OSHKOSH CORP quarterly report, Q1 FY2011

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Oshkosh Corporation — Q1 FY2011 10-Q

Reporting period: Three months ended December 31, 2010; comparisons are with the three months ended December 31, 2009 unless otherwise noted. Figures are unaudited and in U.S. dollars.

Business context and results

Oshkosh manufactures defense vehicles, access equipment, fire and emergency vehicles, and commercial vehicles. The quarter marked a transition from high-volume M-ATV production toward a gradual FMTV production ramp. The scheduled completion of initial M-ATV delivery orders was the principal reason for lower consolidated sales and operating income.

  • Net sales were $1.701 billion, down 30.1% from $2.434 billion. M-ATV vehicle and related parts and services sales were $519.4 million, down $589.3 million year over year.
  • Gross income was $309.0 million versus $479.2 million; gross margin was approximately 18.2% versus 19.7%. Lower volume, fixed-cost under-absorption and new-product development costs weighed on margins.
  • Operating income was $168.7 million, down 48.2%; operating margin was 9.9%, compared with 13.4%. Prior-year operating income included $23.3 million of non-cash impairment charges.
  • Net income attributable to Oshkosh was $99.6 million, versus $169.6 million; diluted EPS was $1.09 versus $1.87. The current-quarter effective tax rate was 30.8%, versus 37.4%, helped by discrete tax benefits.
  • Operating cash flow was $193.4 million, compared with $506.0 million. Investing cash use was $19.1 million and financing cash use was $114.0 million. Cash increased $59.8 million to $398.8 million.

Segments and material changes

  • Defense: Sales of $1.114 billion, down 40.1%; operating income of $217.9 million, down 35.8%. Operating margin increased to 19.6% from 18.3%, reflecting improved mix, partly offset by lower production absorption and higher development spending.
  • Access equipment: Segment sales of $327.3 million fell 56.6%, largely because intersegment M-ATV-related sales dropped to $36.7 million from $530.8 million. External sales rose 30.4% to $290.6 million. The segment recorded a $16.7 million operating loss, including $11.3 million of European restructuring charges.
  • Fire and emergency: Sales fell 10.5% to $201.5 million; operating income was $2.6 million, compared with a prior-year $2.0 million loss that included impairment charges. Lower fire-apparatus volume reflected weak municipal spending.
  • Commercial: Sales fell 22.9% to $119.5 million, and the segment recorded a $7.7 million operating loss versus $3.1 million income. Lower refuse-vehicle and concrete-placement sales contributed.
  • Backlog was $6.33 billion, up 11.2% from a year earlier. Defense backlog was $5.39 billion; access equipment backlog rose 231.9% to $379.9 million. About 40% of total backlog was not expected to be filled in FY2011; backlog excludes certain unfunded contract amounts and is not a certain indicator of future sales.

Debt, liquidity and capital resources

  • Total debt was $1.187 billion, down from $1.302 billion at September 30, 2010. The company repaid $115.1 million during the quarter. Debt to total capitalization declined to 45.3% from 49.5%.
  • Cash was $398.8 million. The $550 million revolving facility had $412.9 million of available capacity after borrowings and letters of credit. Management expected sufficient liquidity for operations over the next twelve months.
  • Current assets were $2.019 billion and current liabilities $1.470 billion. The company reported compliance with credit-agreement financial covenants at quarter end and expected to remain compliant over the next twelve months.
  • Capital expenditures were $16.8 million, excluding rental equipment; FY2011 capital spending was expected to be approximately $125–$135 million. Management planned continued debt reduction, but at a slower pace than in the quarter.

Outlook, commentary and risks

  • Management expected FY2011 sales, operating income and net income to be below FY2010, which benefited from nearly $4.5 billion of M-ATV-related sales. It did not provide specific full-year consolidated quantitative guidance.
  • FY2011 defense sales were expected to be $4.4–$4.5 billion, subject in part to U.S. government funding. FMTV sales were expected to build through the year, with margins near break-even in FY2011 and potential improvement thereafter. Full-year defense operating margin was expected in the low double digits, and lower than Q1’s margin.
  • Management expected access-equipment external sales to increase year over year, with low-single-digit operating margins including restructuring effects. Fire-and-emergency sales were expected to decline slightly; commercial sales were expected to be approximately flat, with margins flat to down.
  • Q1 restructuring charges totaled $12.0 million. The European access-equipment plan included $11.3 million of charges recognized in the quarter; the estimated total plan charges were $13.3–$18.3 million, with $2–$7 million of additional access-equipment charges expected in FY2011. Approximately $5 million of additional fire-and-emergency consolidation charges was also expected.
  • Key risks include defense budget and contract uncertainty, competition and contract repricing, FMTV testing and profitability, lower M-ATV production, cyclical end markets, customer credit and receivables, warranty or systemic vehicle issues, and whether consolidation actions achieve expected savings without disrupting production.
  • Other matters include $224.9 million of guarantees of others’ indebtedness in access equipment, with estimated maximum loss exposure of $74.4 million; recorded related liabilities were $14.1 million. Environmental and product/general liability reserves were $2.0 million and $42.8 million, respectively. Management did not expect these matters to have a material adverse effect, while noting inherent uncertainty.

Most important facts for investors to verify

  • Whether FY2011 U.S. defense funding and order timing support the $4.4–$4.5 billion defense sales outlook.
  • FMTV production ramp, testing, actual margins and progress toward cost efficiencies as M-ATV sales wind down.
  • Whether non-defense demand and segment profitability recover as forecast, and whether restructuring costs and execution match expectations.
  • Cash generation, working-capital movements, debt repayment, revolver availability and continued covenant compliance.
  • Credit exposure and recoverability of finance and notes receivable, customer guarantees, and potential warranty or systemic-product claims.