Oshkosh Corporation — Q2 FY2014 10-Q
Reporting period: Three and six months ended March 31, 2014. Unaudited consolidated results; amounts are in U.S. dollars unless noted. The company manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment.
Financial performance and liquidity
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $1,677.9 million | $1,984.4 million | $3,208.1 million | $3,734.2 million |
| Gross income | $291.2 million | $303.4 million | $546.3 million | $549.4 million |
| Operating income | $119.4 million | $134.6 million | $215.9 million | $214.9 million |
| Net income | $71.5 million | $86.5 million | $126.4 million | $133.0 million |
| Diluted EPS | $0.83 | $0.97 | $1.47 | $1.47 |
- Q2 gross margin was approximately 17.4%, versus 15.3%; operating margin was 7.1%, versus 6.8%. The six-month operating margin was 6.7%, versus 5.8%.
- Q2 net sales fell 15.4%, while operating income declined 11.3%. Six-month sales declined 14.1%, but operating income was nearly flat.
- For the six months, operating cash flow was a use of $54.3 million, versus cash generation of $44.4 million a year earlier. Investing used $47.0 million and financing used $211.9 million. Cash declined to $420.0 million from $733.5 million at September 30, 2013.
- At March 31, total debt was $900.0 million and shareholders’ equity was $2,112.8 million; debt was 29.9% of total capitalization. Cash plus unused revolver availability was approximately $937 million. Current assets were $2,477.7 million and current liabilities $1,314.4 million.
- The company reported $517.4 million of available revolving credit capacity, after outstanding letters of credit. It stated that liquidity was sufficient for the next 12 months and that it was in compliance with credit covenants.
- Six-month capital spending was $36.4 million, excluding rental equipment; FY2014 capital spending was forecast at approximately $80 million. The company reinstated dividends, paying $25.4 million, or $0.30 per share, in the first half.
Business changes and segment results
- Access equipment: Q2 sales rose 5.9% to $866.0 million and operating income rose 22.7% to $116.6 million. Higher volumes, pricing, cost reductions, and mix supported results. Six-month sales increased 9.7% and operating income increased 43.7%.
- Defense: Q2 sales declined 41.5% to $484.4 million and operating income fell 48.6% to $34.5 million, mainly due to lower U.S. Department of Defense demand and lower international M-ATV sales. Six-month sales fell 41.7% and operating income fell 53.7%.
- Fire & emergency: Q2 sales declined 10.3% to $156.1 million, with production delays and lower international deliveries contributing. Six-month sales were nearly flat.
- Commercial: Q2 sales decreased 1.7% to $182.3 million and operating income decreased 28.8% to $5.4 million. Six-month sales rose 3.3%, while operating income was flat.
- Management attributed improved consolidated cost-of-sales ratios to favorable product mix, cost reductions, pricing, and warranty performance, partly offset by higher new-product development spending. Severe U.S. weather affected shipment timing and supplier deliveries.
Outlook, commentary, and unusual items
- FY2014 guidance: sales of $6.7–$6.8 billion; GAAP operating income of approximately $486–$516 million; and diluted EPS of $3.43–$3.68. Adjusted operating income was projected at $490–$520 million and adjusted diluted EPS at $3.40–$3.65, excluding specified items.
- Segment outlook: access equipment sales of $3.40–$3.45 billion with 14.5%–14.75% operating margins; defense sales of $1.725–$1.75 billion with 4.25%–4.5% margins; fire & emergency sales of approximately $800 million with 3.5%–3.75% margins; and commercial sales of $850–$875 million with 6.0%–6.25% margins. Management expected Q3 to have the year’s highest EPS, followed by a seasonal Q4 decline and lower defense volume.
- Management announced planned defense workforce reductions of approximately 760 employees as production rates were expected to decline again in July 2014. Defense backlog fell 51.9% year over year; total backlog declined 32.3% to $2.73 billion. Approximately 23% of total backlog was not expected to ship in FY2014.
- Q2 included $11.0 million of debt-extinguishment costs, a $12.1 million tax benefit from reducing a net-operating-loss valuation allowance after a favorable tax ruling, and a $4.1 million pension curtailment charge. The defense segment also recorded $4.6 million of revenue following agreement with the U.S. government on pension-cost reimbursement. Six-month revenue estimate changes on undefinitized contracts added $4.7 million to net income, or $0.05 per diluted share.
- In February 2014, the company issued $250 million of 5.375% notes due 2022 and used proceeds plus cash to redeem $250 million of 8.125% notes due 2017. It also amended its credit agreement, including a $400 million term loan and a $600 million revolving facility maturing in 2019. Refinancing-related expense affected quarterly interest expense.
- Risks highlighted include reduced defense budgets and contract awards, execution and pricing risk in the JLTV competition, possible interruption to FHTV production, cyclical construction and municipal markets, warranty and receivables exposure, weather and supply disruptions, and commodity, regulatory, foreign-exchange, and cybersecurity risks. The company guaranteed $407.8 million of customer indebtedness, with estimated maximum loss exposure of $105.9 million.
Important facts for investors to verify
- Whether defense production cuts, the announced workforce reductions, and lower DoD spending will further pressure segment margins, cash flow, and backlog.
- Whether access-equipment demand and the improved margins assumed in FY2014 guidance are sustained, and whether weather-related shipment delays unwind as expected.
- How much reported earnings and guidance depend on the tax ruling, debt-refinancing and pension items, government settlements, and contract-estimate changes.
- Whether working-capital needs normalize: receivables increased, days sales outstanding rose to 52 from 40 at September 30, and six-month operating cash flow was negative.
- Liquidity and capital allocation under the amended debt covenants, including planned repurchases, dividends, and the company’s ability to maintain covenant compliance.