Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2002
-----------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission file number 0-368
---------------------------------------------------------
OTTER TAIL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0462685
- ------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
215 South Cascade Street, Box 496, Fergus Falls, Minnesota 56538-0496
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
218-739-8200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
JULY 31, 2002 - 25,324,346 COMMON SHARES ($5 PAR VALUE)
OTTER TAIL CORPORATION
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 (Unaudited) 2 & 3
Consolidated Statements of Income - Three and Six Months
Ended June 30, 2002 and 2001 (Unaudited) 4
Consolidated Statements of Cash Flows - Three and Six Months Ended
June 30, 2002 and 2001 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24-25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 26-27
SIGNATURES 27
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-ASSETS-
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ 998 $ 11,378
Accounts receivable:
Trade - net 77,014 64,215
Other 5,126 5,047
Inventories 42,074 39,301
Deferred income taxes 4,118 4,020
Accrued utility revenues 8,544 11,055
Other 15,967 8,878
------------ -----------
TOTAL CURRENT ASSETS 153,841 143,894
INVESTMENTS 17,748 18,009
GOODWILL -- NET 57,700 48,221
OTHER INTANGIBLES -- NET 5,756 1,584
OTHER ASSETS 18,468 15,687
DEFERRED DEBITS:
Unamortized debt expense and reacquisition premiums 5,446 5,646
Regulatory assets 5,959 5,117
Other 230 1,406
------------ -----------
TOTAL DEFERRED DEBITS 11,635 12,169
PLANT:
Electric plant in service 814,688 810,470
Diversified operations 163,851 145,712
------------ -----------
TOTAL PLANT 978,539 956,182
Less accumulated depreciation and amortization 457,414 441,863
------------ -----------
521,125 514,319
Construction work in progress 50,916 28,658
------------ -----------
NET PLANT 572,041 542,977
------------ -----------
TOTAL $ 837,189 $ 782,541
============ ===========
See accompanying notes to consolidated financial statements.
- 2 -
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-LIABILITIES-
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(Thousands of dollars)
CURRENT LIABILITIES
Short-term debt $ 20,000 $ -
Sinking fund requirements and current maturities 29,439 28,946
Accounts payable 53,450 46,871
Accrued salaries and wages 11,369 17,397
Accrued federal and state income taxes 12,384 1,634
Other accrued taxes 7,539 9,854
Other accrued liabilities 6,740 6,090
----------- -----------
TOTAL CURRENT LIABILITIES 140,921 110,792
NONCURRENT LIABILITIES 34,195 32,981
DEFERRED CREDITS
Accumulated deferred income taxes 86,290 85,591
Accumulated deferred investment tax credit 13,359 13,935
Regulatory liabilities 9,586 9,914
Other 8,145 7,160
----------- -----------
TOTAL DEFERRED CREDITS 117,380 116,600
CAPITALIZATION
Long-term debt, net of sinking fund and current maturities 225,587 227,360
Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2002 and 2001 -- 155,000 shares 15,500 15,500
Cumulative preference shares - authorized 1,000,000
shares without par value;outstanding - none - -
Common shares, par value $5 per share
authorized 50,000,000 shares;
outstanding 2002 -- 25,321,860 and 2001 -- 24,653,490 126,609 123,267
Premium on common shares 17,915 1,526
Unearned compensation (2,600) (151)
Retained earnings 163,657 156,641
Accumulated other comprehensive loss (1,975) (1,975)
----------- -----------
TOTAL 303,606 279,308
TOTAL CAPITALIZATION 544,693 522,168
----------- -----------
TOTAL $ 837,189 $ 782,541
=========== ===========
See accompanying notes to consolidated financial statements.
-3-
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30
--------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(in thousands, except share and per share amounts)
OPERATING REVENUES
Electric $ 71,889 $ 69,377 $ 146,290 $ 152,008
Plastics 24,405 18,663 40,280 32,624
Health services 23,633 19,626 44,752 37,526
Manufacturing 35,742 30,287 67,070 58,552
Other business operations 20,903 19,379 35,913 36,276
----------- ----------- ----------- -----------
Total operating revenues 176,572 157,332 334,305 316,986
OPERATING EXPENSES
Production fuel 10,945 9,440 22,462 20,945
Purchased power 23,625 22,177 42,559 48,568
Other electric operation and maintenance expenses 18,583 18,835 38,555 34,400
Cost of goods sold 72,843 64,079 131,979 120,837
Other nonelectric expenses 17,875 14,375 34,395 28,414
Depreciation and amortization 10,506 10,364 20,690 20,538
Property taxes 2,347 2,342 4,882 5,126
----------- ----------- ----------- -----------
Total operating expenses 156,724 141,612 295,522 278,828
OPERATING INCOME (LOSS)
Electric 10,168 10,514 25,461 30,886
Plastics 4,935 (51) 6,827 (1,214)
Health services 2,613 1,536 5,050 3,290
Manufacturing 3,075 3,303 4,981 6,328
Other business operations (943) 418 (3,536) (1,132)
----------- ----------- ----------- -----------
Total operating income 19,848 15,720 38,783 38,158
OTHER INCOME AND DEDUCTIONS - NET 358 877 409 1,195
INTEREST CHARGES 4,347 4,088 8,671 8,190
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 15,859 12,509 30,521 31,163
INCOME TAXES 5,272 3,352 9,902 10,006
----------- ----------- ----------- -----------
NET INCOME 10,587 9,157 20,619 21,157
Preferred dividend requirements 184 469 368 939
----------- ----------- ----------- -----------
EARNINGS AVAILABLE FOR COMMON SHARES $ 10,403 $ 8,688 $ 20,251 $ 20,218
=========== =========== =========== ===========
Basic earnings per common share: $ 0.41 $ 0.35 $ 0.81 $ 0.82
Diluted earnings per common share: $ 0.41 $ 0.35 $ 0.81 $ 0.82
Average number of common shares outstanding - basic 25,117,325 24,585,577 24,892,640 24,581,192
Average number of common shares outstanding - diluted 25,411,877 24,799,089 25,154,599 24,785,042
Dividends per common share $ 0.265 $ 0.260 $ 0.53 $ 0.52
See accompanying notes to consolidated financial statements.
-4-
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
2002 2001
----------- -----------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,619 $ 21,157
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 20,690 20,538
Deferred investment tax credit - net (576) (576)
Deferred income taxes (408) (462)
Change in deferred debits and other assets (1,838) (5,297)
Change in noncurrent liabilities and deferred credits 2,147 1,289
Allowance for equity (other) funds used during construction (1,004) (323)
Losses from investments and disposal of noncurrent assets 596 236
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (5,360) (916)
Change in other current assets (5,623) (970)
Change in payables and other current liabilities (3,996) (8,585)
Change in interest and income taxes payable 10,407 4,675
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 35,654 30,766
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (40,162) (23,119)
Proceeds from disposal of noncurrent assets 915 497
Acquisitions, net of cash acquired (4,263) -
(Purchase) sale of other investments 1,085 (1,160)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (42,425) (23,782)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 15,515 16,486
Proceeds from employee stock plans 2,241 164
Proceeds from issuance of long-term debt - 5,292
Payments for retirement of long-term debt (7,762) (11,912)
Dividends paid (13,603) (13,632)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (3,609) (3,602)
NET CHANGE IN CASH AND CASH EQUIVALENTS (10,380) 3,382
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,378 1,259
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 998 $ 4,641
=========== ===========
See accompanying notes to consolidated financial statements.
- 5 -
OTTER TAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Otter Tail Corporation (the Company), in its opinion, has included all
adjustments (including normal recurring accruals) necessary for a fair
presentation of the consolidated results of operations for the periods
presented. The consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes for the
years ended December 31, 2001, 2000, and 1999 included in the Company's 2001
Annual Report to the Securities and Exchange Commission on Form 10-K. Because of
seasonal and other factors, the earnings for the three-month and six-month
periods ended June 30, 2002, should not be taken as an indication of earnings
for all or any part of the balance of the year.
Acquisitions
On May 1, 2002 the Company acquired 100% of the outstanding stock of Computed
Imaging Service, Inc. of Houston, Texas for 158,257 shares of Otter Tail
Corporation common stock and approximately $1.2 million in cash. Computed
Imaging Service provides computed tomography and magnetic resonance imaging
mobile services, interim rental, and sales and service of new, used, and
refurbished diagnostic imaging equipment. Computed Imaging Service serves
hospitals and other healthcare facilities in the south central United States.
The acquisition of Computed Imaging Service allows the Company to expand its
existing health services operations into another region of the country. Computed
Imaging Service's annual revenues were approximately $5.9 million in 2001.
On May 28, 2002 the Company acquired 100% of the outstanding stock of
Shore-Masters, Inc. (ShoreMaster), of Fergus Falls, Minnesota for 303,124 shares
of Otter Tail Corporation common stock and $2.3 million in cash. ShoreMaster is
a leading manufacturer of waterfront equipment ranging from residential-use
boatlifts and docks to commercial marina systems. The acquisition of ShoreMaster
is expected to provide diversification and growth opportunities for the
Company's manufacturing segment. ShoreMaster's annual revenues were
approximately $20 million in 2001.
Below is a condensed balance sheet disclosing the amount assigned to each major
asset and liability category of each of the acquired companies.
Computed Imaging
(in thousands) Service, Inc. ShoreMaster
-------------- ---------------- -----------
Assets
Current Assets $ 1,439 $ 9,489
Plant 3,976 4,615
Goodwill 5,589 3,500
Other Intangible Assets 30 4,461
---------- ----------
Total Assets $ 11,034 $ 22,065
========== ==========
Liabilities and Equity
Current Liabilities $ 3,740 $ 9,642
Long-Term Debt 2,587 2,723
Other Long-Term Liabilities 750 --
Equity 3,957 9,700
---------- ----------
Total Liabilities and Equity $ 11,034 $ 22,065
========== ==========
6
Common Shares and Earnings per Share
On April 8, 2002 the Company's Board of Directors granted 278,750 stock options
to key management employees and 75,800 shares of restricted stock to certain key
executives and non-employee directors under the 1999 Stock Incentive Plan. The
exercise price of the stock options is equal to the fair market value per share
at the date of the grant. The options and restricted stock vest ratably over a
four-year period. The options expire ten years after the date of the grant. As
of July 31, 2002 a total of 1,370,727 options were outstanding and a total of
100,513 shares of restricted stock had been issued under the Plan. The Company
accounts for the Plan under Accounting Principles Board Opinion No. 25.
Basic earnings per common share are calculated by dividing earnings available
for common shares by the average number of common shares outstanding during the
period. Diluted earnings per common share are calculated by adjusting
outstanding shares, assuming conversion of all potentially dilutive stock
options.
Comprehensive Income
The only element of comprehensive income for the three and six months ended June
30, 2002 was net income of $10.6 million and $20.6 million, respectively; as
compared to $9.2 million and $21.2 million for the three and six months ended
June 30, 2001, respectively.
Goodwill and Other Intangible Assets- Adoption of Statement of Financial
Accounting Standards No. 142
In June 2001 the Financial Accounting Standards Board (FASB) approved the
issuance of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These
standards, issued in July 2001, established accounting and reporting for
business combinations. SFAS No. 141 requires that all business combinations
entered into subsequent to June 30, 2001 be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other intangible
assets with indefinite lives will not be amortized, but tested for impairment on
an annual basis. Intangible assets with finite useful lives will be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company adopted SFAS No. 142 on January 1, 2002.
The Company determined that as of January 1, 2002 goodwill was not impaired and
therefore no write-off was necessary. The impact of not amortizing goodwill
would have resulted in an increase in net income for the three months ended June
30, 2001 of $599,000 and $1.2 million for the six months ended June 30, 2001.
The following table presents the effects of not amortizing goodwill on reported
net income and basic and diluted earnings per share.
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
--------- -------- --------- ---------
Net income:
Reported net income $ 10,587 $ 9,157 $ 20,619 $ 21,157
Add back: goodwill amortization, net of tax -- 599 -- 1,194
--------- -------- --------- ---------
Adjusted net income $ 10,587 $ 9,756 $ 20,619 $ 22,351
========= ======== ========= =========
Basic earnings per share:
Reported basic earnings per share $ 0.41 $ 0.35 $ 0.81 $0.82
Add back: goodwill amortization, net of tax -- 0.03 -- 0.05
--------- -------- --------- ---------
Adjusted basic earnings per share: $ 0.41 $ 0.38 $ 0.81 $0.87
========= ======== ========= =========
7
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
(in thousands, except per share amounts) 2002 2001 2002 2001
--------- -------- --------- ---------
Diluted earnings per share:
Reported diluted earnings per share $ 0.41 $ 0.35 $ 0.81 $ 0.82
Add back: goodwill amortization, net of tax -- 0.02 -- 0.04
--------- -------- --------- ---------
Adjusted diluted earnings per share: $ 0.41 $ 0.37 $ 0.81 $ 0.86
========= ======== ========= =========
The changes in the carrying amount of goodwill by segment were
Adjustment to
Balance goodwill Goodwill Balance
December 31, acquired acquired June 30,
(in thousands) 2001 in 2001 in 2002 2002
- -------------- ------------ ------------- -------- ---------
Plastics $ 19,302 $ 19,302
Health services 13,311 $ 350 $ 5,589 19,250
Manufacturing 1,627 40 3,500 5,167
Other business operations 13,981 -- -- 13,981
--------- ------ -------- ---------
Total $ 48,221 $ 390 $ 9,089 $ 57,700
========= ====== ======== =========
Goodwill recorded during 2002 relating to the acquisitions of Computed Imaging
Service, Inc. and ShoreMaster was $5,589,000 and $3,500,000, respectively.
The following is a summary of the components of the Company's intangible assets
at June 30, 2002 and December 31, 2001.
June 30, 2002 December 31, 2001
--------------------------------- ---------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in thousands) amount amortization amount amount amortization amount
- -------------- -------- ------------ -------- -------- ------------ --------
Amortized intangible assets:
Covenants not to complete $ 1,819 $ 1,021 $ 798 $ 1,575 $ 933 $ 642
Organization costs 289 139 150 281 118 163
Other intangible assets including contracts 1,790 602 1,188 1,230 451 779
-------- -------- -------- -------- -------- --------
Total $ 3,898 $ 1,762 $ 2,136 $ 3,086 $ 1,502 $ 1,584
======== ======== ======== ======== ======== ========
Non-amortized intangible assets:
Brandname $ 3,620 $ -- $ 3,620 $ -- $ -- $ --
======== ======== ======== ======== ======== ========
Intangible assets with finite lives are being amortized over average lives that
vary from one to 5 years. The amortization expense for these intangible assets
was $260,000 for the six months ended June 30, 2002 compared to $164,000 for the
six months ended June 30, 2001. The estimated annual amortization expense for
these intangible assets for the next five years is $534,000 for 2002; $471,000
for 2003; $457,000 for 2004; $353,000 for 2005; and $204,000 for 2006.
Segment Information
The Company's business operations consist of five segments based on products and
services. Electric includes the electric utility operating in Minnesota, North
Dakota, and South Dakota. Plastics consists of businesses involved in the
production of PVC pipe in the Upper Midwest and Southwest regions of the United
States. Health services include businesses involved in the sale of diagnostic
medical equipment, supplies and accessories. In addition these businesses also
provide service maintenance, mobile diagnostic imaging, mobile positron emission
tomography and nuclear medicine imaging, portable x-ray imaging and rental of
diagnostic medical imaging
8
equipment to various medical institutions located in 31 states. Manufacturing
consists of businesses involved in the production of waterfront equipment, wind
towers, frame-straightening equipment and accessories for the auto repair
industry, custom plastic pallets, material and handling trays, and horticultural
containers, fabrication of steel products, contract machining, and metal parts
stamping and fabrication located in the Upper Midwest and Utah. Other business
operations consists of businesses in electrical and telephone construction
contracting, transportation, telecommunications, entertainment, energy services,
and natural gas marketing, as well as the portion of corporate administrative
and general expenses that are not allocated to other segments. The electrical
and telephone construction contracting companies and energy services and natural
gas marketing business operate primarily in the Upper Midwest. The
telecommunications companies operate in central and northeast Minnesota and the
transportation company operates in 48 states and 6 Canadian provinces. The
Company evaluates the performance of its business segments and allocates
resources to them based on earnings contribution and return on total invested
capital.
Operating Income (Loss)
Three months ended Six months ended
June 30, June 30,
----------------------- ----------------------
(in thousands) 2002 2001 2002 2001
--------- --------- --------- ---------
Electric $ 10,168 $ 10,514 $ 25,461 $ 30,886
Plastics 4,935 (51) 6,827 (1,214)
Health services 2,613 1,536 5,050 3,290
Manufacturing 3,075 3,303 4,981 6,328
Other business operations (943) 418 (3,536) (1,132)
--------- --------- --------- ---------
Total $ 19,848 $ 15,720 $ 38,783 $ 38,158
========= ========= ========= =========
Identifiable Assets
June 30, December 31,
(in thousands) 2002 2001
---------- -----------
Electric $ 540,456 $ 523,948
Plastics 53,598 45,649
Health services 59,098 50,560
Manufacturing 101,998 67,033
Other business operations 82,039 95,351
------ ------
Total $ 837,189 $ 782,541
======== ========
Substantially all sales and long-lived assets of the Company are within the
United States.
Financing
On May 1, 2002 the Company established a new $50 million line of credit. This
line of credit makes available to the Company bank loans for short-term
financing for business operations. It bears interest at the rate of LIBOR plus
0.5% and expires on April 30, 2003. The line of credit contains various
covenants, including interest-bearing debt to total capitalization and interest
charges coverage ratios. The interest rate is subject to adjustment in the event
of a change in ratings on the Company's senior unsecured debt, up to LIBOR plus
0.8% if the ratings on the Company's senior unsecured debt fall to BBB+ or below
(Standard & Poor's) or Baa1 or below (Moody's). The line of credit also provides
for accelerated repayment in the event the Company's senior unsecured debt is
rated below BBB- by Standard & Poor's or Baa3 by Moody's.
9
On June 19, 2002 the Company filed with the SEC a Form S-3 shelf registration
statement for $200 million of unsecured debt securities. It is expected that a
significant portion of the shelf registration will be utilized to refinance
existing debt. In addition proceeds received from the sale of the debt
securities may be used for other general corporate purposes, including working
capital, capital expenditures, the financing of possible acquisitions or stock
repurchases.
Inventories
Inventories consist of the following:
June 30, December 31,
(in thousands) 2002 2001
-------------- --------- ------------
Finished goods $ 13,447 $ 12,644
Work in process 1,926 1,732
Raw material, fuel and supplies 26,701 24,925
--------- ---------
$ 42,074 $ 39,301
========= =========
Regulatory Assets and Liabilities
As a regulated entity the Company and the electric utility account for the
financial effects of regulation in accordance with SFAS No. 71, Accounting for
the Effect of Certain Types of Regulation. This statement allows for the
recording of a regulatory asset or liability for costs that will be collected or
refunded through the ratemaking process in the future.
The following table indicates the amount of regulatory assets and liabilities
recorded on the Company's consolidated balance sheet:
June 30, December 31,
(in thousands) 2002 2001
- -------------- -------- ------------
Regulatory assets:
Deferred income taxes $ 5,959 $ 5,117
Long-term debt refinancing costs 3,137 3,353
------- -------
Total regulatory assets $ 9,096 $ 8,470
------- -------
Regulatory liabilities:
Deferred income taxes $ 9,410 $ 9,735
Gain on sale of division office building 176 179
Gain on long-term debt refinancing 3 6
------- -------
Total regulatory liabilities $ 9,589 $ 9,920
------- -------
Net regulatory position $ (493) $(1,450)
======= =======
The regulatory assets and liabilities related to deferred income taxes are the
result of the adoption of SFAS No. 109, Accounting for Income Taxes. The
remaining regulatory assets and liabilities are being recovered from ratepayers
over the next 32 years.
If for any reason, the Company's regulated businesses cease to meet the criteria
for
10
application of SFAS No. 71 for all or part of their operations, the regulatory
assets and liabilities that no longer meet such criteria would be removed from
the consolidated balance sheet and included in the consolidated statement of
income as an extraordinary item in the period in which the application of SFAS
No. 71 ceases.
Revenue Recognition
Due to the diverse business operations of the Company revenue recognition
depends on the product produced or sold. The Company recognizes revenue when the
earnings process is complete, evidenced by an agreement with the customer, there
has been delivery and acceptance, and the price is fixed and determinable. In
cases where significant obligations remain after delivery, revenue is deferred
until such obligations are fulfilled. Provisions for sale returns and warranty
costs are recorded at the time of sale based on historical information and
current trends.
For those operating businesses recognizing revenue when shipped, the operating
businesses have no further obligation to provide services related to such
product. The shipping terms used in these instances are FOB shipping point.
Some of the operating businesses provide services under fixed-price construction
contracts. Revenues under these contracts are recognized on a
percentage-of-completion basis. The method used to determine the progress of
completion is based on the ratio of costs incurred to total estimated costs. The
following summarizes costs incurred and billings on uncompleted contracts:
June 30, December 31,
(in thousands) 2002 2001
- -------------- ---------- ------------
Costs incurred on uncompleted contracts $ 46,794 $ 27,808
Less billings to date (50,365) (38,808)
Plus earnings recognized 8,160 5,672
--------- ---------
$ 4,589 $ (5,328)
========= =========
The following costs incurred and billings are included in the Company's
consolidated balance sheet:
June 30, December 31,
(in thousands) 2002 2001
-------------- -------- ------------
Costs in excess of billings on uncompleted contracts $ 7,960 $ 1,951
Billings in excess of costs on uncompleted contracts (3,371) (7,279)
------- -------
$ 4,589 $(5,328)
======= =======
The percent of revenue recognized under the percentage-of-completion method
compared to total consolidated revenues for the six months ended June 30, 2002
was 11% compared with 8.9% for the six months ended June 30, 2001.
Shipping and Handling Costs
The Company includes revenues received for shipping and handling in operating
revenues. Expenses paid for shipping and handling are recorded as part of cost
of goods sold.
Supplemental Cash Flow Information
Changes in operating assets and liabilities are net of acquisitions.
"Acquisitions, net of cash acquired" in the Statement of Cash Flows is net of
cash acquired and includes debt assumed and immediately repaid in acquisitions.
Noncash transactions in 2002 include the acquisition of Computed Imaging
Service, Inc for 158,257 shares of Otter Tail Corporation common stock valued at
approximately $5.1 million and the acquisition of ShoreMaster for 303,124 shares
of Otter Tail Corporation common stock valued at $9.7 million.
11
Certain additional supplemental disclosures of cash flow information are shown
below.
Six months ended
June 30,
------------------------
(in thousands) 2002 2001
- -------------- -------- --------
Cash paid for interest and income taxes:
Interest $ 5,084 $ 6,390
Income taxes $ 403 $ 5,504
Reclassifications
Certain prior year amounts have been reclassified to conform to 2002
presentation. Such reclassifications had no impact on net income, shareholders'
equity or cash provided by operating activities.
New Accounting Standards
In July 2001 the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which provides accounting requirements for retirement obligations
associated with tangible long-lived assets. This statement is effective for
fiscal years beginning after June 15, 2002. Retirement obligations associated
with long-lived assets included within the scope of SFAS No. 143 are those for
which there is a legal obligation to settle under existing or enacted law,
statute, written or oral contract or by legal constructions under the doctrine
of promissory estoppel. Adoption of SFAS No. 143 will change the accounting for
decommissioning costs of the utility's generating plants as well as certain
other long-lived assets. Currently, decommissioning amounts collected in the
utility's rates are reported in accumulated depreciation, which upon adoption of
SFAS No. 143 will require a reclassification to a liability. The Company is in
the process of evaluating what assets may have associated retirement costs as
defined by SFAS No. 143 and has not determined the ultimate impact of adoption
at this time.
The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets in October 2001. SFAS No. 144 replaces SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. This statement develops one accounting model for long-lived
assets to be disposed of by sale and also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity in a disposal transaction. The Company
adopted the accounting model for impairment or disposal of long-lived assets on
January 1, 2002. Adoption of this statement did not have a material effect on
the Company's consolidated financial statements.
On April 30, 2002 the FASB issued SFAS No. 145, Recession of SFAS Nos. 4, 44 and
64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145 eliminates
SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, and allows
for only those gains or losses on the extinguishment of debt that meet the
criteria of extraordinary items to be treated as such in the financial
statements. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, to
require sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The provisions
of SFAS No. 145 relating to the recession of SFAS No. 4 are effective for fiscal
years beginning after May 15, 2002, the provisions of SFAS No. 145 relating to
the amendment of SFAS No. 13 are effective for transactions occurring after May
15, 2002 and all other provisions of SFAS 145 are effective for financial
statements issued on or after May 15, 2002. SFAS No. 145 is not expected to have
a material effect on the Company's consolidated results of operations, financial
position or cash flows.
On July 30, 2002 the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 replaces Emerging Issue Task
Force (EITF) No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring).
12
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan as was required by EITF No. 94-3. SFAS
No. 146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. SFAS No. 146 is not expected to have a material effect
on the Company's consolidated results of operations, financial position or cash
flows.
Subsequent Event
Fitch Ratings and Moody's Investors Service lowered the Company's long-term debt
ratings one level in July 2002. Both of these actions, which were expected by
the Company, reflect anticipated higher business and financial risks related to
the Company's non-utility investments. These rating changes did not lead to any
required action under rating triggers or increased interest rates on current
debt outstanding. Otter Tail Corporation's current ratings are:
Moody's
Fitch Investors Standard
Ratings Service & Poor's
------- --------- --------
First mortgage bonds AA- A1 A+
Senior unsecured A+ A2 A
Preferred stock A Baa1 A-
Outlook Stable Negative Stable
The Company's disclosure of these security ratings is not a recommendation to
buy, sell or hold its securities. Further downgrades in these credit ratings
could adversely affect the Company's ability to borrow and the Company's future
borrowing costs would likely increase with resulting reductions in the Company's
net income in future periods.
On August 1, 2002 the Company retired at maturity its $18.2 million 7.25% Series
First Mortgage Bonds.
Forward Looking Information - Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the Act), the Company has filed cautionary
statements identifying important factors that could cause the Company's actual
results to differ materially from those discussed in forward-looking statements
made by or on behalf of the Company. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases and in oral statements, words such as "may", "will",
"expect", "anticipate", "continue", "estimate", "project", "believes" or similar
expressions are intended to identify some of the forward-looking statements
within the meaning of the Act and are included, along with this statement, for
purposes of complying with the safe harbor provision of the Act. Factors that
might cause such differences include, but are not limited to, the Company's
ongoing involvement in diversification efforts, the timing and scope of
deregulation and open competition, growth of electric revenues, impact of the
investment performance of the utility's pension plan, changes in the economy,
governmental and regulatory action, weather conditions, fuel and purchased power
costs, environmental issues, resin prices, and other factors discussed under
"Factors affecting future earnings" on pages 26-27 of the Company's 2001 Annual
Report to Shareholders, which is incorporated by reference in the Company's Form
10-K for the fiscal year ended December 31, 2001. These factors are in addition
to any other cautionary statements, written or oral, which may be made or
referred to in connection with any such forward-looking statement or contained
in any subsequent filings by the Company with the Securities and Exchange
Commission. The Company is not obligated to publicly update or revise any
forward-looking statements.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Material Changes in Financial Position
The Company estimates that funds internally generated net of forecasted dividend
payments, combined with funds on hand at December 31, 2001, will be sufficient
to meet scheduled debt retirements and almost completely provide for its
estimated 2002-2006 consolidated capital expenditures. Reduced demand for
electricity or for the products manufactured or sold by the Company could have
an effect on funds internally generated. Additional short-term or long-term
financing will be required in the period 2002-2006 in order to complete planned
capital expenditures, in the event the Company decides to refund or retire early
any of its presently outstanding debt or cumulative preferred shares, to
complete acquisitions, or for other corporate purposes. There can be no
assurance that any additional required financing will be available through bank
borrowings, debt or equity financing or otherwise, or that if such financing is
available, it will be available on terms acceptable to the Company. If adequate
funds are not available on acceptable terms, our business, results of
operations, and financial condition could be adversely affected.
On May 1, 2002 the Company established a new $50 million line of credit that
replaced three separate lines of credit. This new line of credit bears interest
at the rate of LIBOR plus 0.5% and expires on April 30, 2003. As of June 30,
2002 a balance of $30 million was available under this line of credit. The new
line of credit contains a number of covenants that restrict the Company's
ability to engage in certain transactions, dispose of certain assets, and create
liens on certain assets. In addition, the Company is required to comply with
specified financial covenants, including maintaining a debt-to-total
capitalization ratio not in excess of 60% and an interest and dividend coverage
ratio of at least 1.5 to 1. The Company is currently in compliance with all of
the covenants under the line of credit.The interest rate under the line of
credit is subject to adjustment in the event of a change in ratings on the
Company's senior unsecured debt, up to LIBOR plus 0.8% if the ratings on the
Company's senior unsecured debt fall to BBB+ or below (Standard & Poor's) or
Baa1 or below (Moody's). The line of credit also provides for accelerated
repayment in the event the Company's senior unsecured debt is rated below BBB-
by Standard & Poor's or Baa3 by Moody's.
On June 19, 2002 the Company filed with the SEC a Form S-3 shelf registration
statement for $200 million of unsecured debt securities. It is expected that a
significant portion of the shelf registration will be utilized to refinance
existing debt. In addition proceeds received from the sale of the debt
securities may be used for other general corporate purposes, including working
capital, capital expenditures, the financing of possible acquisitions, or stock
repurchases.
Cash provided by operating activities of $35.7 million for the six months ended
June 30, 2002 combined with cash on hand of $11.4 million as of December 31,
2001 allowed the Company to pay dividends and fund a majority of its capital
expenditures. Net cash provided by operating activities increased $4.9 million
for the six months ended June 30, 2002 compared to the six months ended June 30,
2001 primarily as a result of changes in working capital items and other
deferred debits.
Net cash used in investing activities was $42.4 million for the six months ended
June 30, 2002 compared with net cash used in investing activities of $23.8
million for the six months ended June 30, 2001. The majority of this change is
due to increased capital expenditures. Capital expenditures increased $17
million between the periods. Capital expenditures increased $6.8 million in the
manufacturing segment due to building expansions at the companies that
manufacture wind energy towers and perform metal parts stamping and fabrication.
Nearly $6.3 million of the increase in capital expenditures occurred in the
electric segment reflecting ongoing construction expenditures for a gas-fired
combustion turbine peaking plant and a new transmission line in North
Dakota.Capital expenditures in the plastics segment increased $3.1 million
reflecting the purchase of buildings and land that had previously been leased.
14
Net cash used in financing activities was similar between the periods. On August
1, 2002 the Company retired at maturity its $18.2 million 7.25% Series First
Mortgage Bonds. The Company intends to issue senior unsecured debt securities
under its shelf registration to refinance the short-term borrowings incurred
under its line of credit to retire the 7.25% Series First Mortgage Bonds.
The Company's ratio of earnings to fixed charges was 3.8x for the six months
ended June 30, 2002 compared to 4.1x for the six months ended June 30, 2001. The
decrease was due primarily to a decrease in pretax income from continuing
operations between the periods. The decrease was also due to an increase in the
level of interest bearing debt outstanding between the periods, which resulted
in higher interest charges during the six months ended June 30, 2002.
There are no material changes in the Company's contractual obligations on
long-term debt, coal contracts, construction program commitments, capacity and
energy requirements, and operating leases from those reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. For more
information on contractual obligations and commitments, see Item 7 in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Fitch Ratings and Moody's Investors Services lowered the Company's long-term
debt ratings one level in July 2002. Both of these actions, which were expected
by the Company, reflect anticipated higher business and financial risks related
to the Company's non-utility investments. These rating changes did not lead to
any required action under rating triggers or increased interest rates on current
debt outstanding. Otter Tail Corporation's current ratings are:
Moody's
Fitch Investors Standard
Ratings Service & Poor's
------------ ------------ ------------
First mortgage bonds AA- A1 A+
Senior unsecured A+ A2 A
Preferred stock A Baa1 A-
Outlook Stable Negative Stable
The Company does not expect changes to these ratings when securities are
initially issued under the recently filed shelf registration. The Company's
disclosure of these security ratings is not a recommendation to buy, sell or
hold its securities. Further downgrades in these credit ratings could adversely
affect the Company's ability to borrow and the Company's future borrowing costs
would likely increase with resulting reductions in the Company's net income in
future periods.
15
Material Changes in Results of Operations
Comparison of the Three Months Ended June 30, 2002 and 2001
Consolidated Results of Operations
Total operating revenues were $176.6 million for the three months ended June 30,
2002, an increase of $19.3 million (12.2%) from the $157.3 million for the three
months ended June 30, 2001. Operating income was $19.8 million for the three
months ended June 30, 2002 compared with $15.7 million for the three months
ended June 30, 2001. The Company recorded diluted earnings per share of $0.41
for the three months ended June 30, 2002 compared to $0.35 for the three months
ended June 30, 2001. The benefit resulting solely from the discontinuance of
goodwill amortization is $0.02 per common share during the quarter.
Following is a discussion of the results of operations by segment.
Electric
Three months ended
June 30,
(in thousands) 2002 2001 Change
- -------------- --------- --------- --------
Operating revenues $ 71,889 $ 69,377 $ 2,512
Production fuel 10,945 9,440 1,505
Purchased power 23,625 22,177 1,448
Other electric operation and maintenance expenses 18,583 18,835 (252)
Depreciation and amortization 6,221 6,069 152
Property taxes 2,347 2,342 5
--------- --------- -------
Operating income $ 10,168 $ 10,514 $ (346)
========= ========= =======
The 3.6% increase in electric operating revenues for the three months ended June
30, 2002 compared with the three months ended June 30, 2001 is due to a $2.4
million (110%) increase in other electric operating revenues, a $1 million
(2.3%) increase in retail electric revenues and a $931,000 (4.1%) decrease in
wholesale power revenues.
The increase in other electric operating revenues relates to the construction of
a transmission line in North Dakota for another area utility. The increase in
retail electric revenue resulted from a 4% increase in retail megawatt-hours
(mwh) sold between the periods offset slightly by a 1.6% reduction in revenue
per mwh sold. Retail mwh sold increased in the residential, small commercial and
farms categories. The unusual weather during the second quarter of 2002 resulted
in increases in both heating and cooling degree-days, which contribute to the
increase or decrease in usage by residential customers. Heating degree-days in
the area served by the electric utility increased 28% and cooling degree-days
increased 38.2%. The decrease in wholesale power revenues primarily resulted
from a 25.3% decrease in revenue per mwh sold reflecting the soft wholesale
power market during the three months ended June 30, 2002 compared with the three
months ended June 30, 2001. Wholesale mwh sold increased 28.4% between the
periods.
The $1.5 million (15.9%) increase in production fuel for the three months ended
June 30, 2002 compared with the three months ended June 30, 2001 reflects a 2.7%
increase in generation combined with a 14% increase in fuel costs per mwh
produced at the electric utility's coal-fired generating plants. The increase in
fuel costs per mwh produced reflects the new coal contract at the Big Stone
plant that went into effect at the beginning of 2002.
16
The cost of purchased power increased 6.5% for the three months ended June 30,
2002 compared with the three months ended June 30, 2001 due to a 39% increase in
mwh purchased offset by a 23.4% decrease in cost per mwh purchased. The increase
in mwh purchased reflects the increases in mwh sold for both wholesale and
retail energy sales. The lower cost per mwh purchased reflects the softening in
the wholesale energy market. Activity in the short-term energy market is subject
to change based on a number of factors and it is difficult to predict the
quantity of wholesale power sales or prices for wholesale power.
Plastics
Three months ended
June 30,
(in thousands) 2002 2001 Change
- --------------- --------- --------- --------
Operating revenues $ 24,405 $ 18,663 $ 5,742
Cost of goods sold 17,701 17,004 697
Operating expenses 1,333 894 439
Depreciation and amortization 436 816 (380)
--------- --------- --------
Operating income (loss) $ 4,935 $ (51) $ 4,986
========= ========= ========
The 30.8% increase in operating revenues for the three months ended June 30,
2002 compared with the three months ended June 30, 2001 is the result of a 29.6%
increase in pounds of PVC pipe sold. The average sales price per pound remained
constant between the periods. Cost of goods sold increased 4.1% due to increases
of $394,000 in other overhead costs, $209,000 in freight expense and $198,000 in
labor costs offset by a $145,000 decrease in material costs. The cost per pound
of resin, the raw material used to produce PVC pipe decreased 23.3% between
periods. Operating expenses increased 49.1% primarily due to a $398,000 increase
in administrative and general labor. The 46.5% decrease in depreciation and
amortization is due to the accounting change that eliminated the amortization of
goodwill beginning in 2002.
Since the PVC pipe industry is affected directly by economic cycles it is
difficult to predict that the recent increase in pounds of pipe sold will
continue. The industry experienced a significant increase in demand during the
first half of 2002 compared with the same period last year. Some of the increase
in demand is due to customers increasing their inventory levels of PVC
pipe. Demand for PVC pipe is expected to decrease once adequate inventory levels
are reached. If the gross domestic product continues to be strong for the
remainder of 2002 the Company expects that demand for PVC resin and pipe will be
in balance and that operating margins will continue to be strong.
Health Services
Three months ended
June 30,
(in thousands) 2002 2001 Change
- -------------- --------- --------- --------
Operating revenues $ 23,633 $ 19,626 $ 4,007
Cost of goods sold 16,461 15,086 1,375
Operating expenses 3,496 2,231 1,265
Depreciation and amortization 1,063 773 290
------ ---- ----
Operating income $ 2,613 $ 1,536 $ 1,077
====== ====== ======
17
Health services operating revenues for the three months ended June 30, 2002
compared with the three months ended June 30, 2001 increased 20.4% due to added
revenues from the acquisitions that occurred during the third quarter of 2001.
The number of scans increased 15.5% and the average fee per scan increased
11.5%. Revenue from equipment sales decreased by $1.3 million. The increase in
cost of goods sold, operating expenses and depreciation and amortization are
primarily due to the 2001 acquisitions. The 70.1% increase in the operating
income reflects the operating results from the 2001 acquisitions and an increase
in margins on service sales provided.
Manufacturing
Three months ended
June 30,
(in thousands) 2002 2001 Change
- -------------- --------- --------- ---------
Operating revenues $ 35,742 $ 30,287 $ 5,455
Cost of goods sold 27,132 22,286 4,846
Operating expenses 4,002 3,418 584
Depreciation and amortization 1,533 1,280 253
--------- --------- ---------
Operating income $ 3,075 $ 3,303 $ (228)
========= ========= ========
Included in the results for the three months ended June 30, 2002 are two months
of operations from Shore-Masters, Inc. (ShoreMaster), which was acquired on May
1, 2002. The 18% increase in operating revenues for the three months ended June
30, 2002 compared with the three months ended June 30, 2001 includes $6.2
million from the acquisition combined with an increase of $2.7 million in
revenues from sales of wind towers and steel fabrication offset by a reduction
in revenues of $3.4 million from metal parts stamping and fabrication. The 21.7%
increase in cost of goods primarily is due to the acquisition combined with
increased material cost of $1.5 million related to wind towers and offset by a
$2.5 million decrease in material costs related to metal parts stamping. The
17.1% increase in operating expenses was primarily due to the acquisition.
All of the companies in this segment, except ShoreMaster, experienced decreases
between the quarters in operating income. Operating margins were affected at the
metal parts stamping and fabrication plants due to a temporary closing of a
major's customer's plant during the quarter due to flooding. A slowdown in the
wind energy market--despite the passage of the Production Tax Credit--has
negatively affected the wind tower business. This slowdown may be the result of
uncertainty with the energy industry in general.
Other Business Operations
Three months ended
June 30,
(in thousands) 2002 2001 Change
- -------------- --------- --------- ----------
Operating revenues $ 20,903 $ 19,379 $ 1,524
Cost of goods sold 11,549 9,703 1,846
Operating expenses 9,044 7,832 1,212
Depreciation and amortization 1,253 1,426 (173)
--------- --------- ----------
Operating (loss) income $ (943) $ 418 $ (1,361)
========= ========= ==========
Operating income decreased for each of the companies in this segment for the
three months ended June 30, 2002 compared with the three months ended June 30,
2001. The 7.9% increase in operating revenues and the 19% increase in cost of
goods sold for the three months ended June 30, 2002 compared with the three
months ended
18
June 30, 2001 occurred primarily at the construction companies. Due to a
reduction in work available, bidding among construction companies has been
competitive with very low margins. Operating income decreased at the
transportation company due to an 8.1% reduction in miles driven combined with a
2.3% reduction in revenue per mile. The decrease in operating income at the
energy services and telecommunication companies was caused by an increase in the
provision for doubtful accounts receivable. Operating expenses increased due to
a $587,000 increase in unallocated corporate overhead and a $500,000 increase in
the provision for doubtful accounts receivable at the energy services and
telecommunication companies. The decrease in depreciation and amortization is
due to the accounting change that eliminated the amortization of goodwill
beginning in 2002.
Other Income and Deductions - net, Interest Charges and Income Taxes
For the three months ended June 30, 2002 compared with the three months ended
June 30, 2001, other income and deductions decreased $519,000 (59.2%) due to
lower interest income during 2002, reduction in gains from the sale of fixed
assets, and the recording of a Minnesota Conservation Improvement Program
incentive during 2001 offset by an increase in the amount of allowance for funds
used during construction recorded at the electric utility. The $259,000 (6.3%)
increase in interest charges is due to higher long-term debt balances
outstanding for the three months ended June 30, 2002 compared with the three
months ended June 30, 2001, offset by significantly lower interest rates and
lower average balances under the lines of credit between the periods. The $1.9
million (57.3%) increase in income tax expense between the quarters is primarily
the result of a 26.8% increase in income before income tax for the three months
ended June 30, 2002 compared with the three months ended June 30, 2001. The
effective tax rate was 33.2% for the three months ended June 30, 2002 compared
to 26.8% for the three months ended June 30, 2001.
19
Comparison of the Six Months Ended June 30, 2002 and 2001
Consolidated Results of Operations
The Company recorded basic and diluted earnings per share of $0.81 for the six
months ended June 30, 2002 and $0.82 for the six months ended June 30, 2001.
Excluding goodwill amortization from the six months ended June 30, 2001, basic
earnings per share was $0.87 and diluted earnings per share was $0.86. Total
operating revenues were $334.3 million for the six months ended June 30, 2002,
an increase of $17.3 million (5.5%) from the $317 million for the six months
ended June 30, 2001. Operating income increased $625,000 (1.6%) from $38.2
million for the six months ended June 30, 2001 to $38.8 million for the six
months ended June 30, 2002.
Following is a discussion of the results of operations by segment.
Electric
Six months ended
June 30,
(in thousands) 2002 2001 Change
- -------------- ---------- ---------- ----------
Operating revenues $ 146,290 $ 152,008 $ (5,718)
Production fuel 22,462 20,945 1,517
Purchased power 42,559 48,568 (6,009)
Other electric operation and maintenance expenses 38,555 34,400 4,155
Depreciation and amortization 12,371 12,083 288
Property taxes 4,882 5,126 (244)
---------- ---------- ----------
Operating income $ 25,461 $ 30,886 $ (5,425)
========== ========== ==========
The 3.8% decrease in electric operating revenues for the six months ended June
30, 2002 compared with the six months ended June 30, 2001 is due to a $9.3
million (19.8%) decrease in revenues from wholesale power pool sales and a $1.6
million (1.6%) decrease in retail revenue offset by a $5.2 million (125%)
increase for other electric operating revenues.
The decrease in revenues from wholesale power pool sales resulted from a 31%
decrease in revenue per mwh sold offset by a 16.2% increase in mwh sold. The
decrease in revenue per mwh reflects the soft wholesale power market. Gross
margins per mwh sold on wholesale power pool sales decreased 41.9% between the
periods. The decrease in retail revenues resulted from a 0.7% decrease in retail
mwh sold combined with a 0.9% decrease in revenue per retail mwh sold. Heating
degree-days decreased 1.3% during the first six months of 2002 compared to the
first six months of 2001. The increase in other electric operating revenues is
primarily due to a large transmission line construction project being completed
for another area utility.
Production fuel expenses increased 7.2% during the six months ended June 30,
2002 compared with the six months ended June 30, 2001 primarily due to a 11.4%
increase in fuel costs per mwh produced at the electric utility's coal-fired
generating stations. The increase in fuel costs per mwh produced is due to
higher costs reflected in the new coal contracts that went into effect at the
beginning of 2002. The cost of purchased power decreased 12.4% reflecting a
decrease of 23.8% in the cost per mwh purchased offset by a 14.9% increase in
mwh purchased. The increase in mwh purchased was to provide for the increase in
wholesale energy sales and to meet system demand.
Other operation and maintenance expenses for the six months ended June 30, 2002
increased 12.1% over the six
20
months ended June 30, 2001. This increase includes $2.5 million of expenses
related to the transmission line construction project for another utility, an
increase of $1.2 million in labor and employee benefits costs, and an increase
of $1 million in external services, including $353,000 for the overhaul of one
of the utility's internal combustion turbines.
Plastics
Six months ended
June 30,
----------------------------------------
(in thousands) 2002 2001 Change
- -------------- --------- --------- ---------
Operating revenues $ 40,280 $ 32,624 $ 7,656
Cost of goods sold 30,390 30,437 (47)
Operating expenses 2,189 1,767 422
Depreciation and amortization 874 1,634 (760)
--------- --------- --------
Operating (loss) income $ 6,827 $ (1,214) $ 8,041
========= ========= ========
The 23.5% increase in operating revenues for the six months ended June 30, 2002
compared with the six months ended June 30, 2001 reflects a 32.2% increase in
pounds of PVC pipe sold offset by a 6.6% decline in the average sales price per
pound. The slight decrease in cost of goods sold reflects a $1.1 million
decrease in material cost due to a 30% decrease in the cost per pound of resin,
the raw material used in the production of PVC pipe, offset by an increase of
over $1 million in costs related to the increase in PVC pipe sold, including
increases in freight costs of $378,000, labor costs of $239,000, overhead
adjustments of $226,000, and shop tools and supplies of $115,000. Operating
expenses increased 23.9% primarily due to increases in general and
administrative labor costs and selling expenses. The decrease in depreciation
and amortization is due to the accounting change that eliminated the
amortization of goodwill beginning in 2002.
Since the PVC pipe industry is affected directly by economic cycles it is
difficult to predict that the recent increase in pounds of pipe sold will
continue. The industry experienced a significant increase in demand during the
first half of 2002 compared with the same period last year when demand was
exceptionally weak. During 2001 PVC resin prices declined holding down sales
prices. PVC resin producers have announced a two-cent-per-pound price increase
for July and another two-cent increase for September. The PVC pipe industry in
general has announced several pipe price increases in response to these resin
price increases. Some of the increased demand during 2002 is due to customers
increasing their inventory levels of PVC pipe. Demand for PVC pipe is expected
to decrease once adequate inventory levels are reached. If the gross domestic
product continues to be strong for the remainder of the 2002 the Company expects
that demand for PVC resin and pipe will be in balance and that operating margins
will continue to be strong.
The companies in this segment are highly dependent upon a limited number of
third-party vendors for PVC resin. For the six months ended June 30, 2002 and
2001, purchases of raw materials from two vendors totaled 59.8% and 68.6%,
respectively, of total resin purchases. The companies in this segment believe
their relationships with their key raw material vendors are good. However, the
loss of a key supplier or any interruption or delay in the supply of PVC resin
could have a significant impact on the plastics segment.
21
Health Services
Six months ended
June 30,
--------------------------------------
(in thousands) 2002 2001 Change
- -------------- --------- --------- -------
Operating revenues $ 44,752 $ 37,526 $ 7,226
Cost of goods sold 31,148 28,195 2,953
Operating expenses 6,547 4,536 2,011
Depreciation and amortization 2,007 1,505 502
--------- --------- --------
Operating income $ 5,050 $ 3,290 $ 1,760
========= ========= ========
The 19.3% increase in health services operating revenues, 10.5% increase in cost
of goods sold, 44.3% increase in operating expenses and the 33.4% increase in
depreciation and amortization for the six months ended June 30, 2002 compared
with the six months ended June 30, 2001 is primarily due to the acquisitions
completed during September 2001. The number of scans performed increased 16.4%
and the average fee per scan increased 6.7%. Revenues from equipment sales
decreased 12.1%. The increase in cost of goods sold reflects an increase of $1.3
million in equipment repairs and maintenance and a $1.2 million in labor related
costs. The increase in operating expenses is due to increased labor related
costs and other general and administrative costs. Operating margins improved
between the periods due to increases in margins on service sales in the
diagnostic equipment imaging business and in the mobile imaging business offset
by expenses incurred in the segment's continued investment in fixed-based
imaging systems.
Manufacturing
Six months ended
June 30,
--------------------------------------
(in thousands) 2002 2001 Change
- -------------- --------- --------- -------
Operating revenues $ 67,070 $ 58,552 $ 8,518
Cost of goods sold 50,920 43,503 7,417
Operating expenses 8,189 6,239 1,950
Depreciation and amortization 2,980 2,482 498
--------- --------- ---------
Operating income $ 4,981 $ 6,328 $ (1,347)
========= ========= =========
Increases in the production and sales of wind towers and steel fabrication
combined with the May acquisition of ShoreMaster offset by decreased sales
volumes of metal part stamping led to the 14.5% increase in manufacturing
operating revenues. Cost of goods sold increased 17% which included $3.8 million
related to ShoreMaster and increases of $3.8 million in material cost at the
wind towers and steel fabrication business offset by a $3.6 million reduction in
material costs at the metal parts stamping companies. Increases in labor costs
of $1.1 million, other general and administrative costs of $433,000, and selling
expenses of $351,000, with much of these increases due to the ShoreMaster
acquisition, caused the increase in operating expenses.
All of the companies in the segment, except ShoreMaster, experienced decreases
in their operating income for the six months ended June 30, 2002 compared with
June 30, 2001. The companies in this segment continue to be adversely affected
by a slower economy. Operating margins were also affected at the metal parts
stamping and fabrication plants due to a temporary closing of a major customer's
plant during the month of June due to flooding. A slowdown in the wind energy
market--despite the passage of the Production Tax Credit--has affected the wind
tower business. This slowdown may be the result of uncertainty with the energy
industry in general.
22
Other Business Operations
Six months ended
June 30,
---------------------------------------------
(in thousands) 2002 2001 Change
- -------------- --------- ---------- ---------
Operating revenues $ 35,913 $ 36,276 $ (363)
Cost of goods sold 19,521 18,702 819
Operating expenses 17,470 15,872 1,598
Depreciation and amortization 2,458 2,834 (376)
--------- ---------- ---------
Operating loss $ (3,536) $ (1,132) $ (2,404)
========= ========== =========
Operating income decreased at all of the companies in this segment except for
the telecommunication company for the three months ended June 30, 2002 compared
with the three months ended June 30, 2001. Decreases in operating revenues of
$2.2 million from the energy services and transportation subsidiaries were
partially offset by increases in revenues of $1.9 million from the construction
subsidiaries and telecommunication subsidiary. Both operating revenues and cost
of goods sold decreased for the energy services subsidiary as a result of the
higher cost of natural gas during 2001. A decrease of 9.5% in miles driven
combined with a 3.9% decrease in revenue per mile lead to the decrease in
operating revenues at the transportation subsidiary. Operating expenses
increased 10.1% due to a $1.1 million increase in unallocated corporate overhead
and a $500,000 increase in the provision for doubtful accounts receivable at the
energy services and the telecommunication subsidiaries. A 15% decrease in the
average cost of diesel fuel per gallon helped to reduce the increase in
operating expenses. The decrease in depreciation and amortization is due to the
accounting change that eliminated the amortization of goodwill beginning in
2002.
Other Income and Deductions - net, Interest Charges, and Income Taxes
For the six months ended June 30, 2002 compared with the six months ended June
30, 2001, the $786,000 (65.8%) decrease in other income and deductions is due to
lower interest income, reductions in the gains from sale of fixed assets, the
recording of a Minnesota Conservation Improvement Program Incentive during 2001,
an increase in non-operating miscellaneous expenses and an increase in the
amount of allowance for funds used during construction recorded at the electric
utility. The $481,000 (5.9%) increase in interest charges is due to higher
long-term debt balances outstanding for the six months ended June 30, 2002
compared to the six months ended June 30, 2001, offset by significantly lower
interest rates and lower average balances under the line of credit between the
periods. Income taxes decreased $104,000 between the quarters. The effective tax
rate was 32.4% in the first six months of 2002 compared to 32.1% in the same
period last year.
Critical Accounting Policies
The discussion and analysis of the Company's consolidated financial condition
and results of operations are based on consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States. Preparation of these consolidated financial statements requires
the use of estimates and judgments that affect the reported results. Actual
results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are those that require significant management
judgments and business uncertainties and could result in materially different
results using different assumptions and conditions. The following accounting
policies meet the criteria of a critical accounting policy.
23
Revenue recognition--Due to the diverse business operations of the Company,
revenue recognition depends on the product produced and sold. In general, the
Company recognizes revenue when the earnings process is complete, evidenced by
an agreement with the customer, there has been delivery and acceptance and the
price is fixed or determinable. In cases where significant obligations remain
after delivery, revenue is deferred until such obligations are fulfilled.
Provisions for sale returns and warranty costs are recorded at the time of the
sale based on historical information and current trends.
Electric customers' meters are read and bills are rendered on a cycle basis.
Revenue is accrued for electricity consumed but not yet billed. Rate schedules
applicable to substantially all customers include a cost of energy adjustment
clause, under which the rates are adjusted to reflect changes in average cost of
fuels and purchased power, and a surcharge for recovery of conservation-related
expenses. Revenues on wholesale energy sales are recognized when energy is
delivered. The majority of wholesale energy revenue is the result of bilateral
agreements with individual counter-parties. Plastics operating revenues are
recorded when the product is shipped. Health services operating revenues on
major equipment and installation contracts are recorded when the equipment is
delivered. Amounts received in advance under customer service contracts are
deferred and recognized on a straight-line basis over the contract period.
Revenues generated in the mobile imaging operations are recorded on a fee for
scan basis. Manufacturing operating revenues are recorded when products are
shipped and on a percentage-of-completion basis for construction type contracts.
Other business operations operating revenues are recorded when services are
rendered or products are shipped. In the case of construction contracts, the
percentage-of-completion method is used. The method used to determine the
progress of completion is based on the ratio of costs incurred to total
estimated costs.
Inventory valuation--The majority of the Company's inventory is stated at the
lower of cost (first in, first out) or market. Changes in the market conditions
could require a write down of inventory values.
Use of estimates--The Company uses estimates based on the best information
available in recording transactions and balances resulting from business
operations. Estimates are used for such items as depreciable lives, tax
provisions, collectability of trade accounts receivable, self insurance
programs, environmental liabilities, unbilled electric revenues, unscheduled
power exchanges, service contract maintenance costs, percentage-of-completion
and actuarially determined benefits costs. As better information becomes
available or actual amounts are known, estimates are revised. Operating results
can be affected by changes made to prior accounting estimates.
The Company's significant accounting policies are more fully described in note 1
of the notes to consolidated financial statements included under Item 8 in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has limited exposure to market risk associated with interest rates
and commodity prices. The Company currently has no exposure to market risk
associated with changes in foreign currency exchange rates.
The majority of the Company's long-term debt obligations bear interest at a
fixed rate. Variable rate long-term debt bears interest at a rate that is reset
on a periodic basis reflecting current market conditions. The Company manages
its interest rate risk through the issuance of fixed-rate debt with varying
maturities, through economic refunding of debt through optional refundings,
limiting the amount of variable interest rate debt, and utilization of
short-term borrowings to allow flexibility in the timing and placement of
long-term debt. As of June 30, 2002, the Company had $16.1 million of long-term
debt subject to variable interest rates. Assuming no change in the Company's
financial structure, if variable interest rates were to average 1 percent higher
(lower) than what the average variable rate was on June 30, 2002, interest
expense and pre-tax earnings would change by approximately
24
$161,000. The Company has short-term borrowing arrangements to provide
financing for working capital and general corporate purposes. The level of
borrowings under these arrangements vary from period to period, depending upon,
among other factors, operating needs and capital expenditures.
The Company has not used interest rate swaps to manage net exposure to interest
rate changes related to the Company's portfolio of borrowings. The Company
maintains a ratio of fixed rate debt to total debt within a certain range. It is
the Company's policy to enter into interest rate transactions and other
financial instruments only to extent considered necessary to meet its stated
objectives. The Company does not enter into transactions for speculative or
trading purposes.
The electric utility's retail portion of fuel and purchased power costs are
subject to cost of energy adjustment clauses that mitigate the commodity price
risk by allowing a pass through of most of the increase or decrease in energy
costs to retail customers. In addition, the electric utility participates in an
active wholesale power market providing access to commodity transactions that
may serve to mitigate price risk. The Company has in place an energy risk
management policy with a goal to manage, through the use of defined risk
management practices, price risk and credit risk associated with wholesale power
purchases and sales.
The Company through its energy services subsidiary markets natural gas to
approximately 150 retail customers.A portion of these customers are served under
fixed-price contracts. There is price risk associated with these limited number
of fixed-price contracts since the corresponding cost of natural gas is not
immediately locked in. This price risk is not considered material to the
Company.
The plastics companies are exposed to market risk related to changes in
commodity prices for PVC resins, the raw material used to manufacture PVC pipe.
The PVC pipe industry is highly sensitive to commodity raw material pricing
volatility. Historically, when resin prices are rising or stable, margins and
sales volume have been higher and when resin prices are falling, sales volumes
and margins have been lower. Gross margins also decline when the supply of PVC
pipe increases faster than demand. Due to the commodity nature of PVC resin and
the dynamic supply and demand factors worldwide, it is very difficult to predict
gross margin percentages or assume that historical trends will continue.
25
PART II. OTHER INFORMATION
Item 2. Change in Securities and Use of Proceeds
On May 1, 2002 and June 14, 2002, the Company issued 139,452 shares and
18,805 shares of common stock in connection with the acquisition of
Computed Imaging Service, Inc. On May 1, 2002, the Company issued
303,124 shares of common stock in connection with the acquisition of
Shore-Masters, Inc. The issuance of these shares did not involve a
public offering and therefore was exempt from registration pursuant to
section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on April 8,
2002, for the purpose of electing three nominees to the Board of Directors
with terms expiring in 2005 and approving the appointment of auditors.
Proxies for the meeting were solicited pursuant to Section 14(a) of the
Securities Exchange Act of 1934, as amended, and there was no solicitation
in opposition to management's solicitations.All nominees for directors as
listed in the proxy statement were elected. The names of each other
director whose term of office continued after the meeting are as follows:
Arvid R. Liebe, John C. MacFarlane, Gary J. Spies, Thomas M. Brown, Maynard
D. Helgaas and Robert N. Spolum. The voting results are as follows:
Shares Shares Voted
Election of Directors Voted For Withheld Authority
--------------------- --------- ------------------
Dennis R. Emmen 20,973,139 327,018
Kenneth L. Nelson 21,067,827 232,330
Nathan I. Partain 21,064,150 236,007
Shares Shares Shares
Voted For Voted Against Voted Abstain
---------- ------------- -------------
Approval of Auditors 20,809,054 229,706 261,397
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
10-A Executive Employment Agreement - John Erickson*
10-B Executive Employment Agreement and amendment no. 1 - Lauris Molbert*
10-C Executive Employment Agreement - Kevin Moug*
10-D Executive Employment Agreement - George Koeck*
10-E Change in Control Severance Agreement - John Erickson*
10-F Change in Control Severance Agreement - Lauris Molbert*
10-G Change in Control Severance Agreement - Kevin Moug*
10-H Change in Control Severance Agreement - George Koeck*
26
10-I Credit Agreement dated as of April 30, 2002 among Otter Tail
Corporation, the Banks, as defined therein, and U.S. Bank National
Association, as a Bank and as Agent (incorporated by reference to
Exhibit 99-A-1 to the Company's Registration Statement on Form S-3,
Registration No. 333-90952)
99-A Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002, by
John D. Erickson, Chief Executive Officer and President, Otter Tail
Corporation.
99-B Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 as to the Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2002, by
Kevin G. Moug, Chief Financial Officer and Treasurer, Otter Tail
Corporation.
*Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K.
b) Reports on Form 8-K.
A report on Form 8-K was filed on June 20, 2002, reporting that Doug
Kjellerup, President of Otter Tail Power Company, a division of Otter Tail
Corporation, suffered a stroke on June 12, 2002 and that John Erickson,
President and Chief Executive Officer of Otter Tail Corporation, assumed
Mr. Kjellerup's duties on an interim basis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTTER TAIL CORPORATION
By: /s/ Kevin G. Moug
-------------------------------------------
Kevin G. Moug
Chief Financial Officer and Treasurer
(Chief Financial Officer/Authorized Officer)
Dated: August 14, 2002
EXHIBIT INDEX
Exhibit Number Description
- ------------- -----------
10-A Executive Employment Agreement - John Erickson*
10-B Executive Employment Agreement and amendment no. 1 - Lauris Molbert*
10-C Executive Employment Agreement - Kevin Moug*
10-D Executive Employment Agreement - George Koeck*
10-E Change in Control Severance Agreement - John Erickson*
10-F Change in Control Severance Agreement - Lauris Molbert*
10-G Change in Control Severance Agreement - Kevin Moug*
10-H Change in Control Severance Agreement - George Koeck*
10-I Credit Agreement dated as of April 30, 2002 among
Otter Tail Corporation, the Banks, as defined
therein, and U.S. Bank National Association, as a
Bank and as Agent (incorporated by reference to
Exhibit 99-A-1 to the Company's Registration
Statement on Form S-3, Registration No. 333-90952)
99-A Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 as to the Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002, by John D. Erickson, Chief Executive Officer and
President, Otter Tail Corporation
99-B Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 as to the Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2002, by
Kevin G. Moug, Chief Financial Officer and Treasurer,
Otter Tail Corporation.
*Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K.