Oshkosh Corporation — FY2013 Form 10-K
Business context and reporting period. Oshkosh designs and manufactures specialty vehicles and vehicle bodies across access equipment, defense, fire & emergency, and commercial segments. This annual report covers the fiscal year ended September 30, 2013; fiscal Q4 ended on that date. All amounts are U.S. dollars.
Financial results and key metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $7.665 billion | $8.141 billion |
| Gross income | $1.192 billion | $1.007 billion |
| Operating income / margin | $505.7 million / 6.6% | $387.7 million / 4.8% |
| Net income attributable to Oshkosh | $318.0 million | $230.8 million |
| Diluted EPS from continuing operations | $3.53 | $2.67 |
| Cash from operating activities | $438.0 million | $268.3 million |
| Cash and cash equivalents at year-end | $733.5 million | $540.7 million |
| Total debt | $955.0 million | $955.0 million |
| Net working capital | $1.173 billion | $990.0 million |
Fiscal Q4 net sales were $1.727 billion, operating income $65.2 million, and net income $36.3 million. Diluted EPS from continuing operations was $0.40, versus $0.91 in Q4 FY2012.
Segment results for FY2013:
| Segment | Sales | Operating income | Change in sales vs. FY2012 |
|---|---|---|---|
| Access equipment | $3.121 billion | $379.6 million | Up 6.9% |
| Defense | $3.050 billion | $224.9 million | Down 22.8% |
| Fire & emergency | $792.4 million | $23.8 million | Up 3.1% |
| Commercial | $766.9 million | $41.3 million | Up 10.0% |
The company reported unused revolving-credit availability of $439.0 million, in addition to cash. Debt-to-total-capitalization was 31.2%, down from 34.0%. Capital expenditures were $46.0 million for property, plant and equipment; the company expects about $80 million in FY2014. The filing does not provide a defined free-cash-flow measure.
Material changes versus the prior comparable period
- Consolidated sales fell 5.8%, primarily because defense sales declined $900.8 million. Non-defense sales increased, led by access equipment and commercial.
- Operating income rose 30.4% and operating margin expanded to 6.6% from 4.8%. Management attributed the improvement to pricing, mix, operational improvements and stronger non-defense results.
- Access equipment operating margin increased to 12.2% from 7.9%; fire & emergency to 3.0% from 1.1%; and commercial to 5.4% from 4.6%. Defense margin rose to 7.4% from 6.0%, despite lower segment operating income.
- Operating cash flow increased to $438.0 million from $268.3 million, supported by improved earnings and working-capital management.
- Backlog declined 29.9% to $2.84 billion, principally due to defense backlog falling 39.8% as DoD demand and program orders slowed. About 8% of year-end backlog was not expected to be filled in FY2014.
- The company repurchased 6.1 million shares for $201.8 million. After the fiscal year, it declared a $0.15 quarterly dividend, reinstating a dividend after three fiscal years without one.
Outlook, management commentary, risks and unusual items
Management forecast FY2014 sales of $6.6–$6.9 billion, down 10%–14%, operating income of $455–$490 million, and diluted EPS of approximately $3.10–$3.40. The forecast assumes about a 40% decline in defense sales, partly offset by growth in non-defense segments. FY2014 segment sales outlook: access equipment $3.3–$3.4 billion; defense $1.75–$1.85 billion; fire & emergency $800–$825 million; commercial $850–$900 million. Management estimated a 31% tax rate and approximately $80 million of capital expenditures.
Management maintained its FY2015 EPS target of $4.00–$4.50. It expects to exceed its 250-basis-point operating-margin improvement target from cost optimization, but acknowledged that market recovery is weaker than anticipated in some regions and its new-product revenue initiative missed its FY2013 target. The company’s target for incremental annual revenue from innovation is $350 million by FY2015 versus FY2012; its target for international revenue is more than 25% by FY2015.
Key risks include lower U.S. defense budgets, sequestration and reduced DoD vehicle procurement; the outcome of the JLTV production competition; cyclical construction, rental, municipal and vehicle markets; commodity costs and fixed-price contracts; customer credit and collection exposure; supplier availability; foreign-exchange and international operating risks; and execution of cost, product-development and market-expansion initiatives. Defense contracts may be reduced or terminated, and fixed-price work may face cost overruns. Goodwill and purchased intangible assets are concentrated in access equipment (about 88%); the company recorded a $9.0 million non-cash trade-name impairment in FY2013.
Unusual and other relevant items: FY2013 operating income included $16.3 million of costs related to an unsolicited tender offer and threatened proxy contest, the $9.0 million impairment, and $3.8 million related to a five-year defense union-contract extension. Favorable adjustments on undefinitized defense contracts added $13.8 million of revenue and $6.6 million of net income ($0.07 per share). The ambulance business was discontinued and reported as discontinued operations. The company has $91.8 million of estimated maximum exposure under customer financing guarantees and recorded $4.3 million of guarantee liabilities. Environmental reserves were $1.9 million; net product and general liability reserves were $45.6 million. Management said pending legal matters were not expected to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether DoD spending and defense orders decline as assumed, and the timing and terms of follow-on heavy tactical vehicle contracts and the JLTV production award.
- Whether FY2014 defense sales and margins meet guidance, and whether non-defense growth offsets the defense contraction.
- Whether reported operating-margin gains are sustainable after considering favorable contract adjustments, product mix, pricing, and listed unusual charges.
- Whether the FY2015 EPS, cost-savings, new-product revenue and international-sales targets remain achievable given weaker-than-expected market recovery and delayed innovation results.
- Whether cash generation, working capital, customer credit exposure and $439 million of revolver availability remain adequate through the downturn; also monitor the October 2015 term-loan maturity and covenant compliance.
- Whether the access-equipment goodwill and intangible-asset valuations remain supported by market recovery assumptions, and whether guarantee, warranty, tax and legal exposures change materially.