Oshkosh Corporation — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2013. The filing is unaudited; interim results are not necessarily indicative of full-year results. Amounts are in U.S. dollars.
Financial results
| Metric | Q3 FY2013 | Q3 FY2012 | Nine months FY2013 | Nine months FY2012 |
|---|---|---|---|---|
| Net sales | $2,204.4 million | $2,159.8 million | $5,938.6 million | $6,090.6 million |
| Gross income | $385.5 million | $274.6 million | $934.9 million | $743.6 million |
| Operating income | $225.6 million | $126.2 million | $440.5 million | $289.4 million |
| Net income attributable to Oshkosh | $148.7 million | $75.7 million | $281.7 million | $151.9 million |
| Diluted EPS from continuing operations | $1.67 | $0.84 | $3.12 | $1.76 |
| Operating margin | 10.2% | 5.8% | 7.4% | 4.8% |
- Q3 sales increased 2.1%, while nine-month sales declined 2.5%. Q3 gross margin was approximately 17.5%, compared with 12.7% a year earlier; management attributed the improvement mainly to product mix, including international M-ATV shipments, and pricing.
- For the first nine months, operating cash flow was $247.5 million, versus $74.3 million. Investing activities used $53.8 million and financing activities used $148.5 million. Cash rose to $585.8 million from $540.7 million at September 30, 2012.
- Debt totaled $955.0 million: $455.0 million term loan and $500.0 million senior notes. Debt to total capitalization was 32.3%. The company reported $340.0 million of unused revolving-credit capacity, after $185.0 million of letters of credit; it said it expected sufficient liquidity for the next 12 months.
- Current assets were $2,520.9 million and current liabilities $1,380.1 million at June 30. The term loan’s $48.8 million current maturity begins in the balance-sheet presentation; quarterly principal payments were scheduled to start December 31, 2013.
Material changes and operating performance
- Access equipment Q3 sales rose 15.6% to $941.5 million and operating margin increased to 16.4% from 10.8%, supported by North American replacement demand, price increases, aftermarket sales and cost reductions.
- Defense Q3 sales fell 8.2% to $879.6 million, but operating margin rose to 9.8% from 4.2%. International M-ATV sales, operational improvements and a $5.0 million favorable adjustment on undefinitized contracts contributed; the prior-year quarter included a $7.8 million unfavorable adjustment.
- Fire and emergency Q3 sales declined 11.0% to $204.3 million; it remained profitable. Commercial sales increased 10.5% to $194.7 million, but operating income fell, partly due to $2.7 million of restructuring-related costs.
- Backlog declined 31.9% year over year to $3.18 billion, chiefly reflecting a 42.2% decrease in defense backlog. Approximately 51% of reported backlog was not expected to be filled in FY2013.
- The company repurchased 5.4 million shares for $169.0 million in the first nine months; 5.6 million shares remained authorized for repurchase at June 30.
Outlook, commentary and risks
- Management raised FY2013 adjusted diluted EPS guidance from $2.90–$3.15 to $3.60–$3.70; including $0.11 per share of tender-offer and proxy-contest costs, it expected GAAP EPS of $3.49–$3.59. Guidance is from continuing operations.
- FY2013 segment outlook: access equipment sales approximately $3.1 billion and operating margin 12.0%–12.25%; defense sales approximately $3.1 billion and margin approximately 7.5%; fire and emergency sales nearly $800 million and margin 2.0%–2.5%; commercial sales $720–$750 million and margin 4.5%–5.0%. Corporate expense was expected at approximately $161 million, or $145 million excluding tender/proxy costs. The company forecast a 29.5% effective tax rate and approximately $45 million of capital spending.
- Management expected Q4 to be the fiscal year’s weakest quarter, citing usual seasonal declines in access and commercial sales and lower defense sales. It maintained a FY2015 EPS target of $4.00–$4.50, while cautioning that the path could be uneven and FY2014 defense sales were expected to decline significantly.
- Defense workforce reductions included approximately 700 production employees and contractors during Q3 and approximately 145 salaried employees and contractors after quarter-end. The company cited lower expected production needs.
- Key risks include U.S. defense-budget reductions and sequestration, uncertain DoD procurement and tactical-vehicle strategy, the pending JLTV competition, cyclical construction-related markets, customer credit and receivable collection, production or quality delays, warranty costs, and execution of a multiyear enterprise-resource-planning system implementation.
- The company had recorded $99.1 million of revenue on contracts still undefinitized at quarter-end. It recorded a $10.0 million receivable-related contract-estimate benefit in the first nine months. It also believed it was entitled to an approximately $10 million government adjustment related to a pension curtailment, but had recognized no income because settlement remained uncertain.
- Other exposures include $361.8 million of customer indebtedness guaranteed, with estimated maximum loss exposure of $91.7 million; $250.9 million of bid, performance and specialty bonds; and environmental and product/general-liability matters. Management did not expect these matters, beyond recorded amounts, to have a material adverse effect. Legal proceedings were reported as none in Part II.
Important facts for investors to verify
- Whether the strong Q3 margins and higher EPS are sustainable without the favorable M-ATV mix, contract-estimate adjustments and discrete tax benefits.
- Defense revenue and backlog trends, DoD funding and orders, the JLTV award outcome, and the company’s ability to resize costs as production declines.
- Conversion and timing of the $3.18 billion backlog, including the portion not expected to ship in FY2013 and the limitations on backlog as a sales indicator.
- Actual FY2013 results against revised guidance, including corporate costs, tax rate, capital spending and share-count assumptions.
- Liquidity and covenant headroom, the term-loan repayment schedule and refinancing needs around the October 2015 credit-facility maturity.
- Resolution of undefinitized contracts, customer guarantees and the unrecognized pension-related government adjustment, and any resulting cash or earnings effects.