastructure as defined by the U.S. Department of Homeland Security and we remain open and operational. Throughout this pandemic, we've continued to produce and ship products to meet our customers' needs. Our order rates have declined since the COVID-19 outbreak, as our customers are dealing with the overall economic uncertainty we're all facing. However, our quoting activity has increased in recent weeks, pointing to a first half of 2021 recovery in orders. The full impact of the virus on our business and end markets remains difficult to quantify. We anticipate that current availability under our credit line and PPP proceeds will provide adequate liquidity to support our business during this period of uncertainty. Moving on to an update of markets served and our continuing diversification initiative. On a TTM basis, our non-wind revenue represents about 30% of total revenue. We continue to pursue opportunities outside of the wind sector to offset the lumpy timing of wind orders. We are seeing continued growth in our industrial markets, which include material handling and infrastructure projects, with power generation and mining remaining relatively stable. These markets are partially offsetting the softness in oil and gas we continue to see. On a TTM basis, the rebound in our wind-based revenue has caused non-wind revenue to represent about 30% of total. We continue to invest business development resources toward markets with the biggest opportunities for growth, as we continue to press for market diversification. Turning to our demand outlook by end market, beginning with the wind sector, which represents about 70% of TTM revenue, the outlook for this sector continues to be positive, driven by various economic forces such as the PTC, including the one-year extension announced late last year, the competitiveness of wind power versus other sources, and the nation's desire for clean energy. There are currently more than 60,000 turbines operating across some 41 states in the U.S., with individual state renewable portfolio standards supporting further growth. Thirteen states have more than one gigawatt of wind projects, either under construction or advanced development, with Texas, Colorado, and Kansas leading the way. While underlying demand conditions continue to support strength for this sector over a multi-year period, our customers acknowledge that some projects scheduled for this year and early next could be delayed due to the pandemic. In 2020, Wood Mackenzie projects that more than 16 gigawatts of wind power will be installed in the U.S., followed by 13 gigawatts next year, both significant achievements. And as a reminder, the federal government has given an extra year to bring projects slated for 2020 online without jeopardizing important tax credits. Looking ahead, in addition to the strength expected for onshore installation through 2021, Wood Mackenzie forecasts increasing demand in the out years as offshore turbines gain traction in the U.S., adding to a stable onshore demand. This long-term projection for U.S. wind now has improved to include nearly 25 gigawatts of offshore installations for Wood Mackenzie. Although some projects have moved from 2023 to 2024 and 2025, the industry still expects 2023 to be a strong initial year for offshore wind developments. We generated about 8% of our TTM revenue from the industrial sector, which has an outlook of positive to neutral. Much of our revenue in this sector comes from customers and material handling, with ultimate end users in defense and similar vital applications, which are less cyclical than some of the other markets we serve. Our deepwater port in Wisconsin, combined with our heavy lifting capacity, unique fabrication capabilities, and huge paint booths, continue to draw strong customer interest. 8% of TTM revenue came from the power generation sector. We see a positive demand outlook. Our primary customer in this market is gaining share, and we continue to expand our customer base in the new gas turbine space. The mining sector drove about 9% of TTM revenue, and our customers report a neutral outlook. Orders from this sector, which was strong in Q1, have softened since. The oil and gas sector, which comprised 4% of TTM revenue, have seen a significant decline in demand. Hydraulic fracturing economics are less attractive with the recent pullback in crude oil prices causing customers to defer their capital expenditures. Customer activity levels have improved in recent weeks as recounts have increased. Construction drove about 1% of TTM revenue, and we see the outlook for this segment as neutral to negative in the near term. An infrastructure bill, if introduced, would certainly benefit us, as this would create demand for new equipment purchases to support road building, bridge construction, and waterway projects. At this juncture, expectations are for a successor to the FAST Act sometime during 2021. Our key initiatives for broadband remain consistent. Our near-term and medium-term strategy for the business remains unchanged, in spite of the challenges of COVID-19. In the heavy fabrication segment, we were in discussions with our expanded base of tower customers to sell our 2021 capacity. We will continue to improve processes and system capabilities to maximize throughput and profitability. We continue to see progress around offshore, particularly given the recent announcement of multi-year projects on the East Coast, reflecting the growing demand for offshore wind in that region. We will leverage the investments made in our engineering and supply chain teams to better support the evolving tower market, as well as other opportunities. And lastly, we will continue our built-in quality continuous improvement action to ensure smooth process flows and good throughput in our plants. In the gearing segment, we remain focused on accelerating our efforts towards end market diversification by leveraging our experienced engineering and sales teams. We will grow our custom gearbox business and leverage our service and repair facilities in Illinois, Pennsylvania, and North Carolina to better serve customers in the Midwest, Northeast, and Southeast regions. Lastly, we will continue to size our business in accordance with market demand. In our industrial solutions segment, we continue to focus on expanding our core product line of new gas turbine and aftermarket components as we push into adjacent markets. Our rebranding initiative continues with the rollout of our new website and support materials. We are following that with an increased digital marketing campaign designed to reach customers where they are in a time where trade shows and customer visits are significantly limited. Looking ahead, we remain excited about our growth potential in wind, renewables, and clean tech, but also see opportunities to grow in the other markets we serve, such as material handling, power generation, and other industrial applications. We're continuing a multi-year diversification plan to leverage our core process capabilities in other markets, and have achieved TTM revenues in excess of $60 million outside of wind, even as we grow our position in wind. The extension of the PTC for a sixth year, which is a real benefit for our wind market, and the recent favorable trade case findings provide a catalyst for growth in our heavy fabrication segment. Thank you for your interest, and we look forward to providing updates throughout the coming year as our business navigates through this period of uncertainty. With that said, I'll turn the call over to the moderator for the Q&A session.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line, I'm Eric Stein with Craig Hellum Capital Group. Please proceed with your question.