Oshkosh Corporation — Form 10-Q Summary
Business context and period. This unaudited filing covers the fiscal third quarter and first nine months ended June 30, 2010, compared with the corresponding 2009 periods. Oshkosh manufactures defense vehicles, access equipment, fire and emergency vehicles, and commercial vehicles. The results were strongly affected by the U.S. military M-ATV program.
Key financial results
| Metric | Three months ended June 30, 2010 | Three months ended June 30, 2009 | Nine months ended June 30, 2010 | Nine months ended June 30, 2009 |
|---|---|---|---|---|
| Net sales | $2,439.0 million | $1,215.0 million | $7,737.3 million | $3,781.0 million |
| Gross income | $481.6 million | $175.9 million | $1,588.6 million | $462.5 million |
| Operating income (loss) | $340.5 million | $39.3 million | $1,160.5 million | $(1,097.7) million |
| Net income (loss) attributable to Oshkosh | $211.2 million | $(26.6) million | $673.4 million | $(1,239.1) million |
| Diluted earnings (loss) per share | $2.31 | $(0.36) | $7.41 | $(16.65) |
| Cash provided by operating activities | Not stated for the quarter | $530.7 million | $444.0 million |
Third-quarter sales rose 100.8%; nine-month sales rose 104.6%. Gross margin was approximately 19.7% for the quarter and 20.5% for the nine months, versus 14.5% and 12.2%, respectively, in 2009. Operating margin was 14.0% for the quarter and 15.0% for the nine months; the prior-year nine-month period included substantial impairment charges.
At June 30, 2010, cash was $424.5 million, down from $530.4 million at September 30, 2009. Total debt was approximately $1.441 billion, down from $2.038 billion; debt to total capitalization fell to 55.4% from 79.9%. The company reported $522.3 million of unused revolving-credit availability. Current assets were $2.262 billion and current liabilities were $1.629 billion. The filing does not present a company-defined free-cash-flow measure.
Material changes and drivers
- Defense: Third-quarter segment sales increased to $1.701 billion from $605.4 million, primarily from M-ATV deliveries and related parts and service. M-ATV-related sales were $1.08 billion in the quarter and $3.81 billion in the first nine months.
- Access equipment: Segment sales were $689.9 million, including $316.0 million of intersegment M-ATV-related sales. External-customer sales increased 77.0% in the quarter to $373.9 million, from unusually weak prior-year demand.
- Fire and emergency: Third-quarter sales declined 15.6% to $243.3 million, with lower volume associated with weak municipal demand and shipment timing. Nine-month sales declined 12.9%.
- Commercial: Third-quarter sales increased 14.4% to $158.3 million; nine-month sales were essentially flat at $459.3 million.
- Lower debt reduced third-quarter net interest expense by $21.9 million versus the prior-year quarter. Nine-month operating cash flow increased, although working-capital movements used cash, particularly receivables, inventory, and customer advances.
Outlook, commentary, and risks
- Management expected fourth-quarter fiscal 2010 M-ATV deliveries of 700–800 vehicles, lower M-ATV-related sales than in the third quarter, and continued strong defense earnings. It expected fiscal 2010 capital spending of approximately $100 million and an annual tax rate of about 34%.
- For fiscal 2011, management expected sales, operating income, and net income to be below fiscal 2010, which was expected to include approximately $4.5 billion of M-ATV-related sales. Management anticipated solid defense performance, but said initial FMTV margins would be very low; it expected fiscal 2011 capital expenditures near $100 million, potentially $125 million if the recovery strengthened, and an effective tax rate of 37%–38%.
- Management said it expected sufficient liquidity for the next 12 months and planned to continue reducing debt. At June 30, the company was in compliance with credit-agreement leverage and interest-coverage covenants, with reported ratios of 0.96 to 1.0 and 9.00 to 1.0, respectively. Dividends had been suspended since April 2009.
- Key risks include the scheduled M-ATV production wind-down, uncertainty in defense budgets and contract competition, fixed-price contract cost overruns and FMTV testing, cyclical and weak non-defense markets, customer credit and receivable collection, and potential M-ATV warranty issues. The company also cited possible future impairment of goodwill and intangibles, interest-rate exposure, raw-material cost volatility, and international and regulatory risks.
- Unusual items included a favorable tax-audit settlement that increased third-quarter net income by $15.3 million, or $0.17 per share, and $23.3 million of first-quarter fiscal 2010 impairment charges related to the Oshkosh Specialty Vehicles reporting unit. The filing also reports $258.2 million of guaranteed indebtedness of others in the access-equipment segment, with $22.1 million of related recorded liabilities.
Investor verification priorities
- Verify the expected timing and scale of the M-ATV production decline, related parts-and-service demand, and the transition to FMTV production and margins.
- Assess how much reported growth and profitability depend on defense contracts and intersegment M-ATV activity; U.S. government sales represented approximately 74% of nine-month sales.
- Review working-capital needs as customer advances are used and M-ATV deliveries wind down, including the effect on operating cash flow and debt repayment.
- Monitor covenant headroom, variable-rate debt and interest-swap exposure, and the company’s ability to maintain liquidity through the defense-program transition.
- Track warranty claims, customer credit exposure, tax contingencies, and impairment assumptions, particularly for mobile medical equipment and other cyclical businesses.