Oshkosh Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. Unless otherwise noted, financial amounts are in millions of dollars. Results are unaudited and compare with the corresponding 2012 periods.
Business context and results
Oshkosh manufactures access equipment, defense vehicles and services, fire and emergency vehicles, and commercial vehicles and equipment. In Q2, growth in its non-defense businesses partly offset lower defense sales. Management cited improved pricing, product mix and operating efficiencies as drivers of stronger profitability.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,984.4 | $2,062.3 | $3,734.2 | $3,930.8 |
| Gross income | $303.4 | $244.1 | $549.4 | $469.0 |
| Gross margin | 15.3% | 11.8% | 14.7% | 11.9% |
| Operating income | $134.6 | $84.1 | $214.9 | $163.2 |
| Operating margin | 6.8% | 4.1% | 5.8% | 4.2% |
| Net income attributable to Oshkosh | $86.5 | $37.3 | $133.0 | $76.2 |
| Diluted EPS | $0.97 | $0.41 | $1.47 | $0.83 |
Key financial metrics and changes
- Q2 revenue and earnings: Sales declined 3.8%, while operating income rose 60.0% and diluted EPS more than doubled. Continuing-operations diluted EPS was $0.96, versus $0.47.
- Six-month performance: Sales fell 5.0%, but operating income increased 31.7%. Higher prices and improved performance in access equipment and fire and emergency supported results.
- Segment trends, Q2: Access equipment sales rose 7.5% to $817.4 and operating income reached $95.0. Defense sales fell 16.2% to $827.6, while operating income rose to $67.0, supported by international M-ATV mix and efficiencies. Fire and emergency sales increased 3.3% to $174.0 and returned to operating income of $2.7. Commercial sales rose 10.6% to $185.5 and operating income increased to $7.6.
- Cash flow: Operating cash flow was $44.4 for the first six months, compared with $46.9 a year earlier. Investing cash use was $24.9 and financing cash use was $108.6, including $125.1 of share repurchases. Cash declined $88.4 to $452.3.
- Liquidity and debt: Total debt was $955.0, unchanged from September 30, 2012; cash was $452.3 and unused revolving-credit availability was $338.5. Debt to total capitalization was 33.6%. The company reported compliance with credit covenants and expected to meet them over the next 12 months.
- Balance sheet and working capital: Current assets were $2,659.0 and current liabilities $1,614.6. Inventory rose to $1,060.7 from $937.5; inventory turns declined to 5.3 from 6.0 at September 30, 2012, reflecting seasonality and longer defense shipment transit times. Customer advances were $529.1.
Outlook, risks and unusual items
- Management raised fiscal 2013 adjusted diluted EPS guidance to $2.90–$3.15 from $2.80–$3.05. Including $0.11 per share of tender-offer and proxy-contest costs, the stated GAAP continuing-operations range was $2.79–$3.04.
- Fiscal 2013 sales guidance: access equipment $2.85–$3.05 billion; defense $3.1–$3.2 billion; fire and emergency $720–$750 million; commercial $720–$750 million. Expected segment operating margins were 10.5%–11.0%, approximately 7.0%, 2.0%–2.5%, and 4.5%–5.0%, respectively.
- Management expected Q3 to be the strongest quarter, reflecting seasonal construction demand and UAE M-ATV deliveries; Q4 was expected to be the weakest because of seasonality and lower defense sales. Fiscal 2013 capital spending was estimated at approximately $50 million. The expected full-year tax rate was approximately 31%.
- Defense production rates were expected to decline approximately 30% beginning in June 2013. The company announced planned reductions of about 700 production employees and 200 salaried employees and contractors in June and July. A Saudi Arabian M-ATV order was expected to deliver in fiscal 2014.
- Backlog at March 31 was $4.03 billion, down 27.7% year over year; defense backlog fell 34.4%. About 32% of total backlog was not expected to be filled in fiscal 2013. Backlog excludes certain options and unfunded contract portions and is not a guarantee of future sales.
- Management identified risks from U.S. defense budget reductions and sequestration, contract timing and funding, cyclical construction and municipal markets, customer financing and receivable collection, input costs, warranty claims, production or shipment delays, foreign exchange, and execution of planned cost reductions. Sales to the U.S. government represented approximately 40% of first-half sales.
- Unusual items include $16.3 million of expected fiscal-year tender-offer and proxy-contest costs; increased share-based compensation; discontinued ambulance and mobile medical trailer operations; and a $4.6 million Q2 tax benefit from reinstatement of the U.S. research and development credit and lower foreign taxes. The company repurchased 4.25 million shares for $125.1 million in the first half and targeted an additional $175 million of repurchases over the next six to twelve months.
- Other exposures include $89.2 million of estimated maximum loss exposure on customer credit guarantees, $89.8 million of revenue recorded on still-undefinitized contracts, and $23.1 million of restructured notes receivable. Management said it did not expect identified legal, warranty, or environmental matters to materially adversely affect the company, while noting inherent uncertainty.
Important facts for investors to verify
- Whether defense reductions, sequestration and contract timing affect second-half revenue, margins, cash conversion and the planned workforce actions.
- Whether UAE M-ATV deliveries, the Saudi Arabian order, and expected timing of customer orders support management’s segment and EPS outlook.
- Whether inventory growth, defense working-capital demands and customer advances translate into sustainable operating cash flow.
- Whether the $338.5 million of revolving capacity remains available after letters of credit, covenant requirements and planned share repurchases.
- How much of reported earnings improvement reflects recurring price, mix and efficiency gains versus tax benefits, contract estimates, share-based compensation and other unusual items.
- Whether receivable concentration, guarantees, warranty reserves and contract definitization result in losses or estimate changes beyond recorded amounts.