Oshkosh Corporation — Fiscal 2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; fourth-quarter results are also summarized below. Oshkosh makes specialty vehicles across access equipment, defense, fire and emergency, and commercial markets.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $6.81 billion | $7.67 billion | Down 11.2% |
| Gross income / margin | $1.18 billion / 17.4% | $1.19 billion / 15.5% | Margin improved |
| Operating income / margin | $503.3 million / 7.4% | $505.7 million / 6.6% | Income down 0.5% |
| Net income | $309.3 million | $318.0 million | Down 2.7% |
| Diluted EPS | $3.61 | $3.55 | Up $0.06 |
| Cash from operations | $170.4 million | $438.0 million | Down $267.6 million |
| Capital expenditures for property, plant and equipment | $92.2 million | $46.0 million | Up $46.2 million |
Operating cash flow fell largely because of higher receivables and inventory. Cash and equivalents were $313.8 million at year-end, versus $733.5 million a year earlier; net working capital was $1.07 billion. Debt totaled $895 million, down from $955 million, and debt-to-capitalization was 31.1%. The company also had $516.7 million of unused revolving-credit availability and reported compliance with its financial covenants.
Segment trends: Access equipment sales rose 12.4% to $3.51 billion, with operating income up 32.0% to $501.1 million and margin of 14.3%. Defense sales fell 43.5% to $1.72 billion and operating income fell 66.1% to $76.4 million. Fire and emergency sales declined 4.5% to $756.5 million, while operating income increased to $26.6 million. Commercial sales rose 12.9% to $865.9 million and operating income rose 30.5% to $53.9 million.
Fourth quarter: Net sales were $1.67 billion, operating income $113.1 million, net income $77.8 million, and diluted EPS $0.93. The filing reports a $3.8 million pension curtailment and settlement charge in the defense segment during the quarter.
Material changes and capital allocation
- Defense contraction drove the consolidated sales decline: defense backlog fell 57.6% to $779.7 million, and total backlog fell 33.4% to $1.89 billion. Access, fire and emergency, and commercial backlogs increased year over year.
- Non-defense margins improved, supported by cost reduction initiatives, pricing and product mix. The access equipment segment posted its second consecutive year of record sales, operating income and margin.
- The company repurchased 8.3 million shares for $403.3 million during FY2014 and paid $50.7 million in dividends. The quarterly dividend was raised from $0.15 to $0.17 per share after year-end.
- A refinancing replaced the 8.125% notes due 2017 with $250 million of 5.375% notes due 2022; refinancing and debt-extinguishment costs included $10.9 million of FY2014 interest expense.
Outlook, commentary and risks
For FY2015, management forecast sales of $6.5–$6.6 billion, operating income of $510–$540 million and diluted EPS of $3.89–$4.14. Adjusted EPS, excluding estimated costs of refinancing the 2020 notes when callable, was forecast at $4.00–$4.25. The outlook assumed defense sales would decline more than 40%, while each non-defense segment grew. Management expected access-equipment margin near 15%, defense earnings slightly above break-even, fire and emergency margin near 4.25%, and commercial margin near 6.5%. Planned FY2015 capital expenditures were approximately $150 million.
- The DoD’s budget reductions and the drawdown in Afghanistan weigh on defense demand. Management expected a break in FHTV production beginning in FY2015’s second quarter while a follow-on contract was negotiated; restart timing, staffing and supplier readiness remain important uncertainties.
- The JLTV production award, expected in late July 2015, is a significant potential opportunity for the defense segment; the filing provides no assurance Oshkosh will win. FY2015 defense guidance also assumed an international order supporting sales of a couple hundred vehicles in the fourth quarter.
- Other risks include cyclical construction and municipal markets, slower-than-expected recovery, commodity costs, fixed-price contract execution, customer credit and receivables, supplier interruptions, foreign-exchange exposure, and possible goodwill impairment. Approximately 90% of goodwill and indefinite-lived intangibles were concentrated in JLG; the annual test found no impairment.
- Reported unusual items included the $8.9 million reversal of DoD billings for disallowed post-employment-benefit costs, pension curtailment and settlement effects, a $1.6 million defense asset impairment, and tax benefits. FY2014 also included $7.5 million of revenue from updated estimates on undefinitized contract changes, increasing net income by $4.7 million.
- Product and general liability claims had estimated net liabilities of $39.4 million. Management said the resolution of legal matters and claims was not expected to materially adversely affect the company, while acknowledging uncertainty.
Investor verification priorities
- Track DoD orders, the FHTV follow-on contract and production restart, the JLTV decision, and whether the assumed international defense contract materializes.
- Compare quarterly cash flow with receivables and inventory trends; FY2014 receivables and inventory rose, and days sales outstanding increased to 50 from 40.
- Assess whether access, fire and emergency, and commercial growth and margin targets are achieved, including the effects of cost initiatives and planned production changes.
- Review refinancing costs and debt maturities, covenant headroom, share repurchases, dividends and the planned $150 million of FY2015 capital expenditures.
- Monitor JLG goodwill and intangibles, customer financing guarantees (maximum estimated exposure $114.7 million), warranty and liability reserves, and tax contingencies.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor reported effective controls as of September 30, 2014.