Oshkosh Corporation — FY2010 Form 10-K
Reporting period: Fiscal year ended September 30, 2010. The filing also reports fourth-quarter results. Oshkosh designs and manufactures specialty vehicles across defense, access equipment, fire and emergency, and commercial markets. Defense accounted for 73% of consolidated sales; the U.S. government represented approximately 72% of sales.
Financial performance and liquidity
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $9.842 billion | $5.253 billion |
| Gross income / margin | $1.970 billion / 20.0% | $703.3 million / 13.4% |
| Operating income (loss) / margin | $1.394 billion / 14.2% | ($979.5 million) / (18.6%) |
| Net income (loss) attributable to Oshkosh | $790.0 million | ($1.099 billion) |
| Diluted EPS, continuing operations | $8.72 | ($15.26) |
| Cash from operating activities | $619.7 million | $898.9 million |
| Capital expenditures for property, plant and equipment | $83.2 million | $46.2 million |
| Cash and cash equivalents at year-end | $339.0 million | $530.4 million |
| Total debt at year-end | $1.302 billion | $2.038 billion |
| Net working capital | $403.9 million | $484.6 million |
FY2010 revenue grew 87.4%, driven chiefly by M-ATV production. The company delivered 7,539 M-ATVs and recorded $4.48 billion of related vehicle, parts and service sales. FY2010 operating results included $25.6 million of noncash impairment charges, compared with $1.19 billion in FY2009; the prior-year loss was therefore substantially affected by impairment. Cash from operations declined year over year, in part because FY2009 included significant customer advances and working-capital releases. Debt fell $735.9 million, and debt-to-total capitalization improved to 49.5% from 79.9%.
Fourth quarter: Sales were $2.105 billion, operating income was $233.6 million, income from continuing operations attributable to common shareholders was $116.6 million, and diluted EPS from continuing operations was $1.28. In Q4 FY2009, those figures were $1.472 billion, $118.2 million, $45.7 million and $0.55, respectively; FY2009 quarterly net income also included discontinued-operations items.
Material changes and business developments
- Defense segment sales rose 176.0% to $7.162 billion; operating income rose to $1.321 billion. M-ATV activity drove the increase, while FMTV production began ramping up.
- Access equipment sales rose to $3.012 billion, including $1.73 billion of intersegment M-ATV-related sales. External-customer sales increased 12.0%; segment operating income was $97.3 million, versus a prior-year loss that included $941.7 million of impairment charges.
- Fire and emergency sales declined 12.1% to $916.0 million, reflecting weaker fire-apparatus shipments and mobile medical demand. Commercial sales increased 5.4% to $622.1 million, including greater defense-related component activity.
- Year-end backlog declined 3.8% to $5.40 billion. Defense backlog was $4.73 billion; access equipment backlog increased 82.0% to $197.1 million, while fire and emergency and commercial backlogs declined.
- The company issued $500 million of senior notes in March 2010 and entered a new senior secured credit agreement in September. It suspended common dividends effective April 2009 and paid none in FY2010.
- Oshkosh sold its BAI business in October 2009; Geesink and BAI results are reported as discontinued operations. JerrDan was reassigned from fire and emergency to access equipment, with historical segment information reclassified.
Outlook, risks and unusual items
Management expected FY2011 sales, operating income and net income to be below FY2010, principally because M-ATV deliveries were scheduled to conclude in the first quarter. It expected defense sales above $4 billion, FMTV to represent about 15% of defense sales, and FMTV margins to be near break-even during the ramp-up. Management forecast low-double-digit total defense margins, low-single-digit access equipment margins, flat-to-down fire and emergency margins, and modestly higher commercial sales. It expected more modest debt reduction, lower interest expense, capital expenditures near $100 million (potentially $125 million if recovery strengthened), and an effective tax rate of approximately 38%. These are management expectations, not guarantees.
- Customer and contract concentration: U.S. government sales were approximately 72% of FY2010 revenue. Government funding, contract termination, competition, testing, fixed-price cost overruns and the end of M-ATV deliveries could materially affect results. FMTV was bid at aggressive margins and remained subject to testing.
- Economic and market exposure: Access equipment, construction-related commercial products and municipal fire apparatus face cyclical demand; management cited continuing economic weakness and tight credit markets.
- Debt and liquidity: The company had $339.0 million of cash and $363.8 million of unused revolving capacity at year-end, subject to credit-agreement covenants. Its debt includes variable-rate borrowings, restrictive covenants and scheduled amortization.
- Receivables and guarantees: Access equipment customer credit quality and collateral values remain risks. Maximum exposure under customer-indebtedness guarantees was estimated at $103.2 million; recorded liabilities were $24.0 million.
- Warranty, supply and restructuring: Warranty provisions rose to $83.8 million and the accrued warranty liability to $90.5 million. The company also cited potential M-ATV systemic repair costs, supplier disruption, facility consolidation costs and execution risks.
- Impairment sensitivity: Approximately 86% of recorded goodwill and purchased intangibles were concentrated in JLG. Its estimated fair value exceeded book value by about $400 million, but depended on a projected construction recovery; a 50-basis-point higher discount rate would reduce estimated JLG fair value by about $150 million.
- Other exposures: Foreign exchange, commodity prices, labor negotiations, environmental and product-liability claims, and health-care reimbursement changes affecting mobile medical products were identified risks. Recorded environmental reserves were $1.9 million and product/general liability reserves were $44.4 million.
Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of September 30, 2010.
Investor verification priorities
- Confirm the timing and financial effect of the final M-ATV deliveries, related aftermarket sales and use of contract advances.
- Track FMTV order volumes, test acceptance, cost performance and realized margins against management’s near-break-even ramp-up expectation.
- Assess the quality and conversion of the $5.40 billion backlog, noting that it excludes unfunded contract portions and 22.5% was not expected to be filled in FY2011.
- Review operating cash flow and working-capital needs as customer advances unwind, alongside debt repayment, covenant headroom and refinancing requirements.
- Monitor JLG impairment assumptions, customer-credit exposures, warranty developments and the effects of facility consolidations.