Oshkosh Corporation — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 31, 2012, compared with the three months ended December 31, 2011. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $1,761.0 | $1,875.7 |
| Gross income / gross margin | $246.3 / 14.0% | $221.5 / 11.8% |
| Operating income / operating margin | $80.8 / 4.6% | $75.4 / 4.0% |
| Net income attributable to Oshkosh | $46.5 | $38.9 |
| Diluted EPS | $0.51 | $0.42 |
| Cash provided by operating activities | $45.1 | $61.9 |
- Sales declined 6.1%, primarily because defense sales fell; external-customer sales increased in each non-defense segment. Gross margin improved as a percentage of sales, with lower material costs and pricing gains partly offset by unfavorable mix and lower defense overhead absorption.
- Operating income rose 7.1% despite lower sales and higher corporate costs, including expenses associated with a stock tender offer and threatened proxy contest. SG&A increased to $151.1 million from $131.4 million.
- The effective tax rate was 31.5%, versus 22.3% a year earlier; the prior-year rate benefited more from discrete tax items. Q1 FY2013 included a $1.9 million discrete tax benefit.
Liquidity, debt and cash flow
- At December 31, 2012, cash and cash equivalents were $455.7 million, total debt was $955.0 million, and shareholders’ equity was $1,787.9 million. Debt to total capitalization was 34.8%, compared with 34.0% at September 30, 2012.
- The company reported $349.0 million of unused revolving-credit availability, after letters of credit, and said it expected sufficient liquidity for operations over the next 12 months. It was in compliance with its credit agreement covenants and expected to remain compliant.
- Cash declined $85.0 million during the quarter, to $455.7 million. Operating cash flow was lower year over year, primarily due to income-tax prepayments. Investing activities used $5.9 million; financing activities used $124.4 million, including $125.1 million for share repurchases.
- Inventory was $1,056.9 million, up from $937.5 million at September 30; the company attributed lower inventory turns partly to seasonality and longer transit times for international defense shipments.
Material changes and business developments
- Defense: Sales fell 21.1% to $828.7 million and operating income fell to $60.9 million from $92.4 million, mainly reflecting lower M-ATV and related parts shipments. Higher FHTV and FMTV sales partly offset the decline. The company received large delivery orders for both programs and began UAE deliveries under a 750-vehicle M-ATV order.
- Access equipment: Segment sales were $581.3 million, down 7.4% including lower intersegment sales to Defense; external sales increased 15.1%. Operating income increased to $48.9 million from $13.1 million, supported by external volume and pricing.
- Fire & emergency: Sales rose 20.7% to $193.3 million, and the segment returned to profit, reporting $5.8 million of operating income versus a $9.9 million loss. The company remained on track to exit its Medtec ambulance business after completing backlog, expected in Q2 FY2013.
- Commercial: Sales increased 3.3% to $177.3 million and operating income rose to $8.0 million. Concrete mixer demand improved, while lower chassis volume partly offset the increase.
- Backlog was $4.53 billion at December 31, down 20.3% from $5.69 billion a year earlier, largely reflecting lower Defense backlog. Approximately 24% of current backlog was not expected to be filled in FY2013.
- The company repurchased 4,250,072 shares for $125.1 million at an average $29.43 per share and stated it targeted a further $175 million of repurchases over the next 9 to 15 months, subject to restrictions. A shareholder rights plan adopted in October was terminated on January 7, 2013.
Outlook, risks and unusual items
- Management raised its FY2013 adjusted diluted EPS outlook from $2.35–$2.60 to $2.80–$3.05. The corresponding GAAP EPS range shown in the filing was $2.71–$2.96. Adjusted guidance excludes $0.09 per share of Q1 tender-offer/proxy-contest costs and excludes potential future related costs, restructuring costs and discrete tax items.
- FY2013 segment outlook: Access equipment sales of $2.8–$3.0 billion, with operating margin now expected at about 10.5%; Defense sales of $3.2–$3.3 billion and margin about 6.5%; Fire & emergency sales of $720–$750 million and margin of 2.0%–2.5%; Commercial sales of $720–$750 million and margin of 4.5%–5.0%.
- Management expected adjusted corporate expenses of $130–$135 million, excluding $16.3 million of tender-offer/proxy-contest costs; a FY2013 effective tax rate of about 32%; and capital spending of about $60 million. Defense sales were expected to rise marginally in Q2 and Q3, aided by UAE deliveries, then decline about 25% in Q4 from Q1 levels.
- Q1 included $16.3 million of tender-offer and threatened proxy-contest costs, versus $2.8 million of proxy-contest costs in the prior-year quarter. The filing also reports $3.5 million of revenue from updated estimates on undefinitized contract change orders; the adjustment increased net income by $2.2 million, or $0.02 per share. Revenue recorded on contracts still undefinitized at quarter-end was $93.7 million.
- Key risks include changes in U.S. defense budgets and contract awards, government funding and procurement timing, contract competition and fixed-price cost overruns, production or component delays, cyclical end markets, customer credit and receivable collectability, warranty exposure, and foreign-exchange and regulatory risks. U.S. government sales were approximately 44% of Q1 sales.
- The company disclosed customer credit guarantees covering $358.6 million of indebtedness, with estimated maximum loss exposure of $88.2 million; product and general liability reserves of $42.0 million; and environmental reserves of $2.0 million. Management did not expect identified contingencies to have a material adverse effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether Defense order conversion, shipment timing, funding and the UAE M-ATV deliveries support the revised FY2013 sales and earnings outlook; monitor the declining Defense backlog.
- How much of the adjusted EPS outlook depends on excluding tender/proxy costs, restructuring and discrete tax items, and whether further activist-related costs arise.
- Whether the Medtec exit is completed as planned and whether Fire & emergency profitability is sustained.
- Whether cash generation and working-capital trends support planned buybacks while preserving liquidity and covenant headroom.
- Whether estimates for undefinitized contracts, customer receivables, guarantees and warranty claims ultimately require material adjustments.