Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

** **

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended September 30, 2010**

 

**OR**

 

**o  TRANSITION REPORT PURSUANT TO SECTION 13OR 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 sincelast report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x   No o

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting 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) |   |                             |

 

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

 

Numberof shares of registrant’s common stock, par value $0.001, outstanding as of November 1,2010: 107,017,316

 

 

 

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**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         |

 

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**PART I.        FINANCIALINFORMATION**

 

**Item 1.   FinancialStatements**

 

**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except share and per share data)**

** **
| ** **                                                                                                                                                                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                                                                                                       | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                                                                       | ** ** | ** **             | ** ** | ** **            | ** ** |
| **CURRENT ASSETS:**                                                                                                                                                                              |       |                   |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                        |       | $                      | 9,425      |                  | $          | 4,829 |   |
| Short-term investments                                                                                                                                                                           |       | 922                    |       | —                |       |
| Restricted cash                                                                                                                                                                                  |       | —                 |       | 2,010                 |       |
| Accounts receivable, net of allowance for doubtful  accounts of $618 and $1,641 as of September 30, 2010 and  December 31, 2009, respectively                                          |       | 23,938                 |       | 21,920                |       |
| Inventories, net                                                                                                                                                                                 |       | 16,260                 |       | 9,039                 |       |
| Prepaid expenses and other current assets                                                                                                                                                        |       | 4,714                  |       | 5,688                 |       |
| Total current assets                                                                                                                                                                             |       | 55,259                 |       | 43,486                |       |
| Property and equipment, net                                                                                                                                                                      |       | 129,396                |       | 136,249               |       |
| Goodwill                                                                                                                                                                                         |       | 5,154                  |       | 9,715                 |       |
| Intangible assets, net                                                                                                                                                                           |       | 34,024                 |       | 37,248                |       |
| Deferred income tax assets                                                                                                                                                                       |       | 6                      |       | —                |       |
| Other assets                                                                                                                                                                                     |       | 2,126                  |       | 3,338                 |       |
| **TOTAL ASSETS**                                                                                                                                                                                 |       | $                      | 225,965    |                  | $          | 230,036 |   |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                   | ** ** | ** **             | ** ** | ** **            | ** ** |
| **CURRENT LIABILITIES:**                                                                                                                                                                         |       |                   |       |                  |       |
| Lines of credit and notes payable                                                                                                                                                                |       | $                      | —     |                  | $          | 10,717 |   |
| Current maturities of long-term debt                                                                                                                                                             |       | 2,649                  |       | 9,021                 |       |
| Current portions of capital lease obligations                                                                                                                                                    |       | 1,172                  |       | 1,130                 |       |
| Accounts payable                                                                                                                                                                                 |       | 18,652                 |       | 14,710                |       |
| Accrued liabilities                                                                                                                                                                              |       | 6,987                  |       | 6,965                 |       |
| Deferred revenue                                                                                                                                                                                 |       | 7,399                  |       | 10,199                |       |
| Total current liabilities                                                                                                                                                                        |       | 36,859                 |       | 52,742                |       |
|                                                                                                                                                                                             |       |                   |       |                  |       |
| **LONG-TERM LIABILITIES:**                                                                                                                                                                       |       |                   |       |                  |       |
| Long-term debt, net of current maturities                                                                                                                                                        |       | 11,044                 |       | 15,778                |       |
| Long-term capital lease obligations, net of  current portions                                                                                                                                    |       | 2,453                  |       | 3,286                 |       |
| Interest rate swap agreements                                                                                                                                                                    |       | —                 |       | 253                   |       |
| Deferred income tax liabilities                                                                                                                                                                  |       | —                 |       | 403                   |       |
| Other                                                                                                                                                                                            |       | 1,524                  |       | 1,979                 |       |
| Total long-term liabilities                                                                                                                                                                      |       | 15,021                 |       | 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; 107,007,228 and 96,701,127 shares issued and outstanding as of  September 30, 2010 and December 31, 2009, respectively |       | 107                    |       | 97                    |       |
| Additional paid-in capital                                                                                                                                                                       |       | 355,861                |       | 300,779               |       |
| Accumulated other comprehensive income                                                                                                                                                           |       | 2                      |       | —                |       |
| Accumulated deficit                                                                                                                                                                              |       | (181,885               | )          | (145,281              | )          |
| Total stockholders’ equity                                                                                                                                                                  |       | 174,085                |       | 155,595               |       |
| **TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                             |       | $                      | 225,965    |                  | $          | 230,036 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

**(Inthousands, except per share data)**

 
| ** **                                                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                          | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                          | ** ** | ** **                                               | ** ** | ** **                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                            |       | $                                                        | 38,197     |                                                    | $          | 59,507 |   | $ | 96,996 |   | $ | 164,882 |   |
| Cost of sales                                                       |       | 38,655                                                   |       | 52,925                                                  |       | 102,334 |   | 150,464 |   |
| Gross (loss) profit                                                 |       | (458                                                     | )          | 6,582                                                   |       | (5,338 | ) | 14,418 |   |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| **OPERATING EXPENSES:**                                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Selling, general and administrative                                 |       | 7,314                                                    |       | 8,247                                                   |       | 22,995 |   | 27,688 |   |
| Goodwill impairment                                                 |       | —                                                   |       | —                                                  |       | 4,561 |   | — |   |
| Intangible amortization                                             |       | 1,075                                                    |       | 2,906                                                   |       | 3,224 |   | 8,718 |   |
| Total operating expenses                                            |       | 8,389                                                    |       | 11,153                                                  |       | 30,780 |   | 36,406 |   |
| Operating loss                                                      |       | (8,847                                                   | )          | (4,571                                                  | )          | (36,118 | ) | (21,988 | ) |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| **OTHER (EXPENSE) INCOME, net:**                                    |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest expense, net                                               |       | (345                                                     | )          | (732                                                    | )          | (1,068 | ) | (1,831 | ) |
| Other, net                                                          |       | 380                                                      |       | 243                                                     |       | 118 |   | 5,910 |   |
| Total other income (expense), net                                   |       | 35                                                       |       | (489                                                    | )          | (950 | ) | 4,079 |   |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss before benefit for income taxes                            |       | (8,812                                                   | )          | (5,060                                                  | )          | (37,068 | ) | (17,909 | ) |
| **BENEFIT FOR INCOME TAXES**                                        |       | (513                                                     | )          | (116                                                    | )          | (464 | ) | (389 | ) |
| **NET LOSS**                                                        |       | $                                                        | (8,299     | )                                                       | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| **NET LOSS PER COMMON SHARE - Basic  and diluted**                  |       | $                                                        | (0.08      | )                                                       | $          | (0.05 | ) | $ | (0.35 | ) | $ | (0.18 | ) |
|                                                                |       |                                                     |       |                                                    |       |   |   |   |   |
| **WEIGHTED AVERAGE COMMON SHARES  OUTSTANDING - Basic and diluted** |       | 106,900                                                  |       | 96,609                                                  |       | 106,019 |   | 96,550 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)(In thousands)**

** **
| ** **                                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| ** **                                                                                     | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                     |       |                                                    |       |   |   |
| Net loss                                                                                       |       | $                                                       | (36,604    | ) | $ | (17,520 | ) |
| **Adjustments to reconcile net loss  to net cash (used in) provided by operating activities:** |       |                                                    |       |   |   |
| Depreciation and amortization expense                                                          |       | 14,550                                                  |       | 20,131 |   |
| Goodwill impairment                                                                            |       | 4,561                                                   |       | — |   |
| Change in fair value of interest rate swap  agreements                                         |       | (253                                                    | )          | (262 | ) |
| Deferred income taxes                                                                          |       | (409                                                    | )          | 83 |   |
| Stock-based compensation                                                                       |       | 636                                                     |       | 1,491 |   |
| Allowance for doubtful accounts                                                                |       | (1,023                                                  | )          | (1,032 | ) |
| Loss (gain) on disposal of assets                                                              |       | 61                                                      |       | (78 | ) |
| Changes in operating assets and liabilities:                                                   |       |                                                    |       |   |   |
| Accounts receivable                                                                            |       | (995                                                    | )          | 11,067 |   |
| Inventories                                                                                    |       | (7,221                                                  | )          | 26,972 |   |
| Prepaid expenses and other current assets                                                      |       | 974                                                     |       | (140 | ) |
| Accounts payable                                                                               |       | 4,915                                                   |       | (21,046 | ) |
| Accrued liabilities                                                                            |       | (207                                                    | )          | (4,116 | ) |
| Deferred revenue                                                                               |       | (2,800                                                  | )          | (11,070 | ) |
| Other non-current assets and liabilities, net                                                  |       | 843                                                     |       | (1,627 | ) |
| Net cash (used in) provided by operating  activities                                           |       | (22,972                                                 | )          | 2,853 |   |
|                                                                                           |       |                                                    |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                     |       |                                                    |       |   |   |
| Purchases of property and equipment                                                            |       | (5,490                                                  | )          | (9,761 | ) |
| Purchases of available-for-sale investments                                                    |       | (922                                                    | )          | — |   |
| Proceeds from disposals of property and equipment                                              |       | 9                                                       |       | 54 |   |
| Decrease (increase) in restricted cash                                                         |       | 2,010                                                   |       | (2,003 | ) |
| Net cash used in investing activities                                                          |       | (4,393                                                  | )          | (11,710 | ) |
|                                                                                           |       |                                                    |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                     |       |                                                    |       |   |   |
| Net proceeds from issuance of stock                                                            |       | 53,347                                                  |       | 547 |   |
| Common stock issued under defined contribution  401(k) plan                               |       | 499                                                     |       | — |   |
| Payments on lines of credit and notes payable                                                  |       | (21,707                                                 | )          | (8,312 | ) |
| Proceeds from lines of credit and notes payable                                                |       | —                                                  |       | 5,033 |   |
| Proceeds from sale-leaseback transactions                                                      |       | —                                                  |       | 3,686 |   |
| Proceeds from deposits on equipment                                                            |       | —                                                  |       | 665 |   |
| Principal payments on capital leases                                                           |       | (791                                                    | )          | (906 | ) |
| Issuance of restricted stock grants                                                            |       | 611                                                     |       | 551 |   |
| Net cash provided by financing activities                                                      |       | 31,959                                                  |       | 1,264 |   |
|                                                                                           |       |                                                    |       |   |   |
| Effect of foreign exchange rates                                                               |       | 2                                                       |       | — |   |
|                                                                                           |       |                                                    |       |   |   |
| **NET INCREASE (DECREASE) IN CASH  AND CASH EQUIVALENTS**                                      |       | 4,596                                                   |       | (7,593 | ) |
| **CASH AND CASH EQUIVALENTS,  beginning of the period**                                        |       | 4,829                                                   |       | 15,253 |   |
| **CASH AND CASH EQUIVALENTS, end of  the period**                                              |       | $                                                       | 9,425      |   | $ | 7,660 |   |
|                                                                                           |       |                                                    |       |   |   |
| **Supplemental cash flow  information:**                                                       |       |                                                    |       |   |   |
| Interest paid, net of capitalized interest                                                     |       | $                                                       | 1,207      |   | $ | 1,697 |   |
| Income taxes paid                                                                              |       | $                                                       | 38         |   | $ | 531 |   |
|                                                                                           |       |                                                    |       |   |   |
| **Non-cash financing activities:**                                                             |       |                                                    |       |   |   |
| Non-cash purchase accounting allocation charges                                                |       | $                                                       | —     |   | $ | 3,030 |   |
| Common stock issued under defined contribution  401(k) plan                               |       | $                                                       | 499        |   | $ | — |   |
| Issuance of restricted stock grants                                                            |       | $                                                       | 611        |   | $ | 551 |   |

 

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

 

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**BROADWINDENERGY, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**(Inthousands, except share and per share data)**

 

**NOTE 1 — BASIS OF PRESENTATION**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States (“GAAP”) for interim financial information and in accordance withthe instructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, the financial statements do not include all of the information andnotes required by GAAP for complete financial statements. In the opinion ofmanagement, all adjustments, including normal recurring accruals, considerednecessary for a fair presentation have been included. Operating results for thethree and nine months ended September 30, 2010 are not necessarilyindicative of the results that may be expected for the twelve months endingDecember 31, 2010. The December 31, 2009 consolidated balance sheetwas derived from audited financial statements, but does not include alldisclosures required by GAAP. This financial information should be read inconjunction with the consolidated financial statements and notes included inthe Company’s Annual Report on Form 10-K for the year endedDecember 31, 2009.

 

Theunaudited condensed consolidated financial statements presented herein includethe accounts of Broadwind Energy, Inc. and its wholly owned subsidiaries.As of September 30, 2010, the Company had five operating subsidiaries,which consisted of Brad Foote Gear Works, Inc. (“Brad Foote”), Tower TechSystems Inc. (“Tower Tech”), Energy Maintenance Service, LLC (“EMS”),Badger Transport, Inc. (“Badger”), and Broadwind Energy Europe GmbH. Allinter-company transactions and balances have been eliminated. Additionally,certain reclassifications have been made to prior period financial statementsto 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., aDelaware corporation headquartered in Naperville, Illinois, and its whollyowned subsidiaries. The Company is an independent, horizontally integratedsupplier of customized products and services to the U.S. wind energy industry.The Company’s product and service portfolio provides its customers, includingwind turbine manufacturers, wind farm developers and wind farm operators, withaccess to a broad array of wind component and service offerings. The Companymanufactures gearing systems and wind towers for the wind industry, andprovides technical service, precision repair and engineering and specializedlogistics to the wind industry in the U.S.

 

InDecember 2009, the Company revised its reporting segment presentation intofour reportable operating segments: Towers, Gearing, Technical and EngineeringServices, and Logistics. Accordingly, all prior period financial results havebeen reclassified to reflect these changes. See Note 14, “SegmentReporting,” of the notes to these condensed consolidated financial statementsfor further discussion of the Company’s reportable segments.

 

*Towers*

 

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

 

*Gearing*

 

The Company manufactures precision gearing systems for the windindustry and for industrial markets including mining and oilfield equipment.  The Company uses an integrated manufacturingprocess, which includes a machining process in Cicero, Illinois, a heattreatment process in Neville Island, Pennsylvania and a finishing process inthe Company’s Cicero factory.

 

*Technical and Engineering Services*

 

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

 

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andother components. The Company also provides customer support, preventivemaintenance and wind technician training. The Company’s technicians utilizeregional service centers for storage and repair of parts as well as for training.Through its precision repair and engineering services, the Company repairs andrefurbishes complex wind components, including control systems, gearboxes andblades. The Company also conducts warranty inspections, commissions turbinesand provides technical assistance.

 

*Logistics*

 

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

 

**Financing and Liquidity**

 

Asof September 30, 2010, the Company had cash, cash equivalents and short-terminvestments of $10,347. The Company’s management anticipates that the Companywill be able to satisfy the cash requirements associated with, among otherthings, working capital needs, capital expenditures and debt and leasecommitments through at least the next 12 months primarily with currentcash on hand, receipts of deposits from customers to fund steel purchases andcash generated by operations or other financing arrangements.

 

OnSeptember 29, 2010, Tower Tech, Brad Foote, EMS and Badger (each individually,a “Subsidiary” and collectively, the “Subsidiaries”) each entered into anindividual Account Purchase Agreement (collectively, the “AP Agreements”) withWells Fargo Business Credit, a division of Wells Fargo Bank, N.A. (“Wells Fargo”).The aggregate facility limit of the AP Agreements is $10,000. At September 30,2010, no amounts were drawn under the AP Agreements, and the Company had theability to borrow up to $10,000, subject to maintaining a month-end minimumtotal cash balance of $5,000. 

 

**NOTE 2 — EARNINGS PER SHARE**

 

The following table presents a reconciliation of basic and dilutedearnings per share for the three and nine months ended September 30, 2010and 2009 as follows:

 
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                             | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic earnings per share  calculation:**             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss to common stockholders                        |       | $                                | (8,299     | )                               | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average number of common shares  outstanding  |       | 106,900,143                      |       | 96,608,575                      |       | 106,019,147 |   | 96,549,710 |   |
| Basic net loss per share                               |       | $                                | (0.08      | )                               | $          | (0.05 | ) | $ | (0.35 | ) | $ | (0.18 | ) |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted earnings per share calculation:**            | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss to common stockholders                        |       | $                                | (8,299     | )                               | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average number of common shares  outstanding  |       | 106,900,143                      |       | 96,608,575                      |       | 106,019,147 |   | 96,549,710 |   |
| Common stock equivalents:                              |       |                             |       |                            |       |   |   |   |   |
| Stock options and unvested restricted stock units  (1) |       | —                           |       | —                          |       | — |   | — |   |
| Weighted average number of common shares  outstanding  |       | 106,900,143                      |       | 96,608,575                      |       | 106,019,147 |   | 96,549,710 |   |
| Diluted net loss per share                             |       | $                                | (0.08      | )                               | $          | (0.05 | ) | $ | (0.35 | ) | $ | (0.18 | ) |

 

----

(1) Stock options andunvested restricted stock units granted and outstanding of 1,462,500 and1,877,745 as of September 30, 2010 and 2009, respectively, are excludedfrom the computation of diluted earnings per share due to the anti-dilutiveeffect as a result of the Company’s net loss for these respective periods.

 

**NOTE 3 — INVENTORIES**

 

Inventoriesare stated at the lower of cost or market value and primarily consist of rawmaterial, work-in-process, and finished goods. Work-in-process consists oflabor and overhead, processing costs, purchased subcomponents and materialspurchased 

 

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forspecific customer orders. Finished goods consist of components purchased fromthird parties as well as components manufactured by the Company that will beused to produce final customer products.

 

The components of inventories as of September 30, 2010 andDecember 31, 2009 are summarized as follows:

 
| ** **                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                                            |       |                   |       |                  |       |
| Raw materials                                   |       | $                      | 10,849     |                  | $          | 4,957 |   |
| Work-in-process                                 |       | 4,802                  |       | 2,921                 |       |
| Finished goods                                  |       | 2,275                  |       | 3,338                 |       |
|                                            |       | 17,926                 |       | 11,216                |       |
| Less: Reserve for excess and obsolete inventory |       | (1,666                 | )          | (2,177                | )          |
| Net inventories                                 |       | $                      | 16,260     |                  | $          | 9,039 |   |

 

**NOTE 4 — GOODWILL AND INTANGIBLE ASSETS**

 

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

 

Duringthe second quarter of 2010, the Company identified a triggering eventassociated with a continued deterioration in financial performance within itsTechnical and Engineering Services segment. This triggering event required asubsequent revision in the Company’s projection of future operating results andcash flows for this segment in light of the continued economic weakness in thewind energy industry. The Company’s analysis indicated that the projected fairvalue of the Technical and Engineering Services segment assets did not exceedthe carrying value of these assets. The method used in determining the fairvalue was based upon the Company’s estimate of the projected future discountedcash flows of its reporting unit. As a result, the Company recorded a goodwillimpairment charge of $4,561 during the second quarter and the impairment chargewas recorded to operating expenses in its consolidated statement of operations.

 

Duringthe third quarter of 2010, the Company identified triggering events associatedwith the Company’s current period operating loss combined with a history ofcontinued operating losses, and during the third quarter the Company’s marketcapitalization was below the net book value of its total assets. As a result,the Company evaluated the recoverability of certain of its identifiableintangible assets and goodwill balances. Based upon the Company’s assessment,no impairment to these assets was identified as of September 30, 2010.

 

Asof September 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  September 30, 2010** |       | $          | —     |        | $          | —                                        |       | $             | —     |       | $          | 5,154 |   | $ | 5,154 |   |

 

Intangibleassets represent the fair value assigned to definite-lived assets such as tradenames, customer relationships, and non-compete agreements as part ofacquisitions completed by the Company during 2007 and 2008. Intangible assetsare amortized on a straight-line basis over their estimated useful lives, whichrange from 3 to 20 years. The Company tests intangible assets forimpairment when events or circumstances indicate that the carrying value ofthese assets may not be recoverable. As a result of the triggering events notedabove, the Company evaluated the recoverability of certain of its identifiableintangible assets. Based upon the Company’s assessment, no impairment to theseassets was identified as of September 30, 2010.

 

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Asof September 30, 2010 and December 31, 2009, the cost basis,accumulated amortization and net book value of intangible assets were asfollows: 

 
| ** **             | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | ** **                       | ** ** | ** **                      | ** ** | **Net** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **             | ** ** | **Cost**                         | ** ** | **Accumulated**                 | ** ** | **Book** | ** ** | **Cost** | ** ** | **Accumulated** | ** ** | **Impairment** | ** ** | **Book** | ** ** |
| ** **             | ** ** | **Basis**                        | ** ** | **Amortization**                | ** ** | **Value** | ** ** | **Basis** | ** ** | **Amortization** | ** ** | **Charge** | ** ** | **Value** | ** ** |
| Intangible assets:     |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Customer relationships |       | $                                | 33,059     |                            | $          | (8,059 | ) | $ | 25,000 |   | $ | 106,638 |   | $ | (21,332 | ) | $ | (57,835 | ) | $ | 27,471 |   |
| Trade names            |       | 10,159                           |       | (1,466                          | )          | 8,693 |   | 10,279 |   | (1,099 | ) | (107 | ) | 9,073 |   |
| Noncompete agreements  |       | 1,490                            |       | (1,159                          | )          | 331 |   | 1,490 |   | (786 | ) | — |   | 704 |   |
|                   |       |                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Intangible assets      |       | $                                | 44,708     |                            | $          | (10,684 | ) | $ | 34,024 |   | $ | 118,407 |   | $ | (23,217 | ) | $ | (57,942 | ) | $ | 37,248 |   |

 

Intangibleinvestments associated with customer relationships, trade names and non-competeagreements are amortized ratably over the estimated life of the relatedintangible assets. Amortization expense was $1,075 and $3,224 for the three andnine months ended September 30, 2010, respectively, compared to $2,906 and$8,718 for the three and nine months ended September 30, 2009,respectively.

 

**NOTE 5 — ACCRUED LIABILITIES**

 

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

 
| ** **                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                           |       |                   |       |                  |       |
| Accrued operating expenditures |       | $                      | 487        |                  | $          | 954 |   |
| Accrued payroll and benefits   |       | 3,254                  |       | 2,295                 |       |
| Accrued professional fees      |       | 202                    |       | 1,067                 |       |
| Accrued warranty               |       | 1,368                  |       | 918                   |       |
| Accrued other                  |       | 1,676                  |       | 1,731                 |       |
| Total accrued liabilities      |       | $                      | 6,987      |                  | $          | 6,965 |   |

 

**NOTE 6 — DEBT AND CREDIT AGREEMENTS**

 

TheCompany’s outstanding debt balances as of September 30, 2010 andDecember 31, 2009 consisted of the following:

 
| ** **                                | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2010**               | ** ** | **2009**              | ** ** |
|                                      |       |                   |       |                  |       |
| Lines of credit                           |       | $                      | —     |                  | $          | 10,601 |   |
| Term loans and notes payable              |       | 11,373                 |       | 22,595                |       |
| Related party note                        |       | 2,320                  |       | 2,320                 |       |
|                                      |       | 13,693                 |       | 35,516                |       |
| Less - Current maturities                 |       | (2,649                 | )          | (19,738               | )          |
| Long-term debt, net of current maturities |       | $                      | 11,044     |                  | $          | 15,778 |   |

 

**Credit Facilities**

 

***Brad Foote***

 

Inconnection with the Company’s acquisition of Brad Foote in October 2007,the Company assumed outstanding debt and available lines of credit totalingapproximately $25,500 under various secured debt facilities (the “BOA DebtFacilities”) with Bank of 

 

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America.  On January 22, 2010, Brad Foote repaidall of the outstanding principal and interest under the BOA Debt Facilities inthe aggregate amount of $16,076, and the BOA Debt Facilities were terminated.

 

***Tower Tech***

 

*ICB Line*

 

InOctober 2007, Tower Tech obtained a secured line of credit (the “ICB Line”)from Investors Community Bank in the amount of $2,500, which was subsequentlyincreased to $5,500 on March 21, 2008. On March 13, 2009, InvestorsCommunity Bank agreed to extend the maturity date of the ICB Line toMarch 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 baseavailability. Tower Tech repaid all of the outstanding indebtedness under theICB Line in the amount of $3,066 on January 26, 2010, and allowed the ICBLine to expire on March 13, 2010.

 

*ICB Notes*

 

OnApril 7, 2008, the Company’s wholly owned subsidiary R.B.A., Inc. (“RBA”)executed four (4) promissory notes with Investors Community Bank (the “ICBNotes”) 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 ofOctober 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 ofApril 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 ofApril 25, 2013; and (iv) a line of credit note in the maximumprincipal amount of $1,732, bearing interest at a per annum rate of 4.48% untilMay 1, 2008 and thereafter at LIBOR plus 1.75%, with a maturity date ofApril 5, 2009 (the “Line of Credit Note”). The Line of Credit Note wassubsequently modified on March 13, 2009 to extend the maturity date toMarch 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 weresecured by substantially all of the assets of RBA.

 

Pursuantto the merger of RBA into Tower Tech on December 31, 2009, Tower Techbecame the successor by merger to RBA’s interest in the loans from InvestorsCommunity Bank to RBA evidenced by the ICB Notes (other than the Line of CreditNote, which was repaid in full in January 2010). The ICB Notes containcertain standard and financial covenants.  Tower Tech agreed to a minimum debt service coverage ratio, to maintainits primary deposit accounts with ICB and that no additional loans or leaseswould be entered into by Tower Tech without the prior approval of InvestorsCommunity Bank.   At September 30,2010, Tower Tech was in violation of its debt service coverage ratio andobtained a waiver for this violation from Investors Community Bank.  Any future noncompliance with the covenantsunder the ICB Notes could result in an event of default which would allowInvestors Community Bank to accelerate the amounts due if Tower Tech is unableto obtain a waiver in respect of any such default. As of September 30,2010, (i) the total amount of outstanding indebtedness under the remainingICB Notes was $1,436, and (ii) the effective per annum interest rate ofthe remaining ICB Notes was 5.84%.

 

*GreatWestern Loan*

 

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

 

TheGreat Western Term Loan is secured by a first mortgage on the Facility and allfixtures and proceeds relating thereto, pursuant to a Mortgage and a CommercialSecurity Agreement, each between Tower Tech and Great Western Bank, and by aCommercial Guaranty from the Company. In addition, the Company has agreed tosubordinate all intercompany debt with Tower Tech to the Great Western TermLoan. The Great Western Term Loan contains representations, warranties andcovenants that are customary for a term financing arrangement and contains nofinancial covenants. As of September 30, 2010, the total outstandingindebtedness under the Great Western Term Loan was $6,000.

 

***Badger***

 

OnMarch 13, 2009, Badger obtained a term loan (the “FNB Term Loan”) fromFirst National Bank in the principal amount of $1,538. A portion of theproceeds from the FNB Term Loan was used to pay off Badger’s existing term loanand revolving line of credit with First National Bank, with the remainderavailable for working capital. The FNB Term Loan is secured by the inventoryand certain equipment of Badger, and is guaranteed by the Company. The FNB TermLoan bears interest at a rate of 6.75% per annum,

 

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matureson March 13, 2013, and requires monthly payments of principal andinterest. The FNB Term Loan contains no financial covenants. As of September 30,2010, the total amount of outstanding indebtedness under the FNB Term Loan was$1,009.

 

OnSeptember 30, 2009, Badger obtained a term loan (the “GE Capital Term Loan”)from General Electric Capital Corporation in the principal amount ofapproximately $1,000. The GE Capital Term Loan is secured by certain equipmentof Badger, and is guaranteed by the Company. The GE Capital Term Loan bearsinterest at a rate of 7.76% per annum, matures on September 30, 2014, andrequires monthly payments of principal and interest. The GE Capital Term Loancontains no financial covenants. As of September 30, 2010, the totalamount of outstanding indebtedness under the GE Capital Term Loan was $821.

 

***AP Agreements***

 

OnSeptember 29, 2010, the Subsidiaries entered into the AP Agreements withWells Fargo. Under the AP Agreements, Wells Fargo will advance funds againstcertain receivables arising from the sales of the Subsidiaries’ products andservices. In connection with the entry into the AP Agreements, the Company andeach Subsidiary have executed guaranties (including cross-guaranties) in favorof Wells Fargo. With respect to the Subsidiaries, the AP Agreements containprovisions providing for cross-defaults and cross-collateralization. Inaddition, each Subsidiary has granted to Wells Fargo a security interestagainst all financed receivables and related collateral. Prior to entering intothe AP Agreements, there was no material relationship between the Company, theSubsidiaries and Wells Fargo.

 

Underthe terms of the AP Agreements, Wells Fargo will advance approximately 80% ofthe face value of eligible receivables to the Subsidiaries. Wells Fargo willhave full recourse to the Subsidiaries for collection of the financedreceivables. The aggregate facility limit of the AP Agreements is $10,000. ForWells Fargo’s services under the AP Agreements, the Subsidiaries have agreed topay Wells Fargo (i) a floating discount fee of the then-prevailing LIBORplus 3.75% per annum, (ii) an annual facility fee of 1% of the aggregatefacility limit, and (iii) an annual unused line fee of 0.042% on theportion of the credit facility which is unused. The initial term of the APAgreements ends on September 29, 2013. If the AP Agreements are terminatedprior to this date, an early termination fee of up to 3% of the aggregatefacility limit may apply. At September 30, 2010, no amounts were drawnunder the AP Agreements, and the Subsidiaries had the ability to borrow up to$10,000, subject to maintaining a month-end minimum total cash balance of $5,000.

 

**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 “SellingShareholders”), including J. Cameron Drecoll, the Company’s ChiefExecutive Officer and a member of its Board of Directors, related to thepost-closing escrow established in connection with the Company’s acquisition ofBrad Foote. Under the terms of the Settlement Agreement, among other terms, theCompany issued three promissory notes to the Selling Shareholders in theaggregate principal amount of $3,000 (the “Selling Shareholder Notes”). TheSelling Shareholder Notes mature on May 28, 2012 and bear interest at arate of 7% per annum, with interest payments due quarterly. The SellingShareholder Note issued to Mr. Drecoll in the principal amount of $2,320and pursuant to the terms of the Settlement Agreement is deemed by the Companyto be a related party transaction. As of September 30, 2010, principal of$3,000 and accrued interest of $53 were outstanding under the SellingShareholder Notes. The Company has accounted for the Selling Shareholder Notesas long-term debt in its condensed consolidated balance sheets.

 

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

 

Cashand cash equivalents comprise cash balances and readily marketable investmentswith original maturities of three months or less, such as money market funds,short-term government bonds, Treasury bills, marketable securities andcommercial paper. The Company’s treasury policy is to invest excess cash inmoney market funds or other short-term investments, which are generally of ashort-term duration based upon operating requirements. Income earned on theseinvestments is recorded to interest income in the Company’s condensedconsolidated statements of operations. As of September 30, 2010, cash andcash equivalents totaled $9,425 and consisted of cash balances and investmentsin municipal bonds with original maturities of three months or less, comparedto cash and cash equivalents of $4,829 which consisted of cash and money marketfunds at December 31, 2009.

 

Asof September 30, 2010, the Company had $922 in investments in municipalbonds with original maturities greater than three months, but less than oneyear. These financial instruments are categorized as available-for-salesecurities and classified as short-term investments in the Company’s condensedconsolidated balance sheet as of September 30, 2010.

 

Cashand cash equivalents and short-term investments consisted of the following asof September 30, 2010 and December 31, 2009:

 

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| ** **                                                  | ** ** | **September 30, 2010** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | ** **                       | ** ** | **Gross Unrealized** | ** ** | ** ** | ** ** |
| ** **                                                  | ** ** | **Cost**                         | ** ** | **Gain** | ** ** | **(Loss)** | ** ** | **Fair Value** | ** ** |
| Cash and cash equivalents:                                  |       |                             |       |   |   |   |   |   |   |
| Cash                                                        |       | $                                | 7,833      |   | $ | — |   | $ | — |   | $ | 7,833 |   |
| Municipal bonds                                             |       | 1,592                            |       | — |   | — |   | 1,592 |   |
| Total cash and cash equivalents                             |       | 9,425                            |       | — |   | — |   | 9,425 |   |
|                                                        |       |                             |       |   |   |   |   |   |   |
| Short-term investments (available-for-sale):                |       |                             |       |   |   |   |   |   |   |
| Municipal bonds                                             |       | 922                              |       | — |   | — |   | 922 |   |
|                                                        |       |                             |       |   |   |   |   |   |   |
| Total cash and cash equivalents and short-term  investments |       | $                                | 10,347     |   | $ | — |   | $ | — |   | $ | 10,347 |   |

 
| ** **                      | ** ** | **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**

 

TheCompany measures its financial assets and liabilities at fair value. Fair valueis defined as the price that would be received to sell an asset or paid totransfer a liability (i.e., exit price) in an orderly transaction betweenmarket participants at the measurement date. Additionally, the Company is requiredto provide disclosure and categorize assets and liabilities measured at fairvalue into one of three different levels depending on the assumptions (i.e.,inputs) used in the valuation. Level 1 provides the most reliable measureof fair value while Level 3 generally requires significant managementjudgment. Financial assets and liabilities are classified in their entiretybased on the lowest level of input significant to the fair value measurement.The fair value hierarchy is defined as follows:

 

Level 1—Valuationsare based on unadjusted quoted prices in active markets for identical assets orliabilities.

 

Level 2—Valuationsare based on quoted prices for similar assets or liabilities in active markets,or quoted prices in markets that are not active for which significant inputsare observable, either directly or indirectly.

 

Level 3—Valuationsare based on prices or valuation techniques that require inputs that are bothunobservable and significant to the overall fair value measurement. Inputsreflect management’s best estimate of what market participants would use invaluing the asset or liability at the measurement date.

 

**Fair value of financial instruments**

 

Thecarrying amounts of the Company’s financial instruments, which include cash andcash equivalents, accounts receivable, prepaid expenses and other currentassets, accounts payable, accrued liabilities and customer deposits approximatetheir respective fair values due to the relatively short-term nature of theseinstruments. Based upon interest rates currently available to the Company fordebt with similar terms, the carrying value of the Company’s long-term debt isapproximately equal to its fair value. As of September 30, 2010, theCompany held short-term investments in municipal bonds, which are required tobe measured at fair value. As of September 30, 2010, the Company did nothold any interest rate swaps. The following table presents the Company’s fairvalue measurements valued on a recurring basis as of September 30, 2010:

 
| ** **      | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|-----------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
|            |       |             |       |             |       |             |       |      |       |
| Municipal bonds |       | $                | 922        |             | $          | —           |       | $         | —     |   | $ | 922 |   |
| Total           |       | $                | 922        |             | $          | —           |       | $         | —     |   | $ | 922 |   |

 

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Thefollowing table represents the fair values of the Company’s financialliabilities as of December 31, 2009:

 
| ** **          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
|                |       |             |       |             |       |             |       |      |       |
| Interest rate swaps |       | $                | —     |             | $          | 253              |       | $         | —     |   | $ | 253 |   |
| Total               |       | $                | —     |             | $          | 253              |       | $         | —     |   | $ | 253 |   |

 

**Assets measured at fair value on a nonrecurring basis**

 

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

 

Duringthe third quarter of 2010, the Company identified triggering events associatedwith the Company’s current period operating loss combined with a history ofcontinued operating losses, and during the third quarter the Company’s marketcapitalization was below the net book value of its total assets. As a result,the Company evaluated the recoverability of certain of its identifiableintangible assets and goodwill balances. Based upon the Company’s assessment,no impairment to these assets was identified as of September 30, 2010.

 

Thefair value measurement approach utilizes a number of significant unobservableinputs or Level 3 assumptions. These assumptions include, among others,projections of the Company’s future operating results, the implied fair valueof these assets using an income approach by preparing a discounted cash flowanalysis and other subjective assumptions.

 

**NOTE 9 — TOTAL COMPREHENSIVE LOSS**

 

The components of total comprehensive loss are net loss and the changein cumulative currency translation adjustments.  The following table setsforth the components of total comprehensive loss for the three and nine monthsended September 30, 2010 and 2009:

 
| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss                                 |       | $                                                        | (8,299     | )                                                       | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |
| Other comprehensive income:              |       |                                                     |       |                                                    |       |   |   |   |   |
| Foreign currency translation adjustments |       | 4                                                        |       | —                                                  |       | 2 |   | — |   |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Total comprehensive loss                 |       | $                                                        | (8,295     | )                                                       | $          | (4,944 | ) | $ | (36,602 | ) | $ | (17,520 | ) |

 

In May 2010, the Company opened a sales office in Hamburg,Germany. The Euro is the functional currency in Germany. All related expenseshave been translated into U.S. dollars using an average exchange rate for theperiod. The assets and liabilities for this location have been translated intoU.S. dollars using the spot rate at the end of the period with a currencytranslation gain of $4 and $2 included in accumulated other comprehensive lossfor three and nine months ended September 30, 2010, respectively.

 

**NOTE 10 — STOCKHOLDERS’ EQUITY**

 

On January 21, 2010, the Company completed a public offering ofits common stock, par value $0.001 per share, at an offering price of $5.75 pershare. In the offering, the Company sold 10,000,000 newly issued shares of itscommon stock for approximately $54,625 in proceeds after deducting underwritingdiscounts, but before deducting other offering related costs. In connectionwith the offering, the Company incurred $1,278 in costs associated withprofessional and other offering related expenses, which have been nettedagainst the proceeds received in additional paid-in capital in the Company’scondensed consolidated balance 

 

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sheetas of September 30, 2010.

 

During the three and nine months ended September 30, 2010, theCompany issued 86,500 and 191,479 shares of its common stock for an aggregatefair value of $158 and $499, respectively, in connection with matchingcontributions made under its defined contribution 401(k) safe harbor plan.

 

**NOTE 11 — INCOME TAXES**

 

TheCompany accounts for income taxes based upon an asset and liability approach.Deferred tax assets and liabilities represent the future tax consequences ofthe differences between the financial statement carrying amounts of assets andliabilities versus the tax basis of assets and liabilities. Under this method,deferred tax assets are recognized for deductible temporary differences, andoperating loss and tax credit carryforwards. Deferred tax liabilities arerecognized for taxable temporary differences. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not berealized. The impact of tax rate changes on deferred tax assets and liabilitiesis recognized in the year that the change is enacted.

 

TheCompany recognizes interest and penalties related to uncertain tax positions inincome tax expense. As of September 30, 2010 and December 31, 2009,the Company had accrued interest or penalties related to uncertain taxpositions totaling $24 and $10, respectively.

 

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

 

Thefollowing table presents the income tax benefit for the three and nine monthsended September 30, 2010 and 2009 as follows:

 
| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                               | ** ** | **2010**                                                 | ** ** | **2009**                                                | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                     |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss before benefit for income taxes |       | $                                                        | (8,812     | )                                                       | $          | (5,060 | ) | $ | (37,068 | ) | $ | (17,909 | ) |
| Benefit for income taxes                 |       | (513                                                     | )          | (116                                                    | )          | (464 | ) | (389 | ) |
| Net loss                                 |       | $                                                        | (8,299     | )                                                       | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |

 

Effectivetax rates differ from federal statutory income tax rates primarily due tochanges in the Company’s valuation allowance, permanent differences andprovisions for state and local income taxes. As of September 30, 2010, theCompany had a net deferred income tax asset of $6 related to Badger’s state netoperating losses which the Company reasonably expects to monetize in the nearfuture. During the three months ended September 30, 2010, the Companyrecorded a benefit for income taxes of $513 compared to a benefit for incometaxes of $116 during the three months ended September 30, 2009. Theincrease in income tax benefit during the three months ended September 30,2010 was primarily attributable to the revised forecast of the current yearprojected net loss and recent legislative changes which allow for the five yearcarryback of net operating losses. During the nine months ended September 30,2010, the Company recorded a benefit for income taxes of $464, compared to abenefit for income taxes of $389 during the nine months ended September 30,2009. The increase in income tax benefit during the nine months ended September 30,2010 related to the revised forecast of the current year projected net loss andrecent legislative changes which allow for the five year carryback of netoperating losses.

 

**NOTE 12 — SHARE-BASED COMPENSATION**

 

**Overview of Share-Based Compensation Plan**

 

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

 

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5,500,000shares of the Company’s common stock for grants to officers, directors,employees, consultants and advisors upon whose efforts the success of theCompany and its affiliates will depend to a large degree. As of September 30,2010, the Company had reserved 908,032 shares for the exercise of stock optionsoutstanding, 554,468 shares for restricted stock unit awards outstanding and3,693,723 additional shares for future stock awards under the EIP. As of September 30,2010, 343,777 shares of common stock reserved for stock options and restrictedstock unit awards under the EIP have been issued in the form of common stock.

 

*Stock Options.*    Theexercise price of stock options granted under the EIP is equal to the closingprice of the Company’s common stock on the date of grant. Stock optionsgenerally become exercisable on the anniversary of the grant date, with vestingterms 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 planparticipant’s employment is terminated during the vesting period, he or sheforfeits the right to unvested stock option awards.

 

*Restricted Stock Units.*    Thegranting of restricted stock units is provided for under the EIP. Restrictedstock units generally vest on the anniversary of the grant date, with vestingterms 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 theCompany’s common stock on the date of grant and is expensed ratably over thevesting term of the restricted stock award. If a plan participant’s employmentis terminated during the vesting period, he or she forfeits the right to anyunvested portion of the restricted stock units.

 

Thefollowing table summarizes stock option activity during the nine months ended September 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                                 |       | (647,766    | )          | $                                                    | 9.37       |   |
| Expired                                   |       | (91,193     | )          | $                                                    | 15.64      |   |
| Outstanding as of September 30, 2010 |       | 908,032     |       | $                                                    | 10.29      |   |
|                                      |       |        |       |                                                 |       |
| Exercisable as of September 30, 2010 |       | 403,804     |       | $                                                    | 10.44      |   |

 

Thefollowing table summarizes restricted stock unit activity during the ninemonths ended September 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                                   |       | 529,373                       |       | $                                                                                     | 3.57       |   |
| Vested                                    |       | (129,485                      | )          | $                                                                                     | 5.20       |   |
| Forfeited                                 |       | (124,571                      | )          | $                                                                                     | 7.20       |   |
| Outstanding as of September 30, 2010 |       | 554,468                       |       | $                                                                                     | 4.99       |   |

 

Thefair value of each stock option award is estimated on the date of grant usingthe Black-Scholes option pricing model. The determination of the fair value ofeach stock option is affected by the Company’s stock price on the date ofgrant, as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, theCompany’s expected stock price volatility over the expected life of the awardsand actual and projected stock option exercise behavior. The weighted averagefair value per share of stock option awards granted during the nine monthsended September 30, 2010

 

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and2009, and assumptions used to value the stock options, are as follows:

 
| ** **                                                           | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                           | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Dividend yield                                                       |       | —                                                  |       | — |   |
| Risk-free interest rate                                              |       | 3.1                                                     | %          | 2.6 | % |
| Weighted average volatility                                          |       | 85.9                                                    | %          | 85.0 | % |
| Expected life (in years)                                             |       | 6.3                                                     |       | 6.5 |   |
| Weighted average grant date fair value per share  of options granted |       | $                                                       | 3.96       |   | $ | 5.58 |   |
|                                                                      |            |                                                         |            |  |  |  |  |

 

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

 

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

 

Duringthe nine months ended September 30, 2010 and 2009, the Company utilized astandard volatility assumption of 85.9% and 85.0%, respectively, for estimatingthe fair value of stock options awarded based on comparable volatility averagesfor the energy related sector.

 

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

 

Duringthe nine months ended September 30, 2010 and 2009, the Company utilized aforfeiture rate of 25% and 10%, respectively, for estimating the forfeitures ofstock options granted. During the second quarter of 2010, the Company revisedits forfeiture rate to 25% based upon the Company’s historical forfeiturerates. The revision to the Company’s forfeiture was applied to stock optionsand restricted stock units outstanding as of June 30, 2010 and on aprospective basis.

 

Thefollowing table summarizes share-based compensation expense included in theCompany’s condensed consolidated statements of operations for the nine months September 30,2010 and 2009, as follows:

 
| ** **                                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| **Share-based compensation expense:**                       | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Selling, general and administrative                         |       | $                                                       | 1,247      |   | $ | 2,042 |   |
| Income tax benefit (1)                                      |       | —                                                  |       | — |   |
| Net effect of share-based compensation expense on  net loss |       | $                                                       | 1,247      |   | $ | 2,042 |   |
|                                                        |       |                                                    |       |   |   |
| **Reduction in earnings per share:**                        | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Basic and diluted earnings per share (2)                    |       | $                                                       | 0.01       |   | $ | 0.02 |   |

 

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(1) Incometax benefit is not illustrated because the Company is currently operating at aloss and an actual income tax benefit was not realized for the nine monthsended September 30, 2010 and 2009. The result of the loss situationcreates a timing difference, resulting in a deferred tax asset, which is fullyreserved for in the Company’s valuation allowance.

 

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

 

Asof September 30, 2010, the Company estimates that pre-tax compensationexpense for all unvested share-based awards, including both stock options andrestricted stock units, in the amount of approximately $4,008 will berecognized through the year 2015. The Company expects to satisfy the exerciseof stock options and future distribution of shares of restricted stock byissuing new shares of common stock.

 

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**NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS**

 

Thefollowing is a listing of recent accounting standards issued by the FinancialAccounting Standards Board (“FASB”) and their effect on the Company.

 

InJanuary 2010, the FASB issued ASU 2010-06, *Fair ValueMeasurements and Disclosures* (Topic 820).  ASU 2010-06provides additional disclosure requirements related to fair valuemeasurements. ASU 2010-06 is effective for interim and annual reportingperiods beginning after December 15, 2009, except for the disclosuresabout purchases, sales, issuances, and settlements in the roll forward ofactivity in Level 3 fair value measurements.  Disclosure requirementsapplicable to Level 3 transactions are effective for fiscal years beginningafter December 15, 2010 and for interim periods within those fiscal years,with early adoption permitted.  The portion of ASU 2010-06 that waseffective beginning after December 15, 2009 did not have a material effecton the financial position, results of operations or cash flows of the Company.Additionally, the Company does not anticipate that the disclosurerequirements applicable to Level 3 transactions that are effective for fiscalyears beginning after December 15, 2010 will have a material effect on thefinancial position, results of operations or cash flows of the Company.

 

InOctober 2009, the FASB issued ASU 2009-13, *RevenueRecognition* (Topic 605). ASU 2009-13 provides additional guidancerelated to the accounting for multiple-deliverable arrangements to account forproducts or services (deliverables) separately rather than as a combined unitand eliminates the residual method of allocation.  ASU 2009-13 is effectiveprospectively for revenue arrangements entered into or materially modified infiscal years beginning on or after June 15, 2010, with early adoptionpermitted. The Company does not anticipate that the provisions of ASU 2009-13will have a material effect on the financial position, results of operations orcash flows of the Company.

 

**NOTE 14 — SEGMENT REPORTING**

 

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

 

TheCompany’s segments and their product and service offerings are summarizedbelow:

 

***Towers***

 

TheCompany manufactures wind towers, specifically the larger and heavier windtowers that are designed for 2 MW and larger wind turbines. The Company’sproduction facilities are strategically located in close proximity to theprimary U.S. wind resource regions, sited in Wisconsin and Texas, including arecently constructed third wind tower manufacturing facility in Brandon, SouthDakota, which will become operational as business warrants and pending theinstallation of certain additional equipment. The Company also manufacturesother specialty weldments and structures for industrial customers.

 

***Gearing***

 

The Company manufactures precision gearing systems for the windindustry and for industrial markets including mining and oilfieldequipment.   The Company uses anintegrated manufacturing process, which includes a machining process in Cicero, Illinois,a heat treatment process in Neville Island, Pennsylvania and a finishingprocess in the Company’s Cicero factory.

 

***Technical and Engineering Services***

 

TheCompany is an independent service provider of construction support andoperations and maintenance services to the wind industry. The Company’s specialtyservices include oil change-out, up-tower tooling for gearing systems,drive-train and blade repairs and component replacement. The Company’sconstruction support capabilities include assembly of towers, nacelles, bladesand other components. The Company also provides customer support, preventivemaintenance and wind technician training. The Company’s technicians utilizeregional service centers for storage and repair of parts as well as fortraining. Through its precision repair and engineering services, the Companyrepairs 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 servicelocations are in Illinois, California, South Dakota, Texas and Colorado.

 

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***Logistics***

 

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

 

***Corporate and Other***

 

“Corporateand Other” is comprised of selling, general and administrative expenses for theCompany’s corporate office and European sales office and adjustments toreconcile segment results to consolidated results, which primarily includeintercompany eliminations.

 

Summaryfinancial information by reportable segment for the three and nine months endedSeptember 30, 2010 and 2009 was as follows:

 
| ** **                         | ** ** | **Revenues**                                                               | ** ** | **Operating (Loss) Profit**                                      | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Three Months Ended September 30,** | ** ** |
| ** **                         | ** ** | **2010**                                                                   | ** ** | **2009**                                                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segments:**                      | ** ** | ** **                                                                 |       |                                                                       | ** ** | ** ** | ** ** |   | ** ** |
|                               |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Towers                             |       | $                                                                          | 17,294     |                                                                       | $          | 33,630 |   | $ | (284 | ) | $ | 2,181 |   |
| Gearing                            |       | 13,140                                                                     |       | 14,260                                                                     |       | (3,511 | ) | (2,859 | ) |
| Technical and Engineering Services |       | 3,631                                                                      |       | 6,829                                                                      |       | (2,128 | ) | 8 |   |
| Logistics                          |       | 4,175                                                                      |       | 4,959                                                                      |       | (1,049 | ) | 20 |   |
| Corporate and Other (1)            |       | (43                                                                        | )          | (171                                                                       | )          | (1,875 | ) | (3,921 | ) |
|                               |       | $                                                                          | 38,197     |                                                                       | $          | 59,507 |   | $ | (8,847 | ) | $ | (4,571 | ) |

 
| ** **                         | ** ** | **Depreciation and Amortization**                                | ** ** | **Capital Expenditures**                                              | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **For the Three Months Ended September 30,** | ** ** | **For the Three Months Ended September 30,** | ** ** |
| ** **                         | ** ** | **2010**                                                                   | ** ** | **2009**                                                                   | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segments:**                      | ** ** | ** **                                                                 | ** ** | ** **                                                                 | ** ** | ** ** | ** ** |   | ** ** |
|                               |       |                                                                       |       |                                                                       |       |   |   |   |   |
| Towers                             |       | $                                                                          | 855        |                                                                       | $          | 884 |   | $ | 89 |   | $ | 14 |   |
| Gearing (2)                        |       | 2,511                                                                      |       | 4,290                                                                      |       | (427 | ) | 427 |   |
| Technical and Engineering Services |       | 860                                                                        |       | 801                                                                        |       | 1,775 |   | 177 |   |
| Logistics (3)                      |       | 601                                                                        |       | 682                                                                        |       | 38 |   | (24 | ) |
| Corporate and Other (1)            |       | 41                                                                         |       | 41                                                                         |       | 63 |   | 103 |   |
|                               |       | $                                                                          | 4,868      |                                                                       | $          | 6,698 |   | $ | 1,538 |   | $ | 697 |   |

 
| ** **                         | ** ** | **Revenues**                                                              | ** ** | **Operating (Loss) Profit**                                     | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **For the Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                         | ** ** | **2010**                                                                  | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segments:**                      | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** | ** ** | ** ** |   | ** ** |
|                               |       |                                                                      |       |                                                                      |       |   |   |   |   |
| Towers                             |       | $                                                                         | 45,854     |                                                                      | $          | 76,098 |   | $ | (2,157 | ) | $ | 1,424 |   |
| Gearing                            |       | 35,133                                                                    |       | 54,818                                                                    |       | (11,461 | ) | (11,762 | ) |
| Technical and Engineering Services |       | 8,546                                                                     |       | 22,140                                                                    |       | (11,053 | ) | 606 |   |
| Logistics                          |       | 7,694                                                                     |       | 12,362                                                                    |       | (4,057 | ) | (1,362 | ) |
| Corporate and Other (1)            |       | (231                                                                      | )          | (536                                                                      | )          | (7,390 | ) | (10,894 | ) |
|                               |       | $                                                                         | 96,996     |                                                                      | $          | 164,882 |   | $ | (36,118 | ) | $ | (21,988 | ) |

 

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| ** **                         | ** ** | **Depreciation and Amortization**                               | ** ** | **Capital Expenditures**                                             | ** ** |
|------------------------------------|------------|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **For the Nine Months Ended September 30,** | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                         | ** ** | **2010**                                                                  | ** ** | **2009**                                                                  | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Segments:**                      | ** ** | ** **                                                                | ** ** | ** **                                                                | ** ** | ** ** | ** ** |   | ** ** |
|                               |       |                                                                      |       |                                                                      |       |   |   |   |   |
| Towers                             |       | $                                                                         | 2,553      |                                                                      | $          | 2,553 |   | $ | 1,937 |   | $ | 8,402 |   |
| Gearing                            |       | 7,436                                                                     |       | 12,812                                                                    |       | 811 |   | 252 |   |
| Technical and Engineering Services |       | 2,513                                                                     |       | 2,336                                                                     |       | 2,593 |   | 337 |   |
| Logistics                          |       | 1,924                                                                     |       | 2,348                                                                     |       | 69 |   | 550 |   |
| Corporate and Other (1)            |       | 124                                                                       |       | 82                                                                        |       | 80 |   | 220 |   |
|                               |       | $                                                                         | 14,550     |                                                                      | $          | 20,131 |   | $ | 5,490 |   | $ | 9,761 |   |

 
| ** **                         | ** ** | **Total Assets as of** | ** ** |
|------------------------------------|------------|---------------------------------------|------------|
| ** **                         | ** ** | **September 30,**                | ** ** | **December 31,** | ** ** |
| ** **                         | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| **Segments:**                      | ** ** | ** **                            | ** ** |   | ** ** |
|                               |       |                                  |       |   |   |
| Towers                             |       | $                                     | 88,029     |   | $ | 80,146 |   |
| Gearing                            |       | 83,637                                |       | 92,665 |   |
| Technical and Engineering Services |       | 30,886                                |       | 36,417 |   |
| Logistics                          |       | 20,510                                |       | 21,259 |   |
| Corporate and Other (4)            |       | 2,903                                 |       | (451 | ) |
|                               |       | $                                     | 225,965    |   | $ | 230,036 |   |

 

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(1) “Corporateand Other” includes selling, general and administrative expenses of the Company’scorporate office and European sales office in addition to intercompanyeliminations.

 

(2) Gearingsegment capital expenditures during the three months ended September 30,2010 primarily reflect cash amounts received of $544 in connection with a stateeconomic development grant for prior equipment purchases.

 

(3) Logisticssegment capital expenditures during the three months ended September 30,2009 relate to adjustments to equipment purchases.

 

(4) “Corporateand Other” includes assets of the Company’s corporate office and European salesoffice in addition to intercompany eliminations.

 

**NOTE 15 — COMMITMENTS AND CONTINGENCIES**

 

*Purchase Commitments*

 

During2010, the Company issued purchase commitments in connection with equipmentpurchases for the Company’s MW gearbox refurbishment center. As of September 30,2010, total outstanding purchase commitments totaled approximately $4,316.

 

During2009 and 2010, the Company issued purchase commitments in connection withequipment purchases for the Company’s wind tower manufacturing facility locatedin Brandon, South Dakota. As of September 30, 2010, outstanding purchasecommitments totaled approximately $620.

 

During2008, the Company issued purchase commitments to two equipment manufacturers inconnection with equipment purchases totaling $4,888. Under the terms of thepurchase order, the Company was required to make deposits totaling $1,324.During the second quarter of 2010, the Company informed one of themanufacturers of the Company’s election to cancel one of the equipment purchasecommitments, which resulted in the forfeiture of a non-refundable deposit inthe amount of $650. As of September 30, 2010, outstanding purchasecommitments totaled $1,575.

 

*Legal Proceedings*

 

Fromtime to time, the Company is subject to legal proceedings or claims arisingfrom its normal course of operations. The Company accrues for costs related toloss contingencies when such costs are probable and reasonably estimable. As ofSeptember 30, 2010, the Company is not aware of any material pending legalproceedings or threatened litigation that would have a material adverse 

 

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effecton the Company’s financial condition or results of operations, although noassurance can be given with respect to the ultimate outcome of pending actions.

 

*Customer Disputes*

 

Fromtime to time, the Company may be involved in disputes with its customersregarding matters such as warranty liability, pricing and contract performance.During the third quarter of 2009, the Company became involved in a contractdispute with a customer. The Company and the customer are currently innegotiations to resolve this dispute. During the second quarter of 2010, theCompany wrote off $2,100 in accounts receivable balances which were previouslyreserved for and which are related to this dispute.

 

*Environmental Compliance and Remediation Liabilities*

 

TheCompany’s operations and products are subject to a variety of environmentallaws and regulations in the jurisdictions in which the Company operates andsells products governing, among other things, air emissions, wastewaterdischarges, the use, handling and disposal of hazardous materials, soil andgroundwater contamination, employee health and safety, and product content,performance and packaging. Also, certain environmental laws can impose theentire cost or a portion of the cost of investigating and cleaning up acontaminated site, regardless of fault, upon any one or more of a number ofparties, including the current or previous owners or operators of the site.These environmental laws also impose liability on any person who arrangesfor the disposal or treatment of hazardous substances at a contaminated site.Third parties may also make claims against owners or operators of sites andusers of disposal sites for personal injuries and property damage associatedwith releases of hazardous substances from those sites.

 

*Warranty Liability*

 

TheCompany provides warranty terms that range from two to seven years for variousproducts relating to workmanship and materials supplied by the Company. Fromtime to time, customers may submit warranty claims against the Company. Incertain contracts, the Company has recourse provisions for items that wouldenable recovery from third parties for amounts paid to customers under warrantyprovisions. As of September 30, 2010 and December 31, 2009, estimatedproduct warranty liability was $1,368 and $918 respectively, and is recordedwithin accrued liabilities in the Company’s condensed consolidated balancesheets.

 

Thechanges in the carrying amount of the Company’s total product warrantyliability for the nine months ended September 30, 2010 and for the year endedDecember 31, 2009 were as follows:

 
| ** **                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                         |       |                         |       |                        |       |
| Balance, beginning of period |       | $                            | 918        |                        | $          | 890 |   |
| Warranty expense             |       | 980                          |       | 591                         |       |
| Warranty claims              |       | (530                         | )          | (563                        | )          |
| Balance, end of period       |       | $                            | 1,368      |                        | $          | 918 |   |

 

*Sale-Leaseback Transactions*

 

During2009, the Company entered into sale-leaseback agreements whereby certain ownedequipment was sold to a third party financing company in exchange for cash andthe Company subsequently entered into an equipment lease agreement with thepurchaser. The primary purpose of these arrangements was to provide additionalliquidity to meet working capital requirements. Depending on the terms of thelease 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 beamortized to other income or loss in the Company’s statement of operations overthe life of the operating lease. As of September 30, 2010, the minimummonthly payments due under these lease agreements totaled $98.

 

*Other*

 

Asof September 30, 2010, approximately 24% of the Company’s employees werecovered by two collective bargaining agreements with local unions in Cicero, Illinoisand Neville Island, Pennsylvania. Collective bargaining agreements with theCompany’s Cicero and Neville Island unions were ratified by the local unions inthe fourth quarter of 2009 and the first quarter of 2010, respectively, and arescheduled to remain in effect through October 2012 and February 2014,respectively.

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The following discussion and analysis of our financialcondition and results of operations should be read in conjunction with ourcondensed consolidated financial statements and related notes thereto in Item1, “Financial Statements,” of this Quarterly Report and the auditedconsolidated financial statements and related notes and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in ourAnnual Report on Form 10-K for the year ended December 31, 2009. Thediscussion below contains forward-looking statements that are based upon ourcurrent expectations and are subject to uncertainty and changes incircumstances including, but not limited to, those identified in “CautionaryNote Regarding Forward-Looking Statements” at the end of Item 2.  Actual results may differ materially from theseexpectations due to inaccurate assumptions and known or unknown risks anduncertainties.*

 

***(Dollars are presented in thousands except share dataor unless otherwise stated)***

 

**OUR BUSINESS**

 

***Third Quarter Overview***

 

Duringthe third quarter of 2010, the Company improved upon its financial results ascompared to the prior quarter. On a consolidated basis, revenues for the thirdquarter of 2010 were $38,197 or 4% higher compared to the previous quarter,resulting from continued strength in new customer orders and fulfillment of ourexisting backlog. Additionally, we continued to make improvements to our coststructures, primarily through increased utilization of our manufacturingfacilities and a reduction in administrative costs. Although financial resultscontinue to lag in comparison to prior year levels, we believe that conditionswithin our markets have improved modestly and our production has stabilized.

 

OnSeptember 29, 2010, the Subsidiaries entered into the AP Agreements withWells Fargo.  The aggregate facilitylimit of the AP Agreements is $10,000. At September 30, 2010, no amountswere drawn under the AP Agreements, and we had the ability to borrow up to$10,000, subject to maintaining a month-end minimum total cash balance of$5,000. We believe that this borrowing facility will improve our liquidity andsupport working capital requirements.

 

Wehave continued to experience margin pressures as a result of economicconditions. We anticipate a gradual recovery of economic conditions within thewind energy industry; however, we cannot provide assurances that improvedmarket conditions within the wind energy industry will occur or that we will beable to capitalize on these opportunities. In addition, a continued orprolonged economic slowdown in the wind energy industry or other unfavorablemarket factors could result in further revisions to our expectations withrespect to future financial results and cash flows. These factors may requiremanagement to reassess its estimates of the fair value of our reportablesegments and could result in further review of our goodwill and intangibleassets, which could indicate additional impairment to the carrying value of ourassets.

 

Weare in the process of establishing a MW gearbox refurbishment center to servicethe growing number of up-tower gearboxes with product warranty expirations. Therefurbishment center will be part of our operations within our Technical andEngineering Services segment and will be located in Abilene, Texas. We arecurrently in the process of making capital expenditures for this facility andwe anticipate completion during the fourth quarter of this year.

 

**RESULTS OF OPERATIONS**

 

**Three Months Ended September 30, 2010 Compared toThree Months Ended September 30, 2009**

 

The summary of selected financial data table below should be referencedin connection with a review of the following discussion of our results ofoperations for the three months ended September 30, 2010 compared to thethree months ended September 30, 2009.

 

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| ** **                                   | ** ** | **Three Months Ended September 30,** | ** ** | **2010 vs. 2009**       | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                 | ** ** | **% of Total  Revenue** | ** ** | **2009** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                         |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Revenues                                     |       | $                                                        | 38,197     |                              | 100.0      | % | $ | 59,507 |   | 100.0 | % | $ | (21,310 | ) | -35.8 | % |
| Cost of sales                                |       | 38,655                                                   |       | 101.2                             | %          | 52,925 |   | 88.9 | % | (14,270 | ) | -27.0 | % |
| Gross (loss) profit                          |       | (458                                                     | )          | -1.2                              | %          | 6,582 |   | 11.1 | % | (7,040 | ) | -107.0 | % |
|                                         |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Operating expenses                           |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses |       | 7,314                                                    |       | 19.1                              | %          | 8,247 |   | 13.9 | % | (933 | ) | -11.3 | % |
| Intangible amortization                      |       | 1,075                                                    |       | 2.8                               | %          | 2,906 |   | 4.9 | % | (1,831 | ) | -63.0 | % |
| Total operating expenses                     |       | 8,389                                                    |       | 21.9                              | %          | 11,153 |   | 18.8 | % | (2,764 | ) | -24.8 | % |
|                                         |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Operating loss                               |       | (8,847                                                   | )          | -23.1                             | %          | (4,571 | ) | -7.7 | % | (4,276 | ) | 93.5 | % |
|                                         |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Other income (expense)                       |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Interest expense, net                        |       | (345                                                     | )          | -0.9                              | %          | (732 | ) | -1.2 | % | 387 |   | -52.9 | % |
| Other, net                                   |       | 380                                                      |       | 1.0                               | %          | 243 |   | 0.4 | % | 137 |   | 56.4 | % |
| Other income (expense), net                  |       | 35                                                       |       | 0.1                               | %          | (489 | ) | -0.8 | % | 524 |   | -107.2 | % |
|                                         |       |                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net loss before benefit for income taxes     |       | (8,812                                                   | )          | -23.0                             | %          | (5,060 | ) | -8.5 | % | (3,752 | ) | 74.2 | % |
| Benefit for income taxes                     |       | (513                                                     | )          | -1.3                              | %          | (116 | ) | -0.2 | % | (397 | ) | -342.2 | % |
| Net loss                                     |       | $                                                        | (8,299     | )                                 | -21.7      | % | $ | (4,944 | ) | -8.3 | % | $ | (3,355 | ) | 67.9 | % |

 

***Consolidated***

 

Revenuesdecreased $21,310 or 35.8%, from $59,507 during the three months ended September 30,2009, to $38,197 during the three months ended September 30, 2010. Thedecrease in revenues was primarily attributable to a decline in wind farminstallation projects during the current quarter, which resulted in fewertechnical and service technicians deployed as well as a reduction in windtowers manufactured. Additionally, the reduction in revenues was the result ofa lower average selling price of wind towers manufactured due to lower steelprices and due to a general decline in industrial gearing revenues.

 

Grossprofit decreased $7,040 from $6,582 during the three months ended September 30,2009, to a gross loss of $458 during the three months ended September 30,2010. The decrease in gross profit was primarily attributable to the overallreduction in revenues, which created production and volume inefficiencies butalso reflects margin compression due to increased competition in our key windmarkets. The reduction in wind tower and gearing orders led to theunder-absorption of overhead costs, and the reduction in maintenance and repairservices and transportation contracts negatively affected our utilization. As aresult, our gross margin declined from 11.1% during the three months ended September 30,2009, to (1.2%) during the three months ended September 30, 2010.

 

Selling,general and administrative expenses decreased from $8,247 during the threemonths ended September 30, 2009, to $7,314 during the three months ended September 30,2010. The decrease was primarily attributable to the absence of a $1,200expense related to the prior year settlement of a customer dispute, in additionto lower share-based compensation expense as compared to the prior year.

 

Intangibleamortization expense decreased from $2,906 during the three months ended September 30,2009, to $1,075 during the three months ended September 30, 2010. Thedecrease in amortization expense was due to an intangible asset impairmentcharge taken during the fourth quarter of 2009.

 

Totalother income, net, increased from a $489 expense during the three months ended September 30,2009, to $35 during the three months ended September 30, 2010. Theincrease was primarily attributable to lower interest expense associated withthe repayment of outstanding debt under our Bank of America and InvestorsCommunity Bank debt agreements in January 2010.

 

Benefitfor income taxes increased from $116 during the three months ended September 30,2009, to $513 during the three months ended September 30, 2010. Thereduction in income taxes was primarily attributable to a revision in ourincome tax provision 

 

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based upon the revised forecast of thecurrent year projected net loss and recent legislative changes which allow forthe five year carryback of net operating losses.

 

Netloss increased from $4,944 during the three months ended September 30,2009, to $8,299 during the three months ended September 30, 2010,primarily as a result of the factors described above.

 

**Towers Segment**

 

Thefollowing table summarizes the Towers segment operating results for the threemonths ended September 30, 2010 and 2009: 

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                    |       |                             |       |   |   |
| Revenues                |       | $                                | 17,294     |   | $ | 33,630 |   |
| Operating (loss) income |       | (284                             | )          | 2,181 |   |
| Operating margin        |       | -1.6                             | %          | 6.5 | % |
|                         |            |                                  |            |  |  |  |  |

 

Towerssegment revenues decreased $16,336, from $33,630 during the three months ended September 30,2009, to $17,294 during the three months ended September 30, 2010.  The reduction in revenues was attributable toa decline of approximately 22% in the average selling price of wind towersmanufactured and due to a decline of approximately 36% in production volume ofwind towers manufactured. The decline in the average selling price wasprimarily attributable to lower steel prices, which are included in the sellingprice of wind towers manufactured under the majority of our customeragreements.

 

Towerssegment operating income decreased $2,465, from $2,181 during the three monthsended September 30, 2009, to an operating loss of $284 during the threemonths ended September 30, 2010. The decrease in operating income was attributable to a reduction in windturbine towers manufactured as well as higher labor expense.  The increased labor expense was due in partto training and inefficiencies experienced as the business increased itsworkforce to support expected increased sales during the next severalquarters.  Operating margin decreasedfrom 6.5% during the three months ended September 30, 2009, to (1.6%)during the three months ended September 30, 2010

 

**Gearing Segment**

 

Thefollowing table summarizes the Gearing segment operating results for the threemonths ended September 30, 2010 and 2009:

 
| ** **       | ** ** | **Three Months Ended** | ** ** |
|------------------|------------|----------------------------------|------------|
| ** **       | ** ** | **September 30,**           | ** ** |
| ** **       | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|             |       |                             |       |   |   |
| Revenues         |       | $                                | 13,140     |   | $ | 14,260 |   |
| Operating loss   |       | (3,511                           | )          | (2,859 | ) |
| Operating margin |       | -26.7                            | %          | -20.0 | % |
|                  |            |                                  |            |  |  |  |  |

 

Gearingsegment revenues decreased $1,120, from $14,260 during the three months ended September 30,2009, to $13,140 during the three months ended September 30, 2010.  The decrease in revenues was attributable toa reduction of approximately 62% in our industrial sales, partially offset by a35% increase in our wind gearing sales. The decline in industrial sales isprimarily related to a reduction in orders from one customer compared to theprior year.

 

Gearingsegment operating loss increased $652, from $2,859 during the three monthsended September 30, 2009, to $3,511 during the three months ended September 30,2010. The increase in operating loss was primarily due to a reduction in salesvolume which created production volume inefficiencies in our overhead structureand higher warranty costs of $761, which was partially offset by a reduction ofintangible amortization expense of $1,804. As a result of the factors describedabove, operating margin decreased from (20%) during the three months ended September 30,2009, to (26.7%) during the three months ended September 30, 2010.

 

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**Technical and Engineering Services Segment**

 

Thefollowing table summarizes the Technical and Engineering Services segmentoperating results for the three months ended September 30, 2010 and 2009:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                    |       |                             |       |   |   |
| Revenues                |       | $                                | 3,631      |   | $ | 6,829 |   |
| Operating (loss) income |       | (2,128                           | )          | 8 |   |
| Operating margin        |       | -58.6                            | %          | 0.1 | % |
|                         |            |                                  |            |  |  |  |  |

 

Technicaland Engineering Services segment revenues decreased $3,198, from $6,829 duringthe three months ended September 30, 2009, to $3,631 during the threemonths ended September 30, 2010. The decrease in revenues was primarily attributable to a reduction ofapproximately 63% in technical service revenues. The reduction in technicalservice revenues related to a decline in the number of maintenance and servicetechnicians deployed as several of our key customers have chosen to reduceoutsourcing of their maintenance activities.

 

Technicaland Engineering Services segment operating income decreased $2,136, from $8during the three months ended September 30, 2009, to an operating loss of$2,128 during the three months ended September 30, 2010. The operatingloss incurred during the third quarter was primarily attributable to areduction in maintenance and service technicians deployed and costs associatedwith the establishment of our new drive train refurbishment activities. As aresult, operating margin decreased from 0.1% during the three months ended September 30,2009, to (58.6%) during the three months ended September 30, 2010.

 

**Logistics Segment**

 

Thefollowing table summarizes the Logistics segment operating results for thethree months ended September 30, 2010 and 2009:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **September 30,**           | ** ** |
| ** **              | ** ** | **2010**                         | ** ** | **2009** | ** ** |
|                    |       |                             |       |   |   |
| Revenues                |       | $                                | 4,175      |   | $ | 4,959 |   |
| Operating (loss) income |       | (1,049                           | )          | 20 |   |
| Operating margin        |       | -25.1                            | %          | 0.4 | % |
|                         |            |                                  |            |  |  |  |  |

 

Logisticssegment revenues decreased $784, from $4,959 during the three months ended September 30,2009, to $4,175 during the three months ended September 30, 2010.  The decrease in revenues was primarilyattributable to a reduction of approximately 34% in transportation hauls due tofewer large wind farm transportation contracts as compared to the prioryear.  The decrease in volume waspartially offset by higher average revenue of 27% due to longer hauls.

 

Logisticssegment operating income decreased $1,069, from $20 during the three monthsended September 30, 2009, to an operating loss of $1,049 during the threemonths ended September 30, 2010. The decrease in operating income waslargely attributable to deterioration in margins due to competitive pricingpressure associated with low wind farm construction activity.  As a result of the factors described above,operating margin decreased from 0.4% during the three months ended September 30,2009, to (25.1%) during the three months ended September 30, 2010.

 

**Corporate and Other**

 

Corporateand Other expense decreased $2,046, from $3,921 during the three months ended September 30,2009, to $1,875 during the three months ended September 30, 2010. Thereduction in expense was primarily attributable to the absence of a $1,200expense related to the settlement of a customer dispute, in addition to lowershare-based compensation expense as compared to the prior year.

 

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**Nine Months Ended September 30, 2010 Compared toNine Months Ended September 30, 2009**

 

The summary of selected financial data table below should be referencedin connection with a review of the following discussion of our results ofoperations for the nine months ended September 30, 2010 compared to thenine months ended September 30, 2009.

 
| ** **                                   | ** ** | **Nine Months Ended September 30,** | ** ** | **2010 vs. 2009**       | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                   | ** ** | **2010**                                                | ** ** | **% of Total  Revenue** | ** ** | **2009** | ** ** | **% of Total  Revenue** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
|                                         |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Revenues                                     |       | $                                                       | 96,996     |                              | 100.0      | % | $ | 164,882 |   | 100.0 | % | $ | (67,886 | ) | -41.2 | % |
| Cost of sales                                |       | 102,334                                                 |       | 105.5                             | %          | 150,464 |   | 91.3 | % | (48,130 | ) | -32.0 | % |
| Gross (loss) profit                          |       | (5,338                                                  | )          | -5.5                              | %          | 14,418 |   | 8.7 | % | (19,756 | ) | -137.0 | % |
| ** **                                   | ** ** | ** **                                              | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating expenses                           |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative expenses |       | 22,995                                                  |       | 23.7                              | %          | 27,688 |   | 16.8 | % | (4,693 | ) | -16.9 | % |
| Goodwill impairment                          |       | 4,561                                                   |       | 4.7                               | %          | — |   | 0.0 | % | 4,561 |   | 100.0 | % |
| Intangible amortization                      |       | 3,224                                                   |       | 3.3                               | %          | 8,718 |   | 5.3 | % | (5,494 | ) | -63.0 | % |
| Total operating expenses                     |       | 30,780                                                  |       | 31.7                              | %          | 36,406 |   | 22.1 | % | (5,626 | ) | -15.5 | % |
|                                         |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Operating loss                               |       | (36,118                                                 | )          | -37.2                             | %          | (21,988 | ) | -13.4 | % | (14,130 | ) | 64.3 | % |
|                                         |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Other income (expense)                       |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Interest expense, net                        |       | (1,068                                                  | )          | -1.1                              | %          | (1,831 | ) | -1.1 | % | 763 |   | -41.7 | % |
| Other, net                                   |       | 118                                                     |       | 0.1                               | %          | 5,910 |   | 3.6 | % | (5,792 | ) | -98.0 | % |
| Other (expense) income, net                  |       | (950                                                    | )          | -1.0                              | %          | 4,079 |   | 2.5 | % | (5,029 | ) | -123.3 | % |
|                                         |       |                                                    |       |                              |       |   |   |   |   |   |   |   |   |
| Net loss before benefit for income taxes     |       | (37,068                                                 | )          | -38.2                             | %          | (17,909 | ) | -10.9 | % | (19,159 | ) | 107.0 | % |
| Benefit for income taxes                     |       | (464                                                    | )          | -0.5                              | %          | (389 | ) | -0.2 | % | (75 | ) | -19.3 | % |
| Net loss                                     |       | $                                                       | (36,604    | )                                 | -37.7      | % | $ | (17,520 | ) | -10.7 | % | $ | (19,084 | ) | 108.9 | % |

 

***Consolidated***

 

Revenuesdecreased $67,886 or 41.2%, from $164,882 during the nine months ended September 30,2009, to $96,996 during the nine months ended September 30, 2010. Thedecrease in revenues reflected the low level of new wind farms commissionedduring the first nine months of this year, which has negatively affected ourproduction volumes. Despite sequential improvements in our results compared tothe prior quarters of this year, purchases of wind turbine towers and gearingsets by our customers were fewer in number and we experienced a reduction inmaintenance and service technicians utilized in the current year.

 

Grossprofit decreased $19,756, from $14,418 during the nine months ended September 30,2009, to a gross loss of $5,338 during the nine months ended September 30,2010. The decrease in gross profit was attributable to the overall reduction inrevenues, decreased deployment of maintenance and service technicians and lowermargins in our logistics segment. These factors negatively affected ouroverhead cost structures within our service businesses and resulted in the under-absorptionof overhead costs within our manufacturing businesses. As a result, our grossmargin declined from 8.7% during the nine months ended September 30, 2009,to (5.5%) during the nine months ended September 30, 2010.

 

Selling,general and administrative expenses decreased from $27,688 during the ninemonths ended September 30, 2009, to $22,995 during the nine months ended September 30,2010. The decrease was primarily attributable to cost reduction initiativesimplemented during 2009, the absence of one-time start-up costs related to thecommencement of operations at our Abilene, Texas wind tower manufacturingfacility in the prior year and the absence of expense related to the settlementof a customer dispute.

 

Duringthe nine months ended September 30, 2010, we recorded a goodwillimpairment charge of $4,561 associated with our Technical and EngineeringServices segment. The impairment charge was attributable to a continueddeterioration in financial performance of this segment during the first half ofthis year, which**required us to reassess ourprojections of future operating results and cash flows. These revisedprojections indicated that the projected fair value of this segment’s assetsdid not exceed the carrying value of these net assets.

 

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Intangibleamortization expense decreased from $8,718 during the nine months ended September 30,2009, to $3,224 during the nine months ended September 30, 2010. Thedecrease in amortization expense was due to a reduction in amortization expenseassociated with an intangible impairment charge taken during the fourth quarterof 2009.

 

Totalother income, net, decreased from $4,079 during the nine months ended September 30,2009, to other expense, net, of $950 during the nine months ended September 30,2010. The decrease was primarily attributable to the recognition of $5,082 inincome in the prior year related to an escrow settlement agreement with theformer owners of Brad Foote, which was partially offset by a reduction ininterest expense resulting from the repayment of outstanding debt under ourBank of America and Investors Community Bank debt agreements in January 2010.

 

Benefitfor income taxes increased from $389 during the nine months ended September 30,2009, to $464 during the nine months ended September 30, 2010. Theincrease in income tax benefit was attributable to the revised forecast of thecurrent year projected net loss and recent legislative changes which allow forthe five year carryback of net operating losses.

 

Netloss increased from $17,520 during the nine months ended September 30,2009, to $36,604 during the nine months ended September 30, 2010,primarily as a result of the factors described above.

 

**Towers Segment**

 

Thefollowing table summarizes the Towers segment operating results for the ninemonths ended September 30, 2010 and 2009:

 
| ** **              | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **September 30,**          | ** ** |
| ** **              | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                    |       |                            |       |   |   |
| Revenues                |       | $                               | 45,854     |   | $ | 76,098 |   |
| Operating (loss) income |       | (2,157                          | )          | 1,424 |   |
| Operating margin        |       | -4.7                            | %          | 1.9 | % |
|                         |            |                                 |            |  |  |  |  |

 

Towerssegment revenues decreased $30,244, from $76,098 during the nine months ended September 30,2009, to $45,854 during the nine months ended September 30, 2010.  The decrease in revenues was attributable toa decline of approximately 16% in the average selling price of wind towersmanufactured and a 28% decline in production volume of wind towersmanufactured. The decline in the average selling price was primarilyattributable to lower steel prices, which are included in the selling price ofwind towers manufactured under the majority of our customer agreements.Additionally, specialty weldment revenues decreased by $1,953 compared to theprior year.

 

Towerssegment operating income decreased $3,581, from $1,424 during the nine monthsended September 30, 2009, to an operating loss of $2,157 during the ninemonths ended September 30, 2010. The decrease in operating income wasattributable to the under-absorption of overhead costs as a result of lowerproduction volumes of wind towers, and an unfavorable labor variance as aresult of costs associated with new tower designs produced in both towerplants, which was partially offset by the absence of start-up costs incurred atour wind tower manufacturing facility in Abilene, Texas in the prior year.  As a result of the factors described above,operating margin decreased from 1.9% during the nine months ended September 30,2009, to (4.7%) during the nine months ended September 30, 2010.

 

**Gearing Segment**

 

Thefollowing table summarizes the Gearing segment operating results for the ninemonths ended September 30, 2010 and 2009:

 
| ** **       | ** ** | **Nine Months Ended** | ** ** |
|------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **September 30,**          | ** ** |
| ** **       | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|             |       |                            |       |   |   |
| Revenues         |       | $                               | 35,133     |   | $ | 54,818 |   |
| Operating loss   |       | (11,461                         | )          | (11,762 | ) |
| Operating margin |       | -32.6                           | %          | -21.5 | % |
|                  |            |                                 |            |  |  |  |  |

 

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Gearingsegment revenues decreased $19,685, from $54,818 during the nine months ended September 30,2009, to $35,133 during the nine months ended September 30, 2010.  The decrease in revenues was attributable toreductions of approximately 27% and 46% in our wind gearing and industrialsales, respectively. Lower wind gearing revenues reflected reduced demand incomparison to prior year production levels and a delay in fulfilling ourbacklog from our key wind gearing customers. The decrease in industrial gearingrevenues represented an overall decline in production orders from several ofour key customers as compared to the prior year.

 

Gearingsegment operating loss decreased $301, from $11,762 during the nine monthsended September 30, 2009, to $11,461 during the nine months ended September 30,2010. The decrease in operating loss was due to a reduction in intangibleamortization expense of $5,414 as a result of an impairment charge recordedduring the fourth quarter of 2009, improvements in production scrap and lowerprofessional fees related to the absence of debt covenant amendments, whichmore than offset the adverse impact of lower volumes. As a result of thefactors described above, operating margin decreased from (21.5%) during thenine months ended September 30, 2009, to (32.6%) during the nine monthsended September 30, 2010.

 

**Technical and Engineering Services Segment**

 

Thefollowing table summarizes the Technical and Engineering Services segmentoperating results for the nine months ended September 30, 2010 and 2009:

 
| ** **              | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **September 30,**          | ** ** |
| ** **              | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                    |       |                            |       |   |   |
| Revenues                |       | $                               | 8,546      |   | $ | 22,140 |   |
| Operating (loss) income |       | (11,053                         | )          | 606 |   |
| Operating margin        |       | -129.3                          | %          | 2.7 | % |
|                         |            |                                 |            |  |  |  |  |

 

Technicaland Engineering Services segment revenues decreased $13,594, from $22,140during the nine months ended September 30, 2009, to $8,546 during the ninemonths ended September 30, 2010. The decrease in revenues was primarily attributable to declines ofapproximately 68% and 42% in technical and engineering service revenues,respectively. The decrease in technical service revenues related to a declinein the number of maintenance and service technicians deployed due to theabsence of a large service contract as compared to the prior year and as aresult of the decision by several of our key customers to reduce outsourcing oftheir maintenance activities. The decrease in engineering service revenues wasprimarily due to lower blade refurbishment activity of approximately 70%compared to the prior year.

 

Technicaland Engineering Services segment operating income decreased $11,659, from $606 duringthe nine months ended September 30, 2009, to an operating loss of $11,053during the nine months ended September 30, 2010. The operating lossincurred during the nine months ended September 30, 2010 was primarilyattributable to the goodwill impairment charge of $4,561 recorded during thesecond quarter of this year and as a result of a reduction in our servicetechnicians deployed due to a decline in wind installation and maintenanceprojects, competitive pricing associated with fewer service contractopportunities and the current preference of customers to insource theirmaintenance activities. As a result of the factors described above, operatingmargin decreased from 2.7% during the nine months ended September 30,2009, to (129.3%) during the nine months ended September 30, 2010.

 

**Logistics Segment**

 

Thefollowing table summarizes the Logistics segment operating results for the ninemonths ended September 30, 2010 and 2009:

 
| ** **       | ** ** | **Nine Months Ended** | ** ** |
|------------------|------------|---------------------------------|------------|
| ** **       | ** ** | **September 30,**          | ** ** |
| ** **       | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|             |       |                            |       |   |   |
| Revenues         |       | $                               | 7,694      |   | $ | 12,362 |   |
| Operating loss   |       | (4,057                          | )          | (1,362 | ) |
| Operating margin |       | -52.7                           | %          | -11.0 | % |
|                  |            |                                 |            |  |  |  |  |

 

Logisticssegment revenues decreased $4,668, from $12,362 during the nine months ended September 30,2009, to $7,694 during the nine months ended September 30, 2010. Thedecrease in revenues was attributable to a decline of approximately 40% intransportation hauls as a result of fewer large wind farm installation projectsin the current year.

 

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Logisticssegment operating loss increased $2,695, from $1,362 during the nine monthsended September 30, 2009, to $4,057 during the nine months ended September 30,2010. The decrease in operating income was largely attributable to a lowervolume of activity in addition to a deterioration of margins due to competitivepricing pressure. As a result of the factors described above, operating margindecreased from (11%) during the nine months ended September 30, 2009, to(52.7%) during the nine months ended September 30, 2010.

 

**Corporate and Other**

 

Corporateand Other expense decreased $3,504, from $10,894 during the nine months ended September 30,2009, to $7,390 during the nine months ended September 30, 2010. Thereduction in expense was primarily attributable to the absence of a $1,200expense related to the settlement of a customer dispute, in addition to lowershare-based compensation expense as compared to the prior year and a continuedfocus on corporate expense reductions.

 

**SELECTED FINANCIAL DATA**

 

Thefollowing non-GAAP financial measure presented below relates to earnings beforeinterest, taxes, depreciation, amortization and share-based payments (“AdjustedEBITDA”) and is presented for illustrative purposes as an accompaniment to ourunaudited financial results of operations for the three and nine months ended September 30,2010 and 2009. Adjusted EBITDA should not be considered an alternative to, noris there any implication that it is more meaningful than, any measure ofperformance or liquidity promulgated under GAAP. We believe that AdjustedEBITDA is particularly meaningful due principally to the role acquisitions haveplayed in the development of the Company. Historically, our growth throughacquisitions has resulted in significant non-cash depreciation and amortizationexpense, which was primarily attributable to a significant portion of thepurchase price of our acquired businesses being allocated to depreciable fixedassets and definite-lived intangible assets. The following Adjusted EBITDAcalculation is derived from our unaudited condensed consolidated financialresults for the three and nine months ended September 30, 2010 and 2009,as follows:

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                    | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                 | ** ** |
| Net loss                      |       | $                                | (8,299     | )                               | $          | (4,944 | ) | $ | (36,604 | ) | $ | (17,520 | ) |
| Benefit for income taxes      |       | (513                             | )          | (116                            | )          | (464 | ) | (389 | ) |
| Interest expense, net         |       | 345                              |       | 732                             |       | 1,068 |   | 1,831 |   |
| Goodwill impairment           |       | —                           |       | —                          |       | 4,561 |   | — |   |
| Depreciation and amortization |       | 4,868                            |       | 6,698                           |       | 14,550 |   | 20,131 |   |
| Share-based compensation      |       | 178                              |       | 677                             |       | 1,247 |   | 2,042 |   |
| Adjusted EBITDA               |       | $                                | (3,421     | )                               | $          | 3,047 |   | $ | (15,642 | ) | $ | 6,095 |   |

 

**SUMMARY OF CRITICAL ACCOUNTING POLICIES**

 

Themethods, estimates and judgments that we use in applying our criticalaccounting policies have a significant impact on the results that we report inour financial statements. Some of our accounting policies require us to makedifficult and subjective judgments, often as a result of the need to makeestimates regarding matters that are inherently uncertain.

 

We have identified the accounting policies and estimates listed belowas those that we believe require management’s most subjective and complex judgmentsin estimating the effect of inherent uncertainties. This section should also beread in conjunction with Note 1, “Description of Business and Summary ofSignificant Accounting Policies,” of the notes to our consolidated financialstatements in Part II, Item 8 of our Annual Report on Form 10-Kfor the year ended December 31, 2009, which includes a discussion of theseand other significant accounting policies.

 

**Revenue Recognition**

 

Werecognize revenue when the earnings process is complete and when persuasiveevidence of an arrangement exists, transfer of title has occurred or serviceshave been rendered, the selling price is fixed or determinable, collectabilityis reasonably assured, and delivery has occurred per the terms of the contract.Customer deposits and other receipts are deferred and recognized when therevenue is realized and earned.

 

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Insome instances, products are sold under terms included in bill and hold salesarrangements that result in different timing for revenue recognition. Assumingthe required revenue recognition criteria are met, revenue is recognized uponcompletion of product manufacture and customer acceptance.

 

**Warranty Liability**

 

Weprovide a warranty, with terms up to seven years, for various products andservices relating to workmanship and materials supplied by us. From time totime, customers may submit warranty claims to us. In certain contracts, we haverecourse provisions for items that would enable recovery from third parties foramounts paid to customers under warranty provisions. As of September 30,2010 and December 31, 2009, our estimated product warranty liability was$1,368 and $918, respectively, and is recorded within accrued liabilities inour consolidated balance sheets.

 

**Inventories**

 

Inventoriesare stated at the lower of cost or market. We have recorded a reserve for theexcess of cost over market value in our inventory allowance. Market value ofinventory, and management’s judgment of the need for reserves, encompassesconsideration of other business factors including physical condition, inventoryholding period, contract terms, and usefulness. Inventories are valued based onan average cost method that approximates the first-in, first-out (FIFO) basis.

 

Inventoriesconsist of raw materials, work-in-process, and finished goods. Raw materialsconsist of components and parts for general production use. Work-in-processconsists of labor and overhead, processing costs, purchased subcomponents, andmaterials purchased for specific customer orders. Finished goods consist ofcomponents purchased from third parties as well as components manufactured byus that will be used to produce final customer products.

 

**Goodwill and Intangible Assets**

 

Goodwillrepresents the excess of cost over fair market value of identifiable net assetsacquired through business purchases. We perform our annual goodwill impairmenttest during the fourth quarter of each year, or more frequently when events orcircumstances indicate that the carrying value of our assets may not berecovered. We test intangible assets for impairment when events orcircumstances indicate that the carrying value of our assets may not berecovered. In evaluating the recoverability of the carrying value of goodwilland other intangible assets, we must make assumptions regarding the fair valueof our reporting units. Our method of determining the fair value is based uponour estimate of the projected future discounted cash flows of our reportingunits.

 

Ifour fair value estimates or related assumptions change in the future, we may berequired to record additional impairment charges related to goodwill andintangible assets.

 

**Long-Lived Assets**

 

Wereview property and equipment and other long-lived assets for impairmentwhenever events or circumstances indicate that carrying amounts may not berecoverable. If such events or changes in circumstances occur, we willrecognize an impairment loss if the undiscounted future cash flows expected tobe generated by the asset are less than the carrying value of the relatedasset. The impairment loss would adjust the asset to its fair value.

 

Inevaluating the recoverability of long-lived assets, we must make assumptionsregarding estimated future cash flows and other factors to determine the fairvalue of such assets. If our fair value estimates or related assumptions changein the future, we may be required to record impairment charges related toproperty and equipment and long-lived assets.

 

**Income Taxes**

 

Weaccount for income taxes based upon an asset and liability approach. Deferredtax assets and liabilities represent the future tax consequences of thedifferences between the financial statement carrying amounts of assets andliabilities versus the tax basis of assets and liabilities. Under this method,deferred tax assets are recognized for deductible temporary differences, andoperating loss and tax credit carryforwards. Deferred tax liabilities arerecognized for taxable temporary differences. Deferred tax assets are reducedby a valuation allowance when, in the opinion of management, it is more likelythan not that some portion or all of the deferred tax assets will not berealized. The impact of tax rate changes on deferred tax assets and liabilitiesis recognized in the year that the change is enacted.

 

Inconnection with the preparation of our consolidated financial statements, weare required to estimate our income tax liability for each of the taxjurisdictions in which we operate. This process involves estimating our actualcurrent income tax expense and assessing temporary differences resulting fromdiffering treatment of certain income or expense items for income tax reportingand financial reporting purposes. We also recognize the expected future incometax benefits of net operating loss carryforwards as 

 

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deferred income tax assets. In evaluating therealizability of deferred income tax assets associated with net operating losscarryforwards, we consider, among other things, expected future taxable income,the expected timing of the reversals of existing temporary reportingdifferences, and the expected impact of tax planning strategies that may beimplemented to prevent the potential loss of future income tax benefits.Changes in, among other things, income tax legislation, statutory income taxrates, or future taxable income levels could materially impact our valuation ofincome tax assets and liabilities and could cause our income tax provision tovary significantly among financial reporting periods.

 

Wealso account for the uncertainty in income taxes related to the recognition andmeasurement of a tax position taken or expected to be taken in an income taxreturn. We follow the applicable pronouncement guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition related to the uncertainty in these income taxpositions.

 

**Recent Accounting Pronouncements**

 

Thefollowing is a listing of recent accounting standards issued by the FASB andtheir effect on the Company.

 

InJanuary 2010, the FASB issued ASU 2010-06, *Fair Value Measurements and Disclosures* (Topic820).  ASU 2010-06 provides additional disclosure requirementsrelated to fair value measurements. ASU 2010-06 is effective for interimand annual reporting periods beginning after December 15, 2009, except forthe disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements.  Disclosurerequirements applicable to Level 3 transactions are effective for fiscal yearsbeginning after December 15, 2010 and for interim periods within thosefiscal years, with early adoption permitted.  The portion of ASU2010-06 that was effective beginning after December 15, 2009 did not havea material effect on our financial position, results of operations or cashflows. Additionally, we do not anticipate that the disclosure requirementsapplicable to Level 3 transactions that are effective for fiscal yearsbeginning after December 15, 2010 will have a material effect on ourfinancial position, results of operations or cash flows.

 

InOctober 2009, the FASB issued ASU 2009-13, *Revenue Recognition* (Topic 605). ASU 2009-13 providesadditional guidance related to the accounting for multiple-deliverablearrangements to account for products or services (deliverables) separatelyrather than as a combined unit and eliminates the residual method ofallocation.  ASU 2009-13 is effective prospectively for revenuearrangements entered into or materially modified in fiscal years beginning onor after September 15, 2010, with early adoption permitted. We do notanticipate that the provisions of ASU 2009-13 will have a material effect onour financial position, results of operations or cash flows.

 

**LIQUIDITY, FINANCIAL POSITION AND CAPITAL RESOURCES**

 

Asof September 30, 2010, the Company had cash, cash equivalents andshort-term investments of $10,347. The Company’s management anticipates thatthe Company will be able to satisfy the cash requirements associated with,among other things, working capital needs, capital expenditures and debt andlease commitments through at least the next 12 months primarily withcurrent cash on hand, receipts of deposits from customers to fund steelpurchases and cash generated by operations or other financing arrangements. On September 29,2010, the Subsidiaries entered into the AP Agreements with Wells Fargo.  The aggregate facility limit of the APAgreements is $10,000. At September 30, 2010, no amounts were drawn underthe AP Agreements, and we had the ability to borrow up to $10,000, subject tomaintaining a month-end minimum total cash balance of $5,000.

 

Ourability to make scheduled payments on our debt and other financial obligationswill depend on our future financial and operating performance. However, ifsales and subsequent collections from several of our large customers, as wellas revenues generated from new customer orders, are not materially consistentwith management’s expectations, we may encounter cash flow and liquidityissues. Additional funding may not be available when needed or on termsacceptable to us. Furthermore, if we are unable to obtain additional capital,we will likely be required to delay, reduce the scope of or eliminate our plansfor expansion and growth, and this could affect our overall operations. Anyadditional equity financing, if available, may be dilutive to stockholders, andadditional debt financing, if available, will likely require financialcovenants or other restrictions on us.

 

Ourability to meet financial debt covenants and make scheduled payments on ourdebt and other financial obligations will depend on our future financial andoperating performance. If we cannot make scheduled payments on our debt, orcomply with applicable covenants, we will be in default and, as a result, amongother things, our debt holders could declare all outstanding principal andinterest to be due and payable.  While webelieve that we will continue to have sufficient cash flows to operate ourbusinesses, and meet our financial debt covenants, there can be no assurancesthat our operations will generate sufficient cash or that credit facilitieswill be available to us in an amount sufficient to enable us to pay ourindebtedness or to fund our other liquidity needs.

 

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**Sources and Uses of Cash**

 

***Operating Cash Flows***

 

During the nine months ended September 30, 2010, net cash used inoperating activities totaled $22,972 compared to net cash provided by operatingactivities of $2,853 during the nine months ended September 30, 2009. Thedecrease in net cash provided by operating activities was primarilyattributable to increased operating losses in the current year, and higher cashoutlays to replenish raw material inventories to meet current production needs.

 

***Investing Cash Flows***

 

Duringthe nine months ended September 30, 2010 and 2009, net cash used ininvesting activities totaled $4,393 and $11,710, respectively. The decrease innet cash used in investing activities as compared to the prior period wasprimarily attributable to a reduction in capital expenditures due to thecompletion of certain capital projects initiated in prior years. During thenine months ended September 30, 2009, we made capital expenditurestotaling $9,761, which primarily related to the construction of a new windtower facility in Abilene, Texas. During the nine months ended September 30,2010, we made capital expenditures totaling $5,490, primarily related toequipment purchases for our newly constructed wind tower manufacturing facilityin Brandon, South Dakota and purchases related to our MW gearbox refurbishmentcenter in Abilene, Texas. Cash flows from investing activities increased $2,010during the nine months ended September 30, 2010, due to the release of asecurity interest as part of the conversion of the Construction Loan into theGreat Western Term Loan. Additionally, we invested excess cash and madepurchases of short-term investments in municipal bonds totaling $922.

 

***Financing Cash Flows***

 

During the nine months ended September 30, 2010 and 2009, net cashprovided by financing activities totaled $31,959 and $1,264, respectively. Theincrease in net cash provided by financing activities as compared to the priorperiod was attributable to the equity offering we completed in January 2010,in which we sold 10,000,000 newly issued shares of our common stock forapproximately $54,625, net of underwriting discounts. Partially offsetting theincrease in net cash provided by financing activities was higher payments onlines of credit and notes payable. The decrease in lines of credit and notespayable was primarily due to the repayment of outstanding indebtedness due toBank of America and Investors Community Bank in the aggregate amount of $19,142in January 2010.

 

**Contractual Obligations**

 

During2010, the Company issued purchase commitments in connection with equipmentpurchases for the Company’s MW gearbox refurbishment center. As of September 30,2010, total outstanding purchase commitments totaled approximately $4,316. Asof September 30, 2010, there have been no other significant changes to ourcontractual obligations as previously disclosed in Part I, Item 2 ofour Quarterly Report on Form 10-Q for the period ended March 31,2010.

 

**Off-Balance Sheet Arrangements**

 

During2009, Tower Tech and Badger each entered into sale-leaseback agreements wherebythey sold certain equipment to third party financing companies in exchange foraggregate proceeds of $3,505 and agreed to lease the equipment back for astated period of time. The primary purpose of these arrangements was to provideadditional liquidity for meeting working capital requirements. The lease termsunder these agreements range from three to four years and require aggregatemonthly lease payments of $98. In addition, the sale of the assets resulted inan aggregate gain on disposition of $78, which is being amortized over thelives of the operating leases to other income in our condensed consolidated statementsof operations.

 

**Cautionary Note Regarding Forward-Looking Statements**

 

Thepreceding discussion and analysis should be read in conjunction with ourcondensed consolidated financial statements and related notes included in Item1 of Part I of this Quarterly Report on Form 10-Q and the auditedconsolidated financial statements and related notes and Management’s Discussionand Analysis of Financial Condition and Results of Operations contained in ourAnnual Report on Form 10-K for the year ended December 31, 2009.Portions of this Quarterly Report on Form 10-Q, including the discussionand analysis in this Item 2, contain “forward-lookingstatements”—that is, statements related to future, not past, events—within themeaning of Section 27A of the Securities Act of 1933, as amended, and inSection 21E of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”), that reflect our current expectations regarding our future growth,results of operations, cash flows, performance and business prospects, andopportunities, as well as assumptions made by, and information currentlyavailable to, 

 

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our management. Forward-looking statementsinclude any statement that does not directly relate to a current or historicalfact. We have tried to identify forward-looking statements by using words suchas “anticipate,” “believe,” “expect,” “intend,” “will,” “should,” “may,” “plan”and similar expressions, but these words are not the exclusive means ofidentifying forward-looking statements. These statements are based oninformation currently available to us and are subject to various risks,uncertainties, and other factors, including, but not limited to, thosediscussed in Item 1A “Risk Factors” in Part I in our Annual Report onForm 10-K for the year ended December 31, 2009, that could cause ouractual growth, results of operations, financial condition, cash flows, performanceand business prospects and opportunities to differ materially from thoseexpressed in, or implied by, these statements. Our forward-looking statementsmay include or relate to the following: (i) our plans to continue to growour business through organic growth and integration of previous and futureacquisitions; (ii) our beliefs with respect to the sufficiency of ourliquidity and our plans to evaluate alternate sources of funding if necessary;(iii) our expectations relating to the extension, continuation or renewalof federal tax incentives and grants and state renewable portfolio standards;(iv) our expectations relating to construction of new facilities,expansion of existing facilities and sufficiency of our existing capacity tomeet the demands of our customers and support expectations regarding ourgrowth; (v) our plans with respect to the use of proceeds from financingactivities; (vi) our beliefs and expectations relating to the economicdownturn and the potential impact it may have on our business, including ourcustomers; (vii) the anticipated benefits of our remediation efforts onthe strength of our internal control processes and our plans with respect tofuture remediation efforts; and (viii) our beliefs regarding the state ofthe wind energy market generally. You should not consider any list of suchfactors to be an exhaustive statement of all of the risks, uncertainties, orpotentially inaccurate assumptions that could cause our current expectations orbeliefs to change. Except as expressly required by the federal securities laws,we undertake no obligation to update such factors or to publicly announce theresults of any of the forward-looking statements contained herein to reflectfuture events, developments, or changed circumstances or for any other reason.

 

**Item 3.       Quantitative and Qualitative Disclosures About Market Risk**

 

Therehas been no significant change in our exposure to market risk during the ninemonths ended September 30, 2010. For a discussion of our exposure to marketrisk, refer to “Quantitative and Qualitative Disclosures About Market Risk,”contained in Part II, Item 7A, of our Annual Report onForm 10-K for the year ended December 31, 2009.

 

**Item 4.****       ****Controls and Procedures**

 

**Material Weakness**

 

Inconjunction with the filing of Amendment No. 2 on Form 10-Q/A for thequarter ended September 30, 2008, we identified a material weaknessassociated with the controls over non-routine revenue transactions and therelated accounting treatment of those transactions to ensure compliance withGAAP. In response, management continued to enhance the control structure toaddress these material weaknesses; however, at our Brad Foote subsidiary, thecontrols implemented were not sufficient to fully remediate this materialweakness as it related to our fourth quarter 2009 interim monthly financialstatements. Based on this assessment, management determined that, as ofDecember 31, 2009, we did not maintain effective internal control overfinancial reporting due to the previously reported material weakness related tonon-routine revenue transactions discussed above, which remained outstanding atDecember 31, 2009.

 

***Remediation Activities and Changes inInternal Control Over Financial Reporting***

 

Managementhas continued its remediation efforts to reduce the risk presented by theexisting material weakness. Since year-end, we have made key personnel changes,enhanced our internal controls to detect, monitor and review transactions thatare deemed by the Company to be non-routine revenue transactions. During thethird quarter, we continued our testing of these internal control procedures toassess their effectiveness in remediating this material weakness. The impact ofremediation efforts initiated by management will not be fully known until ourassessment of internal control over financial reporting is completed as ofDecember 31, 2010.

 

Duringthe second quarter of 2010, we enhanced our internal control over financialreporting related to information technology through upgrading our enterpriseresource planning (“ERP”) software and server databases at Brad Foote. Theupgraded ERP software and server databases will provide better visibility intoproduct costing and inventory production planning, in addition to enhancementsto data security and user access controls.

 

Duringthe third quarter of 2010, management continued to enhance the controls overfinancial reporting related to the product costing and inventory productionplanning at Brad Foote. With the enhanced ERP software implemented in thesecond quarter we are continuing to utilize the new capabilities of the system.

 

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**Evaluation of Disclosure Controls and Procedures**

 

OurChief Executive Officer and Chief Financial Officer evaluated the effectivenessof the Company’s disclosure controls and procedures (as defined in Exchange ActRules 13a-15(e) and 15d-15(e)) as of the end of the period covered inthis report. In light of the material weakness associated with the controlsover non-routine revenue transactions, which has not been completely remediatedas of the end of the period covered by this Quarterly Report, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were not effective to provide reasonable assurance thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act was recorded, processed, summarized andreported within the time periods specified by the SEC’s rules and formsand did not ensure that information required to be disclosed in the reportsthat we file or submit under the Exchange Act was accumulated and communicated toour management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Weanticipate the actions to be taken to remediate this material weakness and theresulting improvement in controls will generally strengthen our disclosurecontrols and procedures, as well as our internal control over financialreporting, and will, over time, address the material weakness that weidentified in our internal control over financial reporting as ofDecember 31, 2009. However, because many of the remediation actions wehave undertaken are recent and because some of our remediation actions will bedesigned to improve our internal control over annual measures, management willnot be able to conclude that the material weakness has been eliminated untilsuch time as it is able to complete its assessment of the effectiveness ofinternal control over financial reporting.  While management is exercisingits best efforts to remediate the material weakness identified and describedabove, we cannot provide any assurance as to when such material weakness willbe remediated.

 

**PART II.****   ****OTHER INFORMATION**

 

**Item 1.****       ****Legal Proceedings**

 

Fromtime to time, Broadwind and its subsidiaries are involved in litigationrelating to claims arising out of our operations in the normal course ofbusiness. As of September 30, 2010, we are not aware of material pendinglegal proceedings or threatened litigation that would have a material adverseeffect on our financial condition or results of operations, although noassurance can be given with respect to the ultimate outcome of pending actions.

 

**Item 1A: Risk Factors**

 

Therewere no material changes to our risk factors as previously disclosed in Item 1Aof our Annual Report on Form 10-K for the year ended December 31,2009.

 

**Item 2.****       ****Unregistered Sales of EquitySecurities and Use of Proceeds**

 

None

 

**Item 3.****       ****Defaults Upon SeniorSecurities**

 

None

 

**Item 4.****       ****Removed and Reserved**

 

**Item 5.****       ****Other Information**

 

None

 

**Item 6.****       ****Exhibits**

 

Theexhibits listed on the Exhibit Index following the signature page arefiled as part of this Quarterly Report.

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                   | BROADWIND  ENERGY, INC. |
|------------------------|------------------------------|
|                   |                         |
|                   |                         |   |
| November 5,  2010 | By:                          | /s/  J. Cameron Drecoll |
|                   |                         | J.  Cameron Drecoll |
|                   |                         | Chief  Executive Officer |
|                   |                         |   |
|                   |                         |   |
| November 5,  2010 | By:                          | /s/  Stephanie K. Kushner |
|                   |                         | Stephanie  K. Kushner |
|                   |                         | Chief  Financial Officer |

 

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EXHIBIT INDEX

BROADWIND ENERGY, INC.

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2010

 
| **Exhibit  Number** | ** ** | **Exhibit**                                                                                                                                                                                                                                           |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                |       | Form  of Account Purchase Agreement, dated as of September 28, 2010, between Wells  Fargo National Association and each of Badger Transport, Inc.; Brad Foote  Gear Works, Inc.; Energy Maintenance Service, LLC; and Tower Tech Systems  Inc.*       |
| 10.2                |       | Form  of Continuing Guaranty, dated as of September 28, 2010, executed by each of Badger  Transport, Inc.; Brad Foote Gear Works, Inc.; Energy Maintenance Service,  LLC; and Tower Tech Systems Inc. in favour of Wells Fargo National  Association* |
| 10.3                |       | Continuing  Guaranty, dated as of September 28, 2010, executed by Broadwind Energy, Inc.  in favor of Wells Fargo National Association*                                                                                                               |
| 31.1                |       | Rule 13a-14(a) Certification  of Chief Executive Officer*                                                                                                                                                                                   |
| 31.2                |       | Rule 13a-14(a) Certification  of Chief Financial Officer*                                                                                                                                                                                   |
| 32.1                |       | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 of Chief Executive Officer*                                                                                        |
| 32.2                |       | Certification  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 of Chief Financial  Officer*                                                                                       |

 

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*              Filed herewith.

 

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