Oshkosh Corporation — Form 10-Q, fiscal Q2 2012
Reporting period: Quarter and six months ended March 31, 2012. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and results
Oshkosh makes access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles. Second-quarter sales rose on strong access-equipment demand and higher FMTV defense sales, but lower-margin defense mix sharply reduced earnings. Sales to the U.S. government were approximately 46% of first-half sales.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $2,075.3m | $1,745.6m | $3,953.9m | $3,446.4m |
| Gross income | $239.4m | $281.1m | $461.9m | $590.1m |
| Operating income | $75.9m | $132.4m | $151.2m | $301.1m |
| Net income attributable to Oshkosh | $37.3m | $67.9m | $76.2m | $167.5m |
| Diluted EPS | $0.41 | $0.74 | $0.83 | $1.83 |
| Operating margin | 3.7% | 7.6% | 3.8% | 8.7% |
Q2 sales increased 18.9%, while operating income fell 42.7%. First-half sales increased 14.7%, while operating income fell 49.8%. Cost of sales rose to 88.5% of sales in Q2 from 83.9%, mainly due to adverse defense product mix and material-cost increases exceeding price increases.
Cash flow and liquidity: First-half operating cash flow was $46.9m, down from $256.6m, reflecting lower earnings and working-capital use, including lower customer advances and increases in inventory and receivables. Capital expenditures were $24.1m; cash declined to $388.4m from $428.5m. Debt was $987.8m, down from $1,060.1m, after $72.5m of repayments. Debt-to-total capitalization was 36.9%, versus 39.9% at September 30, 2011. The company reported $517.3m of unused revolving-credit availability.
At March 31, current assets were $2,480.4m and current liabilities were $1,588.2m. Long-term debt was $987.7m. The company reported covenant compliance and expected sufficient liquidity for the next 12 months.
Segment changes
- Access equipment: Q2 sales rose 61.4% to $760.4m and operating income increased to $68.4m from $17.7m. Replacement demand, pricing and volume helped; higher raw-material costs and product-development spending partly offset gains.
- Defense: Q2 sales rose 1.5% to $987.3m, but operating income fell 70.4% to $41.9m. Higher FMTV sales were offset by lower FHTV and aftermarket sales and the resulting unfavorable mix. FMTV margins remained low single digits.
- Fire & emergency: Q2 sales rose 2.4% to $181.5m, but the operating loss widened to $11.3m. First-half operating loss was $21.3m, including ambulance-transition costs, product-line exit and workforce-reduction costs, and litigation and environmental charges.
- Commercial: Q2 sales rose 10.6% to $167.7m; operating income declined to $3.9m from $5.3m. First-half sales rose 25.1% to $339.3m, and the segment returned to operating income of $10.8m.
Outlook, risks and unusual items
- Management characterized fiscal 2012 as a transition year: it expected access-equipment recovery to be more than offset by defense mix, producing significantly lower operating and net income than in fiscal 2011. It expected second-half diluted EPS to be modestly higher than first-half EPS, with Q3 generally stronger than Q4 due to seasonality.
- Fiscal 2012 outlook: access-equipment sales up 35%–40% year over year, with 7.5%–8.0% operating margins; defense sales down 10%–15%, with margins near 5%; fire-and-emergency sales slightly higher and approximately breakeven operating income; commercial sales up about 15%, with low-single-digit margins. Expected tax rate was 32%–34%; capital expenditures were estimated at $75m–$85m.
- Management said the FMTV contract was profitable through the first half and expected it to remain profitable, but estimates of costs, savings and production efficiency are uncertain. A 1% material-cost escalation above assumptions for current backlog would add about $20m in costs and reduce expected margins; changed assumptions could ultimately result in a loss-contract charge.
- Backlog was $5.58bn, down 9.5% year over year; defense backlog fell 21.2% to $3.93bn, while access-equipment backlog rose 57.9% to $941.5m. About 41% of backlog was not expected to be filled in fiscal 2012. Backlog excludes certain options, unsigned orders and unfunded contract portions and is not necessarily predictive of sales.
- Key risks include reduced U.S. defense spending and uncertain FHTV/FMTV funding, cyclical construction and municipal markets, economic weakness and constrained customer credit, commodity inflation, and disruption or costs from facility consolidations. The company also identified proxy-contest costs and potential disruption from activist-shareholder actions.
- Control Solutions LLC asserted $190.3m in damages relating to the M-ATV contract; cross-motions for summary judgment had been filed. The company said the outcome was uncertain and did not expect a material adverse effect. Other exposures include product and general-liability claims, environmental matters, and access-equipment credit guarantees: $142.2m of guaranteed indebtedness, with estimated maximum loss exposure of $39.9m.
- Q2 included $3.6m of proxy-contest costs in corporate expenses, plus fire-and-emergency charges for product-line exit, workforce reductions, litigation and environmental remediation. The first-half tax rate of 29.9% benefited from discrete tax items; management’s full-year tax-rate outlook was higher at 32%–34%.
Important facts for investors to verify
- Whether access-equipment demand, price realization and targeted margins persist as markets and customer replacement cycles change.
- Whether FMTV cost assumptions hold, and how defense budget decisions affect funded orders, backlog and profitability.
- Whether fire-and-emergency consolidation costs and operating losses improve as management expects.
- Whether working-capital demands, especially defense contract timing and customer advances, allow operating cash flow to recover.
- Developments in the Control Solutions litigation, credit-guarantee exposure, and other warranty, environmental and legal contingencies.
- Progress against debt-reduction, covenant-compliance and fiscal 2012 guidance, including the impact of one-time tax benefits and proxy-contest costs.