Oshkosh Corporation — Q3 FY2014 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts are in millions except per-share data.
Business context and results
Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles. Third-quarter performance reflected record quarterly access-equipment sales and stronger commercial results, more than offset by the expected decline in defense sales as U.S. Department of Defense spending and international M-ATV sales fell.
| Metric | Q3 FY2014 | Q3 FY2013 | First 9 months FY2014 | First 9 months FY2013 |
|---|---|---|---|---|
| Net sales | $1,932.4 | $2,204.4 | $5,140.5 | $5,938.6 |
| Gross income | $346.9 | $385.5 | $893.2 | $934.9 |
| Operating income | $174.3 | $225.6 | $390.2 | $440.5 |
| Net income | $105.1 | $148.7 | $231.5 | $281.7 |
| Diluted EPS | $1.22 | $1.67 | $2.68 | $3.13 |
| Operating margin | 9.0% | 10.2% | 7.6% | 7.4% |
Q3 gross margin was approximately 18.0% versus 17.5% a year earlier; nine-month gross margin was approximately 17.4% versus 15.7%. Nine-month results include immaterial discontinued operations in the 2013 comparison.
Segment performance and material changes
- Access equipment: Q3 sales increased 10.4% to $1,039.2 and operating income rose 8.0% to $166.8; nine-month operating income rose 25.2% to $373.7. Higher volumes, pricing and cost reductions contributed. Management cited Latin American market softness and higher spending to support initiatives.
- Defense: Q3 sales fell 46.5% to $470.7 and operating income fell 77.7% to $19.1. Nine-month sales decreased 43.4% to $1,436.4 and operating income declined 63.3% to $78.4, mainly due to lower DoD demand and reduced M-ATV sales.
- Fire & emergency: Q3 sales decreased 8.3% to $187.5 and operating income was $6.2 versus $6.5. Some international deliveries shifted to Q4 because of port and logistics delays.
- Commercial: Q3 sales rose 27.0% to $247.3 and operating income nearly doubled to $19.9, a segment margin of 8.0%. Nine-month sales increased 11.6% to $622.2 and operating income increased 38.6% to $35.5.
Consolidated Q3 operating income declined 22.7%. For the first nine months, sales declined 13.4% and operating income declined 11.4%, while operating margin improved modestly. Q3 SG&A rose to $158.7, or 8.2% of sales, partly reflecting the shift in revenue mix away from defense.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $69.4, versus $247.5 in 2013, primarily reflecting higher receivables and inventory. Investing cash outflow was $67.9; capital expenditures were $54.6. Financing cash outflow was $208.5.
- Cash was $525.7 at June 30, down from $733.5 at September 30, 2013. Total debt was $900.0, versus $955.0; net debt was approximately $374.3. Debt-to-total-capitalization was 28.8%, versus 31.2%.
- Available revolving credit capacity was $513.6, after $86.4 of letters of credit. The company reported compliance with credit covenants and expected sufficient liquidity for the next 12 months.
- Current assets were $2,613.9 and current liabilities $1,337.9. Receivables increased to $1,034.3 from $794.3 and inventory to $929.2 from $822.0. Days sales outstanding rose to 47 days from 40 at fiscal year-end.
- During the nine months, Oshkosh issued $250 of 5.375% notes due 2022 and redeemed $250 of 8.125% notes due 2017, recognizing about $10.5 of related expense. It also entered a new credit agreement with a $400 term loan and a $600 revolving facility maturing in 2019.
- The company paid $38.1 in dividends and repurchased $152.8 of shares in the nine-month period. No shares were repurchased after February 4, 2014; 11 million shares remained authorized for repurchase.
Outlook, commentary and risks
Management forecast FY2014 sales of $6.70–$6.75 billion, GAAP diluted EPS of $3.42–$3.57, and operating income of approximately $485–$500. Adjusted EPS was forecast at $3.40–$3.55 and adjusted operating income at $490–$505. The outlook reflects weaker Latin American demand, slower-than-anticipated fire-apparatus sales, and commercial order and chassis-delivery timing. Capital expenditures were expected to be approximately $100, up from the prior estimate of $80, to support vertical-integration initiatives.
Management reduced defense staffing by a further 30% to align with lower production rates. Q3 defense results included a $9.7 net pension and other post-employment benefit curtailment gain, offset by a $10.7 reduction in sales and operating income from revised eligible benefit costs under historical cost-plus government contracts. The nine-month period also included $11.0 of debt-extinguishment costs and a $12.1 tax benefit from reducing a valuation allowance.
Backlog fell 33.6% year over year to $2.11 billion, primarily due to defense, where backlog declined 53.4% to $879.8. Approximately 45% of total backlog was not expected to be filled in FY2014. Risks include further DoD budget reductions, the outcome of the JLTV competition, potential FHTV production gaps, cyclical construction and municipal markets, slower international demand, working-capital variability, customer credit and collection exposure, and execution of cost-reduction and growth initiatives. The filing also reports $420.4 of customer indebtedness guaranteed, with estimated maximum loss exposure of $109.4; management did not expect guarantee losses materially above reserves. Other disclosed legal, environmental and product-liability matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether DoD procurement, the JLTV award and any FHTV production interruption materially affect defense revenue, margins and cash flow.
- Whether FY2014 sales, GAAP and adjusted earnings, operating-income and capital-spending guidance was achieved, especially given weaker Latin American demand and slower fire & emergency sales.
- Whether receivables, inventory, days sales outstanding and operating cash flow improve as production delays and working-capital needs normalize.
- Whether reported results and outlook appropriately account for benefit curtailments, contract pricing adjustments, refinancing costs and tax valuation-allowance benefits.
- Whether customer guarantees, concentrated notes receivable, warranty claims and other contingencies remain within recorded reserves.