Oshkosh Corporation — Q1 FY2016 10-Q
Reporting period: Three months ended December 31, 2015, compared with the three months ended December 31, 2014. Financial statements are unaudited; amounts are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $1,252.0 million | $1,353.3 million | Down 7.5% |
| Gross income / margin | $182.8 million / 14.6% | $229.7 million / 17.0% | Margin down 240 bps |
| Operating income / margin | $30.3 million / 2.4% | $65.7 million / 4.9% | Down 53.8% |
| Net income | $14.6 million | $34.7 million | Down 57.9% |
| Diluted EPS | $0.19 | $0.43 | Down $0.24 |
| Operating cash flow | $71.8 million | $(52.3) million | Improved $124.1 million |
Cost of sales was 85.4% of sales versus 83.0%; management cited lower access-equipment production and adverse production variances, increased defense start-up costs, and prior-year favorable warranty adjustments. The effective tax rate was 10.6%, compared with 31.9%, including $3.7 million of discrete tax benefits. The company declared dividends of $0.19 per share, versus $0.17.
Operating cash generation benefited primarily from a smaller inventory build in access equipment. Investing activities used $18.2 million, including $21.3 million of capital expenditures; financing activities used $65.2 million, including $100.1 million of share repurchases and $14.1 million of dividends. Cash declined $9.2 million to $33.7 million.
At December 31, 2015, total debt was $985.2 million, up from $938.5 million at September 30, 2015; shareholders’ equity was $1,806.4 million and debt to total capitalization was 35.3%. The company had $628.5 million of unused revolving-credit capacity, after borrowings and letters of credit, and reported compliance with its financial covenants. The revolving facility matures in March 2019.
Segment results and material changes
- Access equipment: Sales fell 26.1% to $529.8 million and operating income fell to $20.4 million from $77.2 million. North American replacement demand weakened, and telehandler shipments were lower following strong prior-year buying ahead of Tier 4 emissions changes. Lower production also hurt manufacturing absorption.
- Defense: Sales increased 18.1% to $318.0 million; operating income rose to $23.2 million from $9.8 million. International M-ATV sales and higher M-ATV reset work contributed, partly offset by lower legacy vehicle sales.
- Fire & emergency: Sales increased 24.2% to $207.5 million and operating income rose to $10.1 million from $1.5 million, reflecting stronger deliveries, production, pricing and product mix.
- Commercial: Sales decreased 4.7% to $200.3 million and operating income fell to $8.9 million from $12.4 million. Lower concrete mixer sales and less favorable warranty experience offset refuse-vehicle growth.
The stronger U.S. dollar reduced consolidated sales by $14.7 million year over year. The company repurchased 2.45 million shares for $100.1 million in the quarter. Backlog increased 30.5% year over year to $3.13 billion, led by defense and fire & emergency; access-equipment backlog declined 8.7%. Approximately 22% of backlog was not expected to be filled in FY2016.
Guidance, outlook and key risks
Management revised FY2016 estimates to revenue of $5.7–$6.0 billion, operating income of $300–$340 million and diluted EPS of $2.20–$2.60. The prior EPS outlook was $3.00–$3.40. The revision reflects a weaker access-equipment outlook and excludes expected fiscal-year sales from a potential international order for more than 1,000 M-ATVs, whose award timing is uncertain. If awarded and funded in time, some deliveries could add to the revised estimates. Corporate expenses were estimated at $130–$135 million, the expected tax rate was lowered to 32%, and average diluted shares were estimated at 74.5 million.
Management expected earnings to be weighted toward the second half of FY2016 and Q2 earnings to be meaningfully below the prior-year quarter, primarily due to lower access-equipment sales and production. Rental-company spending decisions, construction activity, competition and currency movements remain relevant to the outlook.
- A competitor’s lawsuit challenges Oshkosh’s JLTV production-contract award; the court had not ruled on the suit or request for a preliminary injunction. The company said it remained confident in the award.
- The anticipated international M-ATV contract had not been signed. Management could not estimate its award timing with confidence.
- Defense customers’ international payment slowdown increased defense-segment days sales outstanding to 62 days from 38 days at September 30, 2015. Inventory turns declined to 3.3 from 4.3.
- The company had committed to supplier purchases in anticipation of potential contracts; failure or delay in securing contracts could increase inventory and working-capital needs.
- Other stated risks include cyclical construction and equipment markets, U.S. defense budget and procurement uncertainty, foreign-exchange exposure, receivable collectability, warranty claims, production delays and possible impairment in a weaker economic environment.
Contingencies include $564.4 million of customer indebtedness guaranteed, with estimated maximum loss exposure of $117.3 million; $509.5 million of bid, performance and specialty bonds; and $109.8 million of standby letters of credit. Management did not expect warranty, product-liability or other legal matters to have a material effect, while noting outcomes are uncertain. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Investor facts to verify
- Whether and when the international M-ATV contract is awarded and funded, and any resulting FY2016 deliveries.
- Developments in the JLTV litigation and any effect on production or the $110.6 million of JLTV orders included in backlog.
- Access-equipment demand, production levels, margins and the conversion of backlog to sales.
- Defense customer collections, inventory turns and potential working-capital demands from supplier commitments.
- Delivery timing and conversion of the $3.13 billion backlog, including the portion not expected to be filled in FY2016.
- Progress against revised FY2016 revenue, operating-income and EPS ranges, including the effects of discrete tax benefits and share repurchases.