OSHKOSH CORP annual report, FY2015

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Oshkosh Corporation — FY2015 Form 10-K

Reporting period: Fiscal year ended September 30, 2015. The filing also reports fourth-quarter results. Oshkosh designs and manufactures specialty vehicles across access equipment, defense, fire and emergency, and commercial markets.

Financial results

  • FY2015 revenue: $6.10 billion, down 10.4% from $6.81 billion in FY2014.
  • Profitability: Gross income was $1.039 billion (17.0% gross margin), versus $1.183 billion (17.4%) a year earlier. Operating income was $398.6 million (6.5% margin), down 20.8% from $503.3 million (7.4%). Net income was $229.5 million versus $309.3 million; diluted EPS was $2.90 versus $3.61.
  • Cash flow and investment: Operating cash flow was $82.5 million, down from $170.4 million. Capital expenditures were $131.7 million, implying approximately negative $49 million of operating cash flow less property, plant and equipment spending. Inventory rose to $1.302 billion from $961 million; inventory turns fell to 4.3 from 5.8.
  • Debt and liquidity: Total debt was $938.5 million, cash was $42.9 million, and debt-to-capitalization was 32.9%. The company reported $723.9 million of unused revolver capacity and $971.2 million of net working capital. It said it was covenant-compliant and expected sufficient liquidity for the next 12 months.
  • Shareholder returns: Oshkosh repurchased 4.9 million shares for $200.4 million and paid $53.1 million in dividends during FY2015. The quarterly dividend was raised to $0.19 per share beginning in November 2015.

Segments and changes versus FY2014

  • Access equipment: Sales of $3.401 billion, down 3.0%; operating income of $407.0 million, down 18.8%. Currency translation and a North American mid-cycle demand dip hurt sales; product mix and production variances pressured margins.
  • Defense: Sales of $939.8 million, down 45.5%; operating income of $9.2 million, versus $76.4 million. Lower DoD and international M-ATV sales and weak fixed-cost absorption drove the decline.
  • Fire and emergency: Sales of $815.1 million, up 7.8%; operating income of $43.8 million, up 64.5%, reflecting higher deliveries, pricing, product mix and absorption.
  • Commercial: Sales of $978.0 million, up 12.9%; operating income of $64.5 million, up 19.7%, primarily on higher refuse-vehicle volumes and related sales.
  • Backlog increased 37.9% to $2.61 billion, led by defense, fire and emergency, and commercial orders. Access equipment backlog fell 45.4% to $209.7 million. About 17% of total backlog was not expected to ship in FY2016.

Fourth-quarter results

FY2015 fourth-quarter sales were $1.578 billion, operating income was $86.6 million, net income was $50.3 million, and diluted EPS was $0.64. Compared with FY2014 fourth quarter, sales of $1.668 billion, operating income of $113.1 million, net income of $77.8 million, and diluted EPS of $0.93, each reported measure declined. FY2015 Q4 included a $2.9 million workforce-reduction charge ($2.4 million after tax).

Outlook, commentary and risks

  • Management forecast FY2016 sales of $6.2–$6.5 billion, operating income of $400–$440 million, and diluted EPS of $3.00–$3.40, assuming about 75 million average shares. It expected stronger operating cash flow from higher earnings and inventory reductions, and capital expenditures of about $100 million.
  • Management expected access equipment sales to decline 10%–15%, with about a 10.5% operating margin; defense sales to rise approximately 65% to $1.55 billion, with about an 8.75% margin; fire and emergency sales of about $900 million and a 6.0% margin; and commercial sales of about $1.0 billion and a 7.0% margin. The forecast depended partly on an additional international M-ATV contract supporting approximately 1,000 FY2016 deliveries.
  • The DoD awarded Oshkosh an eight-year, $6.7 billion JLTV production contract in August 2015, but a competitor protested the award and the DoD issued a stop-work order. The filing expected a GAO decision in December 2015; $114.7 million of JLTV delivery orders in backlog were on hold.
  • Management cited severe weather, lower oil and gas activity, a strong U.S. dollar, cyclical construction markets, defense-budget uncertainty, commodity and labor cost exposure, supplier constraints, customer credit and inventory risk, and execution of production ramp-ups as important uncertainties. Fixed-price contracts, including JLTV, also expose the company to cost escalation.
  • Unusual items included $14.7 million of debt-extinguishment expense from refinancing, $2.9 million of Q4 workforce-reduction charges, and $13.8 million of discrete tax benefits for FY2015. No goodwill impairment was recorded in FY2015; approximately 90% of goodwill and indefinite-lived intangibles were concentrated in JLG.

Investor verification priorities

  • Verify the outcome and timing of the JLTV protest and whether suspended orders convert into production and cash receipts.
  • Confirm execution, timing, margins and customer funding for the expected international M-ATV contract and FY2016 defense ramp.
  • Track access-equipment demand, inventory reduction, inventory turns and the risk of further margin pressure.
  • Compare FY2016 guidance with reported segment sales and margins, especially defense ramp-up costs and access-equipment under-absorption.
  • Monitor operating cash flow, debt, revolver availability, customer financing guarantees and covenant headroom.

Audit: Deloitte issued an unqualified opinion on the financial statements and internal controls over financial reporting.