Broadwind Energy (BWEN): Miserable Margins, Horrific History Sweep Away Potential

By Sonya Colberg, TheStreetSweeper Senior Editor

Broadwind Energy's ( BWEN ) chief executive recently commented, "I am tempted to say everything went wrong."

The CEO referred to production problems when she made that comment during a recent earnings call. Issues such as paint spatter resulted in $4 million worth of unusable wind tower sections and left an important order unfulfilled.

But those words beautifully sum up Broadwind's past and present condition.

The executive behind those words is Stephanie Kushner. She settled SEC charges just last year - along with Broadwind and a former CEO - related to allegedly keeping investors in the dark about Broadwind's financial deterioration.

Today, the Cicero, Illinois wind tower support manufacturer remains a disaster, with operating losses 253 percent worse than a year earlier.

Regardless, Broadwind stock has risen ... and is now precariously positioned to fall apart.

Investors may find other viewpoints here and here . Meanwhile, TheStreetSweeper presents the top eight reasons we believe an investment in Broadwind will soon be gone with the wind:

*1. Historically Peak Production: Still Losing Money

Broadwind's business is so poor that even at near-peak production of 450 towers in 2015, the company still lost money hand over fist.

(Source: Marketwatch )

In 2015, Broadwind whipped up the following:

*Lowest revenue in 5 years. A 17% drop from prior year.

*Worst net income in 3 years. A 99% drop from prior year.

*Worst return to stockholders in 4 years. Earnings per share dropped 220% from prior year.

Broadwind is twisting and flailing like a mosquito in a tornado, thanks to some basic problems...

*2. Smashed: Margins

One massive problem is that Broadwind is selling a commodity weighed down by terrible gross margins.

Margins for the year hit the lowest level in 4 years ... 3.95%:

(Source: Bloomberg)

So out of every $1 Broadwind makes in sales, it gets to keep less than 4 cents.

The company did manage to cut costs and raise the margin slightly last quarter. But cost cutting can go only so far.

Sales, general and administrative costs were 8.9% (9% for the year) of revenue. Broadwind can't make a profit with yearly gross margins of just 4% to 7% - the range the company has reported over the last five years.

*3. Wind Tower Production: Not Like Canning Beans

A bull somewhere may find hope in Broadwind's recently announced $137 million contract over three years or about $45.6 million per year. But the challenge will be dealing with the combination of terrible margins and production problems.

Ms Kushner talked about those production killers during the fourth quarter 2015 earnings call ( here ):

"We produced only 450 towers, although we had sold 500 and we paid dearly for this miss in cost overruns, efficiency losses and customer penalties."

Ms. Kushner went on to describe the roughly $12 million cost of production mishaps. She added:

"There was clearly too much variability in our production results. The majority of our problems are in two key areas: the paint process and managing an increasingly complex supply chain."

Additionally, she suggested the Abilene, Texas plant layout was poor and cramped, and the workers were relatively inexperienced. The CEO added:

"And I think if we were making cans of beans or something, it would be great."

Ms. Kushner said during the July 28 earnings call that things have improved.

"…we are expecting to finish the year with about 450 towers sold, but our production activity measured by section count will actually be 7% higher year-over-year. Our operating income was just over 7% of sales and EBITDA was just over 10%, where it is averaging for the year-to-date period. With the progress we have made to ensure consistent production at both plants and the tower plants booked up, our second half should see revenue in the same range with slightly higher overall profit margin in the range of 8% and EBITDA margin of about 11%."

However, revenue and net income for the quarter ended in June 2016 turned out much worse than the same quarter in 2015:

(Source: Company SEC filing)

*4. Investor Beware: Material Weakness

In addition to production issues, the company says it is working on addressing material weaknesses in its financial reporting. It had to make a $919,000 inventory charge based on the weaknesses below:

1. "We did not maintain effective controls over the completeness, accuracy and existence of inventory during 2015."

2. "Transactions for towers internal inventory components were not always properly recorded in our inventory records..."

3. "(T)hese errors were not caught timely..."

The company states the issues "give rise to a reasonable possibility that material misstatements of inventory in our annual or interim financial statements will not be prevented or detected on a timely basis.

Management says the company has been working on all the issues. So if everyone feels confident all the various problems have been addressed ...then big banks must be racing to buy Broadwind shares, right?

And analysts must be jostling to post ratings, right?

Wrong ... and wrong....

*5. Institutional Ownership Slips; Analysts Yawn

Institutional ownership in Broadwind has slipped this year, with big banks selling out at 3.6 times the number of new positions established:

(Source: Nasdaq )

Big banks reported in March that they unloaded more than 496,000 shares:

(Source: Nasdaq )

Meanwhile, only one analyst has bothered with this stock, offering a 12-month $4.50 price target and "Hold" rating.

(Source: Wall Street Journal )

*6. Insiders: Sell!

We wonder how much faith insiders have in their company as they have frequently sold shares over the years, as indicated by the red figures below:

(Source: Bloomberg)

Those insiders, after all, do know a lot about Broadwind's turbulent history ...

*7. Grand Jury, Federal Agents, Criminal Charges ... and Irony

From 2010 to 2015, Broadwind must have been getting used to bombs going off under its feet.

In the first couple of years, the company got battered with subpoenas, a whistleblower action, an Environmental Protection Agency search, a grand jury investigation and a US Attorney's Office inquiry.

Questions ranged from the way Broadwind recognized revenue to the way it discharged wastewater.

On March 11, 2013 , the first financial bomb blew up. Broadwind agreed to pay millions to settle a class action lawsuit alleging the company artificially inflated its stock and hid bad news from shareholders.

(Source: Law360 )

On September 24, 2013 , the US Attorney's Office filed criminal charges alleging Clean Water Act violations against one of the company's 2007 acquisitions , Brad Foote Gear Works.

Ironically, the "green" company pleaded guilty to illegally discharging wastewater from its wind turbine gear manufacturing:

(Source: US Department of Justice )

*8. SEC Charges Broadwind, CEO

While those issues were erupting, Ms. Kushner was serving as Broadwind's chief financial officer, a position she accepted in 2009. She was promoted to interim chief executive officer in November 2015 and rose to the permanent CEO position just last May. She came under SEC scrutiny early last year.

On Feb. 5, 2015, the SEC spotlighted - and charged - Ms. Kushner and the company for accounting and disclosure violations that allegedly kept investors unaware of the company's declining long-term business prospects:

(Source: SEC website; click to read the entire release)

Broadwind agreed to pay a $1 million penalty. Former CEO J. Cameron Drecoll settled for $628,358. Ms. Kushner agreed to pay $73,109 . All settled without admitting or denying wrongdoing and the company partially reimbursed Mr. Drecoll and Ms. Kushner.

On Dec. 2, 2015 , the unfortunate SEC spotlight swept over Broadwind once again. This time, investigators alleged Broadwind auditors ignored fraud risks presented by Broadwind and another company in 2009 to 2011:

(Source: SEC )

These regulatory and lawsuit issues have hammered both Broadwind's reputation and balance sheet. The inflated-stock settlement was set at $4 million. The Clean Water Act violation cost $1.5 million, plus ~$1.8 million in remediation costs. And the SEC settlement costs exeeded $1 million. So, not including undoubtedly substantial legal fees, these problems have cost well over $8 million.

*Conclusion:

Broadwind has produced more twists and turns and drama lately than a bad soap opera can churn out in decades.

Everything has gone wrong with this company. Broadwind has attracted unwanted attention from the SEC, the Department of Justice and the Environmental Protection Agency - even handed control of the company to an officer who paid dearly to settle SEC charges related to hoodwinking investors. Horrible margins, material weaknesses, production issues, declining revenue and operating losses further plague company operations.

They're sure not canning beans here - but maybe they should. In the meantime, this stock deserves to swoon at least 50%.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in BWEN and stand to profit on any future declines in the stock price.

• Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org .