Oshkosh Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, three months ended December 31, 2011. Comparisons are with the three months ended December 31, 2010, unless otherwise noted. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $1,878.6 million | $1,700.8 million |
| Gross income / margin | $222.5 million / 11.8% | $309.0 million / 18.2% |
| Operating income / margin | $75.3 million / 4.0% | $168.7 million / 9.9% |
| Net income attributable to Oshkosh | $38.9 million | $99.6 million |
| Diluted EPS | $0.42 | $1.09 |
| Cash from operations | $61.9 million | $193.4 million |
Sales rose 10.5%, but operating income fell 55.3% and diluted EPS fell 61.5%. Lower defense profitability and adverse product mix were the primary drivers; consolidated cost of sales increased to 88.2% of sales from 81.8%. Management attributed the mix impact largely to defense and cited material-cost increases exceeding price increases, partly offset by improved fixed-cost absorption.
Segment sales and operating income (loss): Defense $1,051.0 million and $92.4 million; Access equipment $627.7 million and $13.1 million; Fire & emergency $163.0 million and $(10.0) million; Commercial $171.6 million and $6.9 million. Access equipment sales included $122.6 million of intersegment M-ATV-related sales.
Cash, debt and liquidity
- Cash and cash equivalents were $440.3 million at December 31, 2011, versus $428.5 million at September 30, 2011. Cash increased $11.8 million during the quarter.
- Total debt was $1,020.2 million, down from $1,060.1 million; the company repaid $40.0 million. Debt-to-total capitalization was 38.5%, compared with 39.9% at September 30.
- The company had $520.8 million of unused revolving-credit availability, in addition to cash. It reported compliance with credit-agreement covenants and expected to meet them over the next 12 months.
- Operating cash flow declined to $61.9 million from $193.4 million, primarily due to lower earnings and reduced collections under U.S. government undefinitized contracts. The filing notes that quarterly cash flow can vary substantially with defense-contract activity, performance-based payments and seasonal working capital.
Material changes and management outlook
- Defense sales declined 5.6% and operating income declined 57.6%, mainly reflecting lower FHTV volume and M-ATV aftermarket parts sales, partly offset by increased FMTV production. The FMTV contract generated a $4.0 million quarterly profit, earlier than management’s latest expectation.
- Access equipment sales increased 91.8% (external-customer sales rose 73.8%); operating results improved to income of $13.1 million from a $16.7 million loss. Higher raw-material costs and product-development spending offset some improvement.
- Fire & emergency sales fell 19.1%, and the segment recorded a $10.0 million operating loss, including $4.6 million of costs related to moving ambulance and mobile-medical production to Florida.
- Commercial sales increased 43.6%, and the segment returned to operating income of $6.9 million, led by refuse-vehicle demand and improved overhead absorption.
- Management characterized FY2012 as a transition year and expected significantly lower operating and net income than FY2011. Full-year expectations included defense sales down approximately 15% with operating margin near 5%; access-equipment sales growth of 25%–30% and mid- to high-single-digit margins; slightly higher fire & emergency sales with very-low-single-digit margins; and commercial sales growth of approximately 15% with low-single-digit margins.
- Management expected slightly positive FY2012 free cash flow, defined as operating cash flow less capital expenditures, and capital expenditures of $85–$95 million. It expected a 32%–34% full-year effective tax rate. The second quarter was expected to be the year’s lowest in EPS, with an approximately 36% tax rate.
- Management expected access-equipment price increases effective in January 2012 to begin offsetting material costs. It also expected to address fire & emergency production inefficiencies in coming quarters. The MOVE strategy was expected to begin benefiting results in FY2013.
Risks, contingencies and unusual items
- Defense outlook is exposed to U.S. budget reductions, changing procurement and tactical-vehicle strategy, and a DoD tire allocation that delayed some FHTV sales into FY2013. The FHTV contract was extended: orders may be placed through October 2013, with deliveries through September 2014.
- Management’s FMTV profitability expectation depends on material-cost and production-efficiency assumptions. A 1% material-cost escalation on current backlog orders would add approximately $21 million of costs and materially reduce expected gross margins; a change in assumptions could result in a loss-contract charge.
- Backlog was $5.69 billion, down 10.1% year over year. Defense backlog fell 21.0%, while access equipment rose 106.7%; approximately 27% of total backlog was not expected to be filled in FY2012. Backlog is not a guarantee of future sales.
- Other principal risks include cyclical construction, commercial and municipal markets; tight customer credit; raw-material inflation; warranty exposure; international and currency risks; and ongoing manufacturing-transition inefficiencies. The company reported $136.9 million of guaranteed indebtedness of others in access equipment, with estimated maximum loss exposure of $40.3 million.
- Control Solutions LLC asserted $190.3 million in damages in litigation relating to the M-ATV contract. The company said the outcome could not be predicted but did not expect a material adverse effect. Environmental reserves were $2.1 million; product and general liability reserves were $41.4 million.
- The 22.4% quarterly effective tax rate benefited from discrete tax items, including foreign-audit settlements, tax-reserve releases and adjustments for previously filed returns. The lower rate should not be assumed to represent the expected full-year rate.
- The company disclosed proxy-contest costs of $2.8 million in the quarter and identified activist-shareholder actions as a potential source of expense, disruption and uncertainty. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether defense sales, FHTV timing and FMTV costs develop as assumed, and whether the FMTV program remains profitable.
- Whether access-equipment pricing offsets higher input costs and supports the stated FY2012 growth and margin outlook.
- Whether fire & emergency production-transition inefficiencies are resolved and commercial demand persists after the tax-depreciation-related demand timing effect.
- Quarterly cash-flow and working-capital trends, debt reduction, available revolver capacity and covenant compliance.
- Developments in the $190.3 million Control Solutions litigation, guarantee exposures, and other warranty or contingent liabilities.
- Whether backlog converts to revenue on schedule; reported backlog excludes certain unfunded contract amounts and is not a reliable standalone forecast.