Oshkosh Corporation — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended March 31, 2015. Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles. Results are unaudited; interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Net sales | $1,554.2 million | $1,677.9 million | $2,907.5 million | $3,208.1 million |
| Operating income | $109.7 million | $119.4 million | $175.4 million | $215.9 million |
| Net income | $54.6 million | $71.5 million | $89.3 million | $126.4 million |
| Diluted EPS | $0.69 | $0.83 | $1.12 | $1.47 |
| Operating margin | 7.1% | 7.1% | 6.0% | 6.7% |
- Q2 sales declined 7.4%; six-month sales declined 9.4%. Q2 operating income fell 8.1%, while net income fell 23.6%.
- For the six months, operating cash flow was negative $70.7 million, versus negative $54.3 million a year earlier. Investing cash flow was negative $73.4 million; financing cash flow was negative $119.0 million. Cash decreased $260.4 million to $53.4 million.
- At March 31, current assets were $2,376.4 million and current liabilities $1,381.7 million (current ratio about 1.72). Total debt was $898.7 million, cash $53.4 million, and debt-to-total-capitalization 32.1%. Unused revolving facility capacity was $760.4 million.
- Gross margin was approximately 17.8% in Q2, compared with 17.4% a year earlier. The company reported Q2 operating margin of 7.1% in both periods.
Changes and segment performance
- Defense drove the consolidated sales decline: Q2 segment sales fell 67.2% to $158.7 million, and the segment recorded a $12.0 million operating loss. Lower U.S. Department of Defense orders, a pause in FHTV production, lower FMTV requirements, and no comparable M-ATV international sales were cited.
- Non-defense segments grew in Q2: access equipment sales rose 13.4% to $981.8 million; fire and emergency rose 30.0% to $202.9 million; commercial rose 21.2% to $220.9 million. Operating income increased in each of these segments.
- For the first six months, access equipment, fire and emergency, and commercial sales rose 10.7%, 4.5%, and 15.0%, respectively; defense sales fell 55.7%.
- Backlog was $2.24 billion, down 18.0% from March 31, 2014, primarily due to defense. Defense backlog fell 53.8%; fire and emergency backlog rose 34.1%, and commercial backlog rose 30.0%.
Outlook, commentary, and risks
- Management maintained FY2015 sales guidance of $6.5–$6.6 billion, down 3%–5% from FY2014; operating income guidance of $513–$543 million; and diluted EPS guidance of $3.91–$4.16. Adjusted EPS guidance, excluding specified items, was approximately $4.00–$4.25.
- Management expected positive operating cash flow in the second half, citing higher expected earnings and seasonal inventory reductions. FY2015 capital spending was expected to be about $150 million. Management anticipated Q3 would be the strongest earnings quarter of FY2015 and expected defense results to be similar to Q2.
- The company expected the FHTV production pause to be temporary, with shipments resuming in Q4 after an expected contract finalization. It also expected meaningful international M-ATV orders by FY2015 year-end; these expectations were not assured.
- Currency strength reduced Q2 sales by $28.1 million and operating income by $3.4 million; management cited foreign exchange as a pressure on expected access-equipment and, to a lesser extent, commercial results. Other cited risks include defense-budget and procurement uncertainty, cyclical end markets, customer credit and receivable collection, input costs, production or shipment delays, and warranty claims.
- Q2 included $14.7 million ($0.12 per diluted share after tax) of debt-extinguishment costs. The company issued $250 million of 5.375% notes due 2025 and redeemed its 8.5% notes due 2020 at a premium. The reported six-month effective tax rate was 34.2%; prior-year results benefited from a favorable tax ruling. Significant currency translation losses reduced six-month comprehensive income to $13.6 million.
- Customer credit guarantees covered $469.6 million of indebtedness, with estimated maximum loss exposure of $123.2 million. The filing describes ordinary-course legal, product liability, warranty, and environmental matters; management did not expect their resolution to have a material adverse effect. No legal proceedings were listed in Part II.
Important facts for investors to verify
- Whether defense orders and FHTV production resume on the expected schedule, and whether anticipated international M-ATV orders materialize.
- Whether non-defense demand, pricing, product mix, and backlog convert into sales and earnings sufficient to meet FY2015 guidance.
- Whether seasonal inventory unwinds and operating cash flow turns positive as management expected; inventory was $1,196.5 million at March 31, up from $960.9 million at September 30.
- How foreign exchange movements, customer receivable quality, and the concentration of 73% of cash outside the U.S. affect liquidity and results.
- Whether debt covenants remain satisfied and whether guarantees, warranty claims, tax exposures, and other contingencies require additional reserves or cash outlays.