Otter Tail Corporation — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011. Otter Tail operates electric, wind energy, manufacturing, construction and plastics businesses. The company cautions that seasonality and other factors mean quarterly earnings should not be taken as an indication of full-year results. Several businesses sold in 2011 or Q1 2012 are reported as discontinued operations.
Financial results and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Operating revenue | $277.6 million | $249.1 million |
| Operating income | $17.4 million | $15.6 million |
| Continuing-operations net income | $9.5 million | $5.2 million |
| Net income, including discontinued operations | $7.2 million | $5.7 million |
| Diluted EPS from continuing operations | $0.26 | $0.14 |
| Total diluted EPS | $0.20 | $0.15 |
| Quarterly dividend declared per common share | $0.2975 | $0.2975 |
| Cash from continuing operating activities | $6.4 million | $3.1 million |
| Capital expenditures | $36.3 million | $20.6 million |
Revenue increased 11.4%; operating income increased 11.9%. Operating margin was approximately 6.3%, versus 6.2% a year earlier. Total operating cash flow, including discontinued operations, was $7.9 million. Cash and cash equivalents were zero at March 31, 2012, compared with $14.7 million at year-end 2011.
Total debt, including short-term borrowings and current maturities, was approximately $478.2 million at March 31, 2012, versus $474.9 million at December 31, 2011. Long-term debt was $471.9 million. The company reported $361.3 million available under its revolving credit facilities and said it was in compliance with debt covenants. Its consolidated interest-bearing debt-to-capitalization ratio was 0.45 to 1.00.
Material changes versus the prior comparable period
- Electric revenue fell 1.7% and segment operating income fell 8.3%. Retail electricity sales volume decreased 7.8%, mainly because heating degree days were 27.8% lower in the unusually mild winter. A Big Stone Plant outage also reduced generation and increased purchased-power needs.
- Wind Energy moved from a $5.9 million operating loss to $0.9 million operating income. U.S. tower production rose, and management cited productivity and cost-control improvements; the Canadian plant remained idled.
- Manufacturing revenue rose 19.2%, but operating income declined 11.5% to $5.0 million as operating expenses increased.
- Construction recorded a $6.8 million operating loss, versus a $0.3 million loss, with Foley project cost overruns weighing on results.
- Plastics operating income improved to $5.8 million from a $0.3 million loss, supported by higher PVC pipe sales volume and prices.
- Discontinued operations included a $3.1 million after-tax loss on disposition, principally related to the sale of DMS. DMS was sold in February and Aviva’s assets in January 2012.
Outlook, management commentary, risks and unusual items
Management raised the low end of its 2012 diluted continuing-operations EPS outlook to $1.05, from $1.00; the high end remains $1.40. Updated segment ranges include Electric $1.00–$1.05, Wind Energy $(0.10)–$0.00, Manufacturing $0.36–$0.41, Construction $(0.13)–$(0.08), and Plastics $0.18–$0.23 per share. The company also expects a discontinued-operations disposal loss of $0.08–$0.10 per share. Expected 2012 capital expenditures are $125–$135 million, versus $74 million in 2011.
Management expects slightly lower Electric segment net income for 2012, continued Wind Energy improvement despite industry overcapacity and pricing pressure, stronger Manufacturing and Plastics results, and a Construction segment net loss. Backlogs cited for 2012 were $114 million for Wind Energy, $111 million for Manufacturing and $83 million for Construction.
- Otter Tail made a discretionary $10.0 million pension contribution in January. Management said no further 2012 contribution was required, but future funding needs may change with plan asset performance and other factors.
- The EPA approved South Dakota’s regional haze plan for Big Stone Plant; the company expects to build an air-quality control system and pursue recovery of costs through rates. Related permitting and recovery processes were ongoing in other jurisdictions.
- The company identifies regulatory and environmental requirements, capital-market access and borrowing costs, pension obligations, operating outages, construction overruns, warranty claims, commodity prices, wind-industry incentives and customer concentration as risks. The federal wind Production Tax Credit was scheduled to expire December 31, 2012.
- Potential losses for significant contingencies—including warranty, environmental, litigation, liquidated-damages and tax matters—could be as high as $7.0 million, although management said the disposition of pending ordinary-course litigation was not expected to materially affect results or financial position.
- DMI’s $40 million receivables-sale agreement was terminated effective April 26, 2012; the company reported $35.8 million of receivables sold outstanding at March 31 and said DMI negotiated accelerated customer payments at a discount.
- Management noted common dividends had exceeded net income in each of the previous four years. Future dividends depend on earnings, cash flow, investment needs, credit restrictions and board review.
Important facts for investors to verify
- Whether Foley’s project cost overruns are contained, and whether the reduced construction backlog affects future earnings.
- Whether DMI can maintain production and margins amid wind-tower overcapacity, customer concentration and the loss of its receivables-sale facility.
- Actual capital spending and financing needs against the $125–$135 million plan, including the effect on debt, liquidity and dividends.
- Timing, final cost and regulatory recovery of Big Stone Plant’s air-quality control system and the planned transmission investments.
- Whether the $1.05–$1.40 continuing-operations EPS outlook is achieved, particularly given weather sensitivity, the scheduled wind tax-credit expiration and segment-specific backlogs.
- Potential cash and earnings effects from pension funding, warranties, environmental matters and other contingencies; the filing states quarterly results are seasonal and not necessarily indicative of the full year.