Otter Tail Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results. The company operates Electric, Wind Energy, Manufacturing, Construction and Plastics businesses; it is exiting wind-tower production through the sale of DMI’s fixed assets.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $277.1m | $282.4m | $838.4m | $814.8m |
| Operating income | $21.3m | $18.0m | $15.1m | $47.0m |
| Continuing-operations net income (loss) | $1.9m | $7.3m | $(5.5)m | $17.7m |
| Net income (loss) | $1.9m | $6.4m | $(8.2)m | $30.9m |
| Diluted EPS, continuing operations | $0.05 | $0.20 | $(0.17) | $0.47 |
| Total diluted EPS | $0.05 | $0.17 | $(0.24) | $0.83 |
- Margins: Operating margin was approximately 7.7% in Q3 2012 versus 6.4% in Q3 2011; for the nine-month periods it was approximately 1.8% versus 5.8%.
- Cash flow: Nine-month operating cash flow was $149.4m, including $148.1m from continuing operations, versus $80.4m and $62.5m, respectively, in 2011. Capital expenditures were $96.5m versus $60.4m.
- Liquidity: Cash was zero at September 30, 2012, compared with $14.7m at year-end 2011. Current assets were $299.4m and current liabilities $176.4m. At September 30, $353.8m was available under credit lines; after renewal of the facilities in October, $310.6m was available as of October 31.
- Debt and equity: Long-term debt, net of current maturities, was $421.7m, with $12.4m short-term debt and $0.2m current maturities. Total debt including those amounts was about $434.3m, down from $475.0m at December 31, 2011. The company reported compliance with debt covenants.
- Dividends: Common dividends declared were $0.2975 per share in Q3 and $0.8925 for the first nine months, unchanged from 2011.
Material changes and drivers
- Nine-month revenue rose 2.9%, but operating income fell substantially, primarily due to a $45.6m noncash DMI asset impairment, $4.4m of DMI exit and disposal costs, and weaker Construction results. Q3 operating income improved despite lower consolidated revenue; the $13.1m loss on early debt retirement reduced Q3 earnings.
- Revenue and operating income trends diverged by segment. Plastics operating income increased to $20.0m for the first nine months, while Construction recorded an $11.3m operating loss, including cost overruns at Foley. Electric operating income was $43.4m versus $49.1m; Wind Energy reported a $40.0m operating loss versus $14.3m.
- Cash from continuing operations benefited from working-capital changes, including $49.9m of DMI net working capital monetized as the business wound down. Investing outflows increased with higher electric capital spending, particularly transmission construction.
- The company prepaid its $50m, 8.89% Cascade note in July for $63.0m, including a $12.5m premium and accrued interest. The debt-retirement charge was $13.1m, or $0.22 per share after tax. Management said the retirement should reduce future interest costs.
- Divestitures of Aviva and DMS were completed in 2012; proceeds from discontinued operations were $24.3m for the nine months. Prior-period comparisons reclassify sold businesses as discontinued operations.
Outlook, commentary and risks
- Management maintained 2012 continuing-operations diluted EPS guidance of $0.84–$1.09, inclusive of the $0.22-per-share debt-retirement charge. Expected 2012 capital expenditures were $120m–$130m, versus $74m in 2011.
- The company expected to complete the DMI fixed-asset sale in late 2012 and report DMI as discontinued operations once remaining 2012 tower orders were completed. The agreed fixed-asset sale price was $20m; DMI had no 2013 tower orders amid uncertainty over the federal wind Production Tax Credit, then scheduled to expire at year-end 2012.
- Guidance reflected improved expectations for Electric and Plastics, lower Manufacturing expectations, and a larger Construction loss due to Foley cost overruns. Backlog for 2012 was $50m in Manufacturing and $39m in Construction.
- Key exposures include Foley project execution and a possible impairment of its $7.3m goodwill and $1.1m indefinite-lived trade name; warranty and remediation claims; environmental compliance spending, including the Big Stone air-quality control system; regulatory cost-recovery timing; energy and commodity price volatility; and pension funding needs.
- OTP’s share of coal purchases under a contract beginning in 2016 and extending through 2040 was estimated at approximately $710m over the contract term. The filing also identifies possible purchase of the mine under specified termination or end-of-term circumstances.
- Management stated it believed liquidity was adequate and the company was in covenant compliance. It also noted common dividends had exceeded net income in each of the prior four years; future dividends depend on earnings, cash flows, investment needs, and credit-facility restrictions.
- The filing estimates that specified contingencies, if all resulted in liabilities, could total as much as $8.0m. Management said pending litigation was not expected to materially affect consolidated results, financial position or cash flows.
Important facts for investors to verify
- Whether DMI’s remaining asset sales and wind-down completed as expected, and the final accounting and cash proceeds, including any indemnification or other sale-related obligations.
- Whether Foley’s project estimates, margins and cash flows improve enough to avoid impairment of its goodwill and trade name.
- Actual full-year results versus the $0.84–$1.09 continuing-operations EPS guidance and $120m–$130m capital-spending outlook.
- Progress, regulatory approvals, cost recovery and financing for the Big Stone environmental project and major transmission investments.
- Liquidity, debt levels and covenant headroom after the October credit-facility renewals, as well as the sustainability of dividends relative to earnings and cash flow.
- The eventual effect of the long-term Coyote coal commitment, including contract pricing and any mine-purchase obligations under specified events.