Oshkosh Corporation — Q1 FY2014 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless otherwise stated. Figures are in U.S. dollars.
Business context and results
Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment. Management characterized the quarter as strong, led by access equipment, which more than offset lower defense sales.
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $1,530.2 million | $1,749.8 million |
| Gross income / margin | $255.1 million / 16.7% | $246.0 million / 14.1% |
| Operating income / margin | $96.5 million / 6.3% | $80.3 million / 4.6% |
| Net income | $54.9 million | $46.5 million |
| Diluted EPS from continuing operations | $0.63 | $0.51 |
| Operating cash flow | $4.7 million | $45.1 million |
Sales fell 12.6%, principally because defense sales declined 41.9% to $481.3 million as U.S. Department of Defense sales dropped; access equipment rose 15.0% to $668.6 million, fire and emergency rose 8.7% to $198.0 million, and commercial rose 8.6% to $192.6 million. Cost of sales declined to 83.3% of sales from 85.9%, mainly reflecting favorable product mix and pricing, partly offset by higher product-development spending and lower defense fixed-cost absorption.
Financial position and liquidity
- Cash and cash equivalents were $558.7 million at December 31, 2013, down from $733.5 million at September 30, 2013. Current assets were $2,265.9 million and current liabilities $1,178.5 million.
- Total debt was $938.8 million, including $65.0 million current maturities; shareholders’ equity was $2,032.8 million. Debt to total capitalization was 31.6%, compared with 31.2% at September 30.
- Unused revolving-credit availability was $443.5 million, after $81.5 million in letters of credit. The company reported compliance with credit covenants and expected to meet them over the next 12 months.
- Operating cash flow was $4.7 million; investing cash use was $25.7 million and financing cash use was $153.5 million. Financing included $145.5 million of share repurchases, $16.2 million of debt repayment, and $12.8 million of dividends. Management attributed the operating-cash-flow decline largely to a large customer rebate paid earlier than usual.
Material changes and segment performance
- Access equipment operating income increased to $90.3 million from $48.9 million. Results benefited from mix, higher volume and pricing, and approximately $7.5 million from final pricing agreed on a multiyear U.S. military contract.
- Defense operating income decreased to $24.8 million from $60.9 million, primarily due to lower volume. Management cited reduced U.S. defense spending and continuing cost adjustments as production declines.
- Fire and emergency operating income rose to $6.9 million from $5.4 million; commercial rose to $10.2 million from $8.0 million.
- Q1 FY2013 included $16.3 million of pretax costs for a tender offer and threatened proxy contest, contributing to the year-over-year improvement in corporate expenses and affecting comparability.
- Backlog declined 38.8% to $2.78 billion year over year, mainly from lower defense backlog. Access backlog fell 38.9%; fire and emergency backlog rose 5.7%, and commercial backlog rose 17.4%. The filing cautions that backlog is not necessarily indicative of future sales.
Outlook, risks and unusual items
- After the stronger-than-expected quarter, Oshkosh raised its FY2014 diluted EPS outlook from $3.10–$3.40 to $3.40–$3.65. It expected an average share count of approximately 85.5 million.
- FY2014 segment outlook: access sales $3.35–$3.40 billion and operating margin 14.25%–14.5%; defense sales $1.75–$1.80 billion and margin 3.75%–4.0%; fire and emergency sales $800–$825 million and margin 4.0%–4.5%; commercial sales $850–$900 million and margin 6.75%–7.0%. Corporate expenses were expected to be approximately $147 million, the effective tax rate approximately 32%, and capital expenditures approximately $80 million.
- Management expected sufficient liquidity for the next 12 months and anticipated further fiscal 2014 repurchases, likely at a lower pace than in Q1. The term loan and revolving facility mature in October 2015; management said it might seek to amend or replace the credit agreement in fiscal 2014.
- Revenue estimate changes on U.S. government contracts contributed $7.5 million of revenue in the quarter and increased net income by $4.7 million, or $0.05 per diluted share. The filing also reports $5.1 million of revenue on contracts still undefinitized at quarter-end.
- Key risks include defense-budget reductions, sequestration and contract timing; the outcome of the JLTV competition; cyclical construction and equipment markets; customer credit and receivable collection; production, quality and warranty costs; commodity costs; foreign-exchange exposure; and government-contract compliance. The company guaranteed $392.4 million of customer indebtedness, with estimated maximum loss exposure of $97.0 million. It also disclosed ordinary-course legal, product-liability and environmental matters, which management did not expect to have a material adverse effect.
Important facts for investors to verify
- Whether access-equipment growth and margins persist after favorable product mix, accelerated purchases ahead of Tier 4 price increases, and the $7.5 million contract-pricing benefit.
- Defense sales, backlog and cost reductions, including the timing of international orders and the JLTV award outlook.
- Whether operating cash flow recovers after the early customer rebate payment and amid reduced defense performance-based payments and working-capital swings.
- Capacity for planned repurchases and dividends under debt covenants, alongside the October 2015 credit-facility maturity and potential refinancing.
- Exposure from customer-debt guarantees, concentrated notes receivable, contract definitization, tax audits and other contingencies.