Oshkosh Corporation — Q1 FY2015 10-Q
Reporting period: Three months ended December 31, 2014, compared with the three months ended December 31, 2013. Unaudited results; interim performance is not necessarily indicative of the full year.
Financial results and position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $1,353.3 million | $1,530.2 million | Down 11.6% |
| Gross income | $229.7 million | $255.1 million | Down 10.0% |
| Gross margin | 17.0% | 16.7% | Up about 30 bps |
| Operating income / margin | $65.7 million / 4.9% | $96.5 million / 6.3% | Income down 32.0% |
| Net income | $34.7 million | $54.9 million | Down 36.8% |
| Diluted EPS | $0.43 | $0.63 | Down $0.20 |
| Operating cash flow | $(52.3) million | $4.7 million | Cash use increased |
Cash and cash equivalents were $111.0 million at December 31, down from $313.8 million at September 30, 2014. Total debt was $890.0 million, including $20.0 million current maturities; debt-to-total capitalization was 31.9%. Working capital was approximately $979 million, based on current assets of $2,159.9 million and current liabilities of $1,180.9 million. The company reported $509.8 million of unused revolving-credit availability at quarter-end. Its revolving facility was subsequently increased from $600 million to $850 million, effective January 26, 2015.
Investing cash use was $50.2 million, including $39.0 million of property, plant and equipment additions and $13.2 million for rental equipment. Financing cash use was $100.3 million, including $88.1 million of share repurchases and $13.4 million of dividends. Inventory rose to $1,114.5 million from $960.9 million at September 30; management attributed higher inventory and operating cash use partly to production ahead of the 2015 selling season.
Material changes and business performance
- Defense: Sales fell 44.1% to $269.3 million, principally from lower U.S. Department of Defense sales and no comparable international MRAP All-Terrain Vehicle sales. Segment operating income declined to $9.8 million from $24.8 million. Defense backlog fell 58.8% year over year to $669.8 million.
- Access equipment: Sales increased 7.2% to $716.7 million, led by North American telehandlers and shipments ahead of Tier 4-related price increases. Operating income fell to $77.2 million from $90.3 million; margin declined to 10.8% from 13.5%, reflecting a less profitable telehandler mix, product-development spending and MOVE initiative costs.
- Fire & emergency: Sales declined 15.6% to $167.0 million, partly reflecting a planned production slowdown and a prior-year large international shipment. Operating income fell to $1.5 million from $6.9 million.
- Commercial: Sales rose 9.1% to $210.2 million, driven by refuse collection vehicles and aftermarket parts and service. Operating income increased to $12.4 million from $10.2 million.
- Consolidated backlog decreased 13.4% year over year to $2.40 billion, mainly because of lower defense backlog; access, fire & emergency, and commercial backlogs increased.
Cost of sales declined to 83.0% of sales from 83.3%. Favorable overall segment mix and warranty performance were partly offset by higher product-development costs and the heavier telehandler mix. Selling, general and administrative expense increased 4.0% to $150.5 million, or 11.1% of sales, partly reflecting higher IT and outside-services spending and the lower share of defense sales.
Outlook, commentary and risks
- Management forecast FY2015 sales of $6.5–$6.6 billion, down 3%–5% from FY2014, and GAAP operating income of approximately $513–$543 million. GAAP diluted EPS guidance was $3.91–$4.16, assuming an average share count of about 80 million.
- Adjusted diluted EPS guidance was approximately $4.00–$4.25, excluding estimated debt-extinguishment costs and the first-quarter OPEB curtailment gain. Management expected currency headwinds from the stronger U.S. dollar to offset stronger-than-expected first-quarter performance.
- For Q2 FY2015, management expected adjusted EPS to be in the range of Q2 FY2014, with improved non-defense results offset by lower defense earnings, including a production break on the Family of Heavy Tactical Vehicles program.
- The company planned to bid in Q2 for the eight-year Joint Light Tactical Vehicle production contract, with a decision expected in late summer 2015. It also expected to call and refinance $250 million of 8.5% senior notes callable beginning March 2015.
- Unusual item: First-quarter results included a $3.4 million pre-tax OPEB curtailment gain related to defense workforce reductions. Prior-year access-equipment results included a $7.5 million contract pricing adjustment that increased net income by $4.7 million, or $0.05 per share.
- Key risks include dependence on cyclical markets and U.S. and European economic conditions; defense-budget and procurement uncertainty; ability to win JLTV and other contracts; foreign-exchange movements; customer credit and receivable collectability; warranties, production or shipment disruptions, and achieving planned cost savings. Management stated it expected sufficient liquidity for the next 12 months and compliance with credit covenants; it was in compliance at quarter-end.
- Contingencies include guarantees of $461.1 million of customer indebtedness, with estimated maximum loss exposure of $122.4 million, and $338.8 million of bid, performance and specialty bonds. The company also disclosed ordinary-course legal, product-liability and environmental matters; management did not expect these matters to have a material adverse effect.
Most important facts for investors to verify
- Whether defense revenue and backlog continue to decline, and the timing and outcome of the JLTV award and other defense procurement.
- Whether access-equipment demand, telehandler mix and Tier 4-related shipments normalize without further pressure on segment margins.
- Whether management achieves FY2015 sales, operating-income and EPS guidance, including the effects of currency, planned refinancing costs and the OPEB gain.
- Whether operating cash flow recovers as seasonal inventory builds unwind, and whether capital spending and share repurchases remain consistent with liquidity and leverage targets.
- Whether the increased revolving-credit availability is used to refinance the 2020 notes on acceptable terms, and whether the company continues to satisfy its financial covenants.
- Whether customer-credit guarantees, concentrated notes receivable, contract estimates, warranty claims or other contingencies result in losses beyond recorded reserves.