Oshkosh Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2015; compared with the corresponding 2014 periods. The filing was signed July 30, 2015. Oshkosh operates in access equipment, defense, fire and emergency, and commercial vehicles and equipment.
Financial performance
| Metric | Q3 2015 | Q3 2014 | First nine months 2015 | First nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,612.3 million | $1,932.4 million | $4,519.8 million | $5,140.5 million |
| Gross income | $284.0 million | $346.9 million | $789.5 million | $893.2 million |
| Operating income | $136.6 million | $174.3 million | $312.0 million | $390.2 million |
| Net income | $89.9 million | $105.1 million | $179.2 million | $231.5 million |
| Diluted EPS | $1.13 | $1.22 | $2.25 | $2.68 |
| Operating margin | 8.5% | 9.0% | 6.9% | 7.6% |
- Q3 sales declined 16.6% and operating income declined 21.7%. Lower defense sales and weaker-than-expected access equipment results drove the decrease. A stronger U.S. dollar reduced Q3 sales by $35.5 million.
- For the first nine months, sales fell 12.1%; defense revenue fell 56.7%, while access equipment, fire and emergency, and commercial sales increased 2.2%, 5.2%, and 16.5%, respectively.
- Q3 gross margin was approximately 17.6%, versus 18.0% a year earlier. Nine-month gross margin was approximately 17.5%, versus 17.4%.
- Cash used in operating activities was $36.6 million for the first nine months, compared with $69.4 million generated in 2014. Investing activities used $103.8 million; financing activities used $127.0 million. Cash declined to $46.2 million from $313.8 million at September 30, 2014.
- At June 30, total debt was $900 million and shareholders’ equity was $1,997.6 million; debt to total capitalization was 31.1%. The company had $762.5 million of available revolving-credit capacity and reported compliance with its debt covenants.
Material changes and segment results
- Access equipment: Q3 sales decreased 10.3% and operating income decreased 18.2%. Management cited heavy rains, cautious rental-company ordering, lower oil and gas prices affecting rental demand, and production challenges during new product launches. Nine-month sales rose, but operating income declined.
- Defense: Q3 sales declined 58.7%, and the segment recorded a $7.1 million operating loss. The decrease reflected a production gap between multi-year U.S. Army heavy-vehicle contracts, lower scheduled medium-vehicle volumes, and no comparable international M-ATV sales. Nine-month defense sales declined 56.7% and the segment recorded a $9.3 million operating loss.
- Fire and emergency: Q3 sales increased 6.6% and operating income increased to $9.6 million. Nine-month sales increased 5.2% and operating income increased 42.6%.
- Commercial: Q3 sales increased 18.9% and operating income increased to $22.4 million. Nine-month sales increased 16.5% and operating income increased 22.4%, supported by refuse-vehicle and concrete-placement sales.
- Q3 diluted EPS included approximately $0.09 per share from tax-audit settlement and statute expirations, and approximately $0.09 from lower average diluted shares, principally due to prior repurchases. Q3 2014 EPS included offsetting defense-related OPEB items, including a curtailment gain.
Outlook, risks and contingencies
- Management forecast fiscal 2015 sales of approximately $6.1 billion, consolidated operating income of $400–$425 million on an adjusted basis, and GAAP diluted EPS of $2.91–$3.16. Adjusted EPS guidance was $3.00–$3.25, excluding debt-refinancing costs and an OPEB curtailment gain. The forecast assumed approximately 79.5 million average diluted shares and a tax rate of approximately 32%.
- Management expected fiscal 2015 to be a trough year for defense earnings, with meaningful defense earnings growth in fiscal 2016 anticipated largely from international M-ATV sales. Expected contract timing and deliveries remain subject to finalization and execution. Access equipment sales were expected to decline approximately 5%–10% in fiscal 2016, partly due to reduced replacement demand.
- Backlog was $2.6 billion at June 30, up 22.7% year over year. Access equipment backlog fell 19.0% to $394.9 million; defense backlog rose 38.3% to $1.2 billion. Approximately 58.4% of total backlog was not expected to be filled in fiscal 2015. Backlog excludes certain options, unsigned orders, and unfunded contract amounts and is not a guarantee of future sales.
- Working capital pressures included higher access-equipment inventory for seasonal demand and defense inventory built for anticipated orders. Inventory turns declined to 4.3 from 5.8 at September 30, 2014. Management estimated fiscal 2015 operating cash generation of approximately $10 million and expected capital spending of approximately $150 million.
- In March 2015, the company issued $250 million of 5.375% senior notes due 2025 and used proceeds and cash to redeem its 8.5% notes due 2020. The refinancing generated $14.7 million of expense in the first nine months.
- Material risks include cyclical construction and rental markets, weather and oil-price effects on equipment utilization, foreign exchange, U.S. and international defense procurement and funding, contract timing and pricing, product-launch and production issues, warranty and receivable exposures, and customer credit-guarantee risk. The company guaranteed $549.2 million of customer debt, with estimated maximum loss exposure of $110.2 million. Management stated that it did not expect disclosed legal, warranty, or guarantee matters to have a material adverse effect.
Most important facts for investors to verify
- Whether access-equipment demand and new-product production issues improve, and whether lower rental utilization continues to constrain orders.
- Timing, funding, and profitability of the FHTV recapitalization and anticipated international M-ATV contracts, including amounts ultimately recognized in fiscal 2016.
- Whether inventory converts to sales and cash as expected; monitor operating cash flow, inventory turns, and the fiscal 2015 cash-generation estimate.
- Progress against fiscal 2015 guidance and the assumptions behind fiscal 2016 defense growth and access-equipment sales projections.
- Potential effects of customer credit deterioration, guarantees, tax matters, and covenant restrictions on liquidity, dividends, and share repurchases.