NorthWestern Corp. :NWE-US: Earnings Analysis: Q2, 2017 By the Numbers : July 27, 2017

NorthWestern Corp. reports financial results for the quarter ended June 30, 2017.

Highlights

  • Summary numbers: Revenues of USD 283.86 million, Net Earnings of USD 21.83 million.
  • Gross margins narrowed from 58.52% to 55.79% compared to the same period last year, operating (EBITDA) margins now 30.01% from 35.36%.
  • Change in operating cash flow of 1,672.92% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Narrowing of operating margins contributed to decline in earnings.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-06-30 2017-03-31 2016-12-31 2016-09-30 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 283.86 367.31 330.59 301 293.12
Revenue Growth (%YOY) -3.16 10.46 1.72 10.36 8.34
Earnings (mil) 21.83 56.57 45.94 44.61 35.57
Earnings Growth (%YOY) -38.63 48.65 2.07 87.43 14.84
Net Margin (%) 7.69 15.4 13.9 14.82 12.13
EPS 0.45 1.17 0.95 0.92 0.74
Return on Equity (%) 1.28 3.34 2.76 2.72 2.19
Return on Assets (%) 1.58 4.03 3.31 3.33 2.69

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, NWE-US‘s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if NWE-US‘s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by -22.72% and earnings by -61.41% compared to the previous period.

Earnings Growth Analysis

The company’s year-on-year decline in earnings was influenced by a weakening in gross margins from 58.52% to 55.79%, as well as issues with cost controls. As a result, operating margins (EBITDA margins) went from 35.36% to 30.01% in this time frame. For comparison, gross margins were 56.09% and EBITDA margins were 34.47% in the previous period.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

NWE-US‘s decline in gross margins were offset by some improvements on the balance sheet. The management of working capital, for example, shows progress. The company’s working capital days have fallen to -101.12 days from -85.44 days for the same period last year. This leads Capital Cube to conclude that the gross margin decline is not altogether bad.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

NWE-US‘s year-on-year change in operating cash flow of 1,672.92% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s decline in earnings has been influenced by the following factors: (1) Decline in operating margins (EBIT margins) from 21.75% to 15.39% and (2) one-time items that contributed to a decrease in pretax margins from 13.14% to 7.89%

EBIT Margin History
PreTax Margin History

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Company Profile

NorthWestern Corp. engages in generating and distributing electricity and natural gas. It operates through the following segments: Electric Operations, Natural Gas Operations, and All Other. The Electric Operations segment includes generation, transmission, and distribution of electric utility business as a vertically integrated generation transmission and distribution utility in Montana and South Dakota. The Natural Gas Operations segment includes the production, storage, transmission, and distribution of natural gas. The All Other segment consists of unallocated corporate costs. The company was founded in November 1923 and is headquartered in Sioux Falls, SD.

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