Oshkosh Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended June 30, 2012; filed July 26, 2012. All amounts are U.S. dollars. Comparisons are with the corresponding 2011 periods unless noted.
Business context and results
Oshkosh operates in access equipment, defense, fire and emergency, and commercial vehicles. Management said growth in non-defense markets and its MOVE initiatives were beginning to improve results, while declining U.S. defense spending was expected to pressure the defense business.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $2,176.3 million, up 7.6% | $6,130.2 million, up 12.1% |
| Gross income / gross margin | $273.1 million / 12.5% | $735.0 million / 12.0% |
| Operating income / margin | $124.5 million / 5.7% | $275.7 million / 4.5% |
| Net income attributable to Oshkosh | $75.7 million | $151.9 million |
| Diluted EPS | $0.82 | $1.65 |
| Cash from operations | Not separately stated for the quarter | $74.3 million |
Quarterly diluted EPS included a $0.07 benefit from discrete tax items. The effective tax rate was 29.5% for the quarter and 29.7% for the nine months.
Financial position and liquidity
At June 30, 2012, cash was $390.7 million, total debt was $955.0 million, and shareholders’ equity was $1,747.7 million. Debt-to-total capitalization was 35.3%, versus 39.9% at September 30, 2011. The company repaid $105.0 million of debt during the first nine months. Current assets were $2,679.7 million and current liabilities were $1,724.7 million.
Operating cash flow fell to $74.3 million from $278.7 million. Management attributed the decline principally to lower earnings, working-capital investment accompanying access-equipment growth, and reduced collections under U.S. government contracts. Receivables and inventory increased from fiscal year-end. The company reported $510.9 million of unused revolver capacity at June 30 and said it expected sufficient liquidity for the next twelve months.
Material changes and segment performance
- Access equipment: Quarterly sales rose 40.4% to $814.6 million and operating income reached $88.2 million, aided by higher volumes and price increases. Nine-month sales rose 59.8% to $2,202.7 million.
- Defense: Quarterly sales declined 13.4% to $958.5 million and operating income declined 64.3% to $40.2 million, mainly from lower FHTV and aftermarket sales and a shift toward lower-margin FMTV sales. Nine-month operating income fell to $174.5 million from $472.0 million.
- Fire and emergency: Quarterly sales increased 13.9% to $246.1 million and operating income was $6.4 million. The segment recorded a $14.9 million operating loss for the nine months, including ambulance-transition and other costs.
- Commercial: Quarterly sales rose 11.2% to $176.2 million and operating income increased to $12.1 million, reflecting improved volume and manufacturing efficiency.
For the nine months, gross margin declined to 12.0% from 15.8%, and operating margin to 4.5% from 7.8%, largely reflecting adverse defense mix and higher material costs. In the quarter, cost of sales rose to 87.5% of sales from 86.6%.
Outlook, risks, and unusual items
- Fiscal 2012 guidance: access-equipment sales growth of about 40% with a 7.5%–8.0% operating margin; defense sales down about 10% with a 5.0%–5.5% margin; fire-and-emergency sales slightly higher but a small operating loss; commercial sales up about 20% with a 3.5%–4.0% margin. Expected tax rate was 29%–30%, and capital expenditures were estimated at $50–$60 million.
- Management expected lower fourth-quarter access-equipment results than the third quarter due to seasonality. It said FMTV remained profitable but margins were low single digits; a 1% material-cost increase above its projection for backlog orders could add about $18 million in costs.
- In the quarter, revised estimates on undefinitized contracts reduced previously recognized sales by $38.3 million and operating income by $8.0 million. At June 30, $581.8 million of revenue had been recorded on contracts still undefinitized.
- After quarter-end, the July credit-agreement amendment reduced the variable interest-rate spread by 100 basis points, reduced the revolver limit from $550 million to $525 million, and set the term loan at its then-outstanding $455 million. The company also received authorization to repurchase an additional 4.0 million shares, bringing total authorization to about 7.2 million shares; actual repurchases remain subject to financing covenants.
- After quarter-end, Oshkosh decided to exit ambulance manufacturing, expecting $8–$13 million of pre-tax charges, and planned to sell its European mobile medical investment, with an expected pre-tax loss of about $7 million. Management described combined expected charges of approximately $15–$20 million, with most anticipated in fiscal Q4.
- Key risks include lower U.S. defense procurement and potential contract competition, economic and cyclical weakness in commercial markets, commodity-cost increases, contract definitization and FMTV margin estimates, and collection or working-capital pressures. A lawsuit related to the M-ATV contract seeks $190.3 million; the company said the outcome was uncertain and did not expect a material adverse effect.
Important facts for investors to verify
- Whether access-equipment growth and commercial improvements can offset declining defense sales and margins.
- Progress on definitizing government contracts, collecting receivables, and converting deferred revenue related to trucks awaiting tires.
- FMTV backlog cost assumptions, material-price exposure, and the sustainability of expected contract profitability.
- Actual exit charges and timing for the ambulance and European mobile medical businesses.
- Liquidity, covenant headroom, and the extent of any share repurchases under the amended credit agreement.
- Developments in the $190.3 million Control Solutions lawsuit and the company’s exposure under guarantees and other contingencies.