Tuesday, February 15, 2011

Broadwind Gets Broadsided

The wind energy technology supplier Broadwind Energy, Inc. (BWEN:  Nasdaq) took a $4.6 million charge for goodwill impairment in the June 2010.  In the last couple weeks a slew of class action lawsuits have been filed by shareholders, alleging the Company waited too long to make the balance sheet adjustment and that management failed to keep shareholders informed about problems with contracts and a slip in demand for its power train products.  The alleged infractions occurred between March 2009 and August 2010.

Our initial reaction is that the lawsuits are a bit weak.  

Demand in the renewable energy space is variable at best.  Coming off the worst recession in decades, it has been difficult even for the most seasoned management team operating a company with long-established customer relationships to predict order flow.  How exactly can the plaintiffs prove management knew demand was declining and failed to report that to shareholders?

The tests for impairment of goodwill are fairly cut and dried.  Management has very little latitude in when such charges can be taken.  If they are able to delay the write down of intangibles or goodwill, it is more likely only until the end of the fiscal year when the annual audit is completed.  In Broadwind’s case, the write down was taken mid-year, suggesting that management actually accelerated the charge rather than delayed it to the end of the year.  In the 10Q filing with the SEC for the June 2010 quarter, management described a “triggering event” in its Technical and Engineering Services segment that suggested new projections of future cash flows in the segment implied a lower fair value than was represented on the company’s balance sheet.

When should Broadwind management have written down its goodwill and told investors of this so-called triggering event? 

The dates of the shareholder class suggest shareholders believe that management should have taken the charge at the end of 2009 and informed investors with the fourth quarter and year end 2009 10K filing in March 2010.  Then again we note that the 52-week high was recorded in March 2010, and the stock has been falling ever since.  In retrospect it provides strong justification for shareholders ire  -  and an easy way to calculate shareholder losses.

As weak as the case might seem, there are 13.3 million reasons why the lawsuits will go forward.  That is how much cash Broadwind has on its balance sheet.  There is also that fine deal with Vestas announced in November 2011.  Vestas selected Broadwind to supply the wind towers for the Glacier Hills Wind Park project in Wisconsin. The 90-turbine project is expected to generate more than 400 million kilowatt hours annually  -  enough to power 45,000 homes.  The contract boosted backlog to approximately $245 million or 17% higher than backlog at the end of September 2010.  The project is likely to bring Broadwind closer to profitability, providing an even better kitty for shareholders to split should they win in court.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. BWEN in included in Crystal Equity Research’s Earth, Wind and Fire Index in the Wind Group.

No comments: