Oshkosh Corporation — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011; the filing also reports unaudited fourth-quarter results. Oshkosh designs and manufactures specialty vehicles and bodies across defense, access equipment, fire and emergency, and commercial markets. U.S. government sales were approximately 56% of FY2011 revenue.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $7.585 billion | $9.842 billion |
| Gross income / margin | $1.080 billion / 14.2% | $1.970 billion / 20.0% |
| Operating income / margin | $500.9 million / 6.6% | $1.394 billion / 14.2% |
| Net income | $273.4 million | $790.0 million |
| Diluted EPS | $2.99 | $8.69 |
| Cash from operations | $387.7 million | $619.7 million |
| Capital spending (property, plant and equipment) | $82.3 million | $83.2 million |
| Cash and cash equivalents at year-end | $428.5 million | $339.0 million |
| Total debt at year-end | $1.060 billion | $1.302 billion |
| Net working capital | $762.8 million | $403.9 million |
The company repaid $241.4 million of debt during FY2011. It had $522.1 million of unused revolving-credit availability at year-end and was in compliance with its credit covenants. FY2011 operating cash flow less property, plant and equipment additions was approximately $305 million; this calculation does not deduct additions to rental equipment.
Fourth-quarter FY2011 net sales were $2.115 billion, operating income $73.8 million, net income $38.1 million and diluted EPS $0.41. Fourth-quarter FY2010 net sales were $2.105 billion and operating income $233.6 million.
Changes versus the prior year
- Sales fell 22.9% and operating income fell 64.1%, mainly as M-ATV deliveries declined after the unusually high FY2010 production year.
- Defense sales decreased 39.0% to $4.365 billion. M-ATV vehicle and related parts and service sales fell to $1.25 billion from $4.49 billion. FMTV production began, generating $548.8 million of FY2011 sales.
- Access equipment sales to external customers rose 53.5% to $1.94 billion, but total segment sales fell because intersegment M-ATV activity sharply declined. Higher material costs and lower-margin sales weighed on results.
- Fire and emergency sales declined 12.6% amid weak municipal spending; the segment recorded an $8.2 million operating loss. Commercial sales declined 9.2%, with lower refuse-vehicle volume.
- Cost of sales increased to 85.8% of revenue from 80.0%, reflecting adverse product mix, fixed-cost under-absorption, inefficiencies and increased product-development spending.
- Backlog increased 19.9% to $6.48 billion, including $5.13 billion in defense and $729.2 million in access equipment. Backlog is not a guarantee of future revenue; approximately 21% was not expected to ship in FY2012.
Outlook, commentary and material risks
- Management characterized FY2012 as transitional and expected it to be the trough earnings year of the cycle, with operating and net income significantly below FY2011. The company expected modestly negative free cash flow and $85–$95 million of capital expenditures, while stating that liquidity should be sufficient for the next 12 months.
- Management expected FY2012 defense sales to decline about 15%; segment operating margin was expected below 5%. FMTV was expected to remain loss-making through Q1 FY2012, then become profitable, with full-year margins slightly above breakeven. This outlook depends on cost savings, production efficiency and material-cost assumptions.
- A shortage of specified tires redirected for higher-priority defense programs was expected to delay about $225 million of sales from FY2012 to FY2013 and disrupt FHTV production through much of FY2012.
- Expected FY2012 segment trends: access equipment sales growth of about 20% with mid-to-upper-single-digit margins; fire and emergency sales approximately flat with low-single-digit margins; commercial sales slightly higher with roughly flat margins. These are management estimates, not guarantees.
- Defense exposure is concentrated: U.S. government sales were 56% of FY2011 revenue. Budget cuts, troop drawdowns, appropriations, contract competition or termination, and delayed or reduced orders could materially affect results. The FHTV contract expired in September 2011; a bridge contract remained under negotiation.
- The FMTV contract generated a $44.4 million loss in FY2011, including $43.0 million of start-up costs. Management had not recorded a future loss-contract charge, but a 1% material-cost increase on current backlog was estimated to add about $24 million of cost.
- Other risks include cyclical construction and municipal markets, supplier shortages and commodity inflation, customer credit and financing exposure, foreign-exchange movements, goodwill impairment, debt covenants and restructuring execution. Goodwill and purchased intangibles were concentrated in access equipment; JLG’s estimated fair value exceeded carrying value by about 40% in the annual test.
- A claimant sought $190.3 million in litigation related to the M-ATV contract; the company said the outcome was uncertain and did not expect a material adverse effect. Environmental reserves were $2.1 million and product/general liability reserves were $41.7 million. The company also disclosed notice of a potential proxy contest by funds affiliated with Carl Icahn.
- The company recorded $4.8 million of impairment charges in FY2011 and $7.7 million of restructuring charges. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether FMTV production achieves the expected profitability from Q2 FY2012 onward, and how actual material costs and production efficiencies compare with management’s assumptions.
- Whether the tire constraint, FHTV bridge-contract negotiations and defense-budget changes affect order timing, revenue, margins and performance-based cash receipts.
- Whether access-equipment growth and pricing offset supplier, material-cost and working-capital pressures.
- Whether FY2012 cash flow, debt repayment and covenant headroom track management’s outlook, particularly given its forecast of modestly negative free cash flow.
- Developments in the $190.3 million M-ATV-related lawsuit, customer-credit guarantees, restructuring execution and potential impairment of access-equipment goodwill.