Oshkosh Corporation — Q2 FY2016 Form 10-Q
Business context and reporting period. The quarter and six-month period ended March 31, 2016. Oshkosh makes access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles. Results are unaudited; interim performance is not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $1,524.3m | $1,554.2m | $2,776.3m | $2,907.5m |
| Gross income / margin | $259.3m / 17.0% | $275.8m / 17.8% | $442.1m / 15.9% | $505.5m / 17.4% |
| Operating income / margin | $91.4m / 6.0% | $109.7m / 7.1% | $121.7m / 4.4% | $175.4m / 6.0% |
| Net income | $56.1m | $54.6m | $70.7m | $89.3m |
| Diluted EPS | $0.76 | $0.69 | $0.95 | $1.12 |
| Operating cash flow | Not separately presented for the quarter | $94.5m | $(70.7)m |
Q2 sales declined 1.9% and operating income fell 16.7%; six-month sales declined 4.5% and operating income fell 30.6%. Q2 net income and EPS increased despite lower operating income, with EPS also benefiting from fewer shares after repurchases, discrete tax benefits, and comparison with prior-year debt-extinguishment costs.
- Segment trends, Q2: Access Equipment sales fell 23.2% to $754.3m and operating income fell 44.7% to $75.7m. Defense sales rose 87.1% to $297.0m and moved to $27.8m operating income from a $12.0m loss. Fire & Emergency sales rose 18.5% to $240.4m; Commercial sales rose 7.1% to $236.7m. Both segments improved operating income.
- Cash and liquidity: Cash was $38.4m at March 31, versus $42.9m at September 30, 2015. Current assets were $2,590.2m and current liabilities $1,644.5m. Revolver availability was $604.8m, including the effect of $132.2m drawn and $113.0m in letters of credit. Management said liquidity was sufficient for the next 12 months.
- Debt and capital: Total debt was $1,000.7m, up from $938.5m at September 30; debt-to-total-capitalization rose to 34.8% from 32.9%. Long-term debt was $845.0m, with $155.7m in revolving borrowings, current maturities, and other short-term borrowings. The company reported covenant compliance.
- Capital returns: Six-month repurchases were $100.1m and dividends paid were $28.0m. Declared dividends were $0.19 per share in Q2, versus $0.17 a year earlier.
Material changes and management commentary
- Access Equipment weakness reflected slower North American replacement demand, reduced telehandler sales after prior-year Tier 4-related buying, cautious rental-fleet spending, competitive pricing, and lower factory absorption. Management expected an FY2016 segment sales decline of 13%–18%.
- Defense, Fire & Emergency, and Commercial gains partly offset Access Equipment declines. Consolidated cost of sales as a share of sales increased, reflecting access-equipment production and pricing pressures, start-up costs at a shared Mexico facility, and defense production ramp-up costs.
- Management raised FY2016 diluted EPS guidance by $0.10 to $2.30–$2.70, citing Q2 tax benefits and higher expected Defense results, partly offset by higher corporate costs. Management attributed better-than-expected Q2 results partly to order timing and a milder winter.
- Backlog rose 58.2% year over year to $3.54bn, largely on Defense awards; about 43% was not expected to ship in FY2016. The quarter included withdrawal of a protest against the JLTV award and a $243m order for more than 650 vehicles.
Outlook, risks and unusual items
- A contract for more than 1,000 international M-ATVs was not included in FY2016 outlook or March backlog while funding and delivery schedules were being finalized. Oshkosh was already procuring inventory for the potential work.
- Defense international-customer payment delays increased Defense days sales outstanding to 75 days from 38 at September 30; consolidated DSO rose to 58 from 50 days. Inventory turns declined to 3.5 from 4.3. Delayed contract funding could increase working capital, interest costs, production disruption, or inventory exposure.
- Q2 included $4.4m of discrete tax benefits; six-month tax expense included $8.0m of net discrete benefits. Q2 FY2015 included $14.7m of debt-extinguishment costs ($9.3m after tax). These items affect period comparisons.
- Other exposures include cyclical construction and municipal markets, U.S. defense-budget and contract risks, foreign-exchange effects, warranty claims, customer-credit and guarantee exposure, and execution risks for production ramps and the MOVE strategy. Oshkosh guaranteed $574.7m of customer indebtedness, with estimated maximum loss exposure of $121.3m. Management stated ordinary-course litigation and claims were not expected to have a material effect; no legal proceedings were listed in Part II.
- Fiscal 2016 capital spending was expected to be approximately $100m. Forward-looking statements are subject to risks and are not guarantees.
Important facts for investors to verify
- Whether access-equipment demand and margins stabilize, and whether the projected 13%–18% FY2016 segment sales decline remains appropriate.
- Whether international M-ATV funding and delivery schedules are finalized, and the resulting cash, backlog, inventory, and margin impacts.
- Whether Defense customer collections improve, given the rise in Defense DSO and the company’s material international-contract working-capital commitments.
- How much of the revised $2.30–$2.70 EPS outlook depends on discrete tax benefits, buybacks, and Defense performance versus recurring operating improvement.
- Whether segment backlog converts to sales on schedule, especially given that 43% was not expected to ship in FY2016, and whether liquidity and covenant headroom remain adequate.