Business context and reporting period
Oshkosh Corporation’s unaudited Form 10-Q covers the third quarter and first nine months of fiscal 2011, ended June 30, 2011. The company manufactures defense vehicles, access equipment, fire and emergency vehicles, and commercial vehicles and equipment. Amounts below are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and condition
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Nine months ended June 30, 2011 | Nine months ended June 30, 2010 |
|---|---|---|---|---|
| Net sales | $2,022.9 | $2,439.0 | $5,469.3 | $7,737.3 |
| Gross income | $272.0 | $481.6 | $862.1 | $1,588.6 |
| Operating income | $126.0 | $340.5 | $427.1 | $1,160.5 |
| Net income attributable to Oshkosh | $68.4 | $211.2 | $235.9 | $673.4 |
| Diluted EPS | $0.75 | $2.31 | $2.57 | $7.41 |
| Operating margin | 6.2% | 14.0% | 7.8% | 15.0% |
- Cash flow: Nine-month operating cash flow was $278.7, versus $530.7 a year earlier. Investing used $47.1 and financing used $180.6. Cash increased $54.8 to $393.8.
- Liquidity: At June 30, current assets were $2,302.6 and current liabilities were $1,576.1. The company reported $493.6 of unused revolving-credit capacity, in addition to cash, and said it expected sufficient liquidity for the next 12 months.
- Debt: Total debt was $1,111.7, down from $1,302.3 at September 30, 2010; debt-to-total-capitalization fell to 40.5% from 49.5%. The company repaid $190.4 of debt during the nine months. It was in compliance with credit-agreement financial covenants at June 30.
- Other metrics: Backlog was $6.05 billion, up 16.3% year over year. Days sales outstanding increased to 43 from 37 at September 30, 2010; inventory turns declined to 5.2 from 6.7.
Material changes versus the prior comparable period
- Third-quarter sales declined 17.1% and nine-month sales declined 29.3%, chiefly because M-ATV production and related sales were much lower than in fiscal 2010. M-ATV-related sales were $194.6 in the quarter and $958.4 in the nine-month period.
- Defense sales fell 34.9% for the quarter and 45.2% for the nine months as initial M-ATV production wound down and FMTV production ramped up. Defense operating income declined to $112.5 in the quarter from $304.1.
- Access-equipment sales to external customers grew 44.3% in the quarter and 50.3% for the nine months, led by replacement demand, particularly in North America. Segment totals were nevertheless reduced by the sharp fall in intersegment M-ATV sales.
- Gross margin pressure reflected lower-margin product mix, FMTV ramp-up losses, fixed-cost under-absorption and inefficiencies, and increased product-development spending. Quarterly cost of sales rose to 86.6% of sales from 80.3%.
- Net interest expense declined, primarily due to lower average debt and interest rates. Nine-month net income in 2010 also included $23.3 of impairment charges, while the prior-year quarter benefited from an income-tax audit settlement that increased net income by $15.3.
Outlook, management commentary, risks and unusual items
- FMTV: The company recorded $21.8 of third-quarter costs in excess of revenue on the program and $37.1 of ramp-up costs for the first nine months. It expected losses to continue through fiscal 2012’s first quarter, with profitability beginning in the second quarter. No loss-contract charge was recorded for remaining orders; estimates depend on production efficiencies, cost reductions, and insourcing. Management said a further 1% material-cost increase could add about $26 to costs and could make future orders loss-making.
- Defense supply risk: A DoD-directed diversion of specialty tires could delay production and deliveries for six to nine months. The company said fiscal 2011 fourth-quarter results could be affected by up to $125 of sales and $25 of operating income, shifted into fiscal 2012, if no alternative solution is found; it expected reimbursement of incremental costs.
- Outlook: Fiscal 2011 capital expenditures were expected at $90–$100 and the effective tax rate at 34%–35%. Management described fiscal 2012 as transitional and expected operating and net income to be significantly below fiscal 2011, with modest cash use and capital expenditures of $85–$95. It forecast access-equipment sales growth of about 25% or more in fiscal 2012, while defense sales were expected modestly lower, fire-and-emergency sales slightly lower, and commercial sales flat to slightly higher.
- Other unusual items: Updated estimates on undefinitized M-ATV change orders added $18.9 to nine-month operating income and $12.0 to net income, or $0.13 per share. A customer repayment and release of guarantees increased first-quarter pretax income by $8.1. Warranty liability reductions included favorable experience on M-ATV claims.
- Risks and contingencies: Key exposures include defense-budget reductions and contract competition, cyclical construction and municipal markets, commodity and supplier cost/availability, FMTV execution, variable-rate debt and covenant constraints, and restructuring execution. The company guaranteed $169.6 of others’ indebtedness, with estimated maximum loss exposure of $64.9. It also reported environmental, product/general liability and other routine claims; management did not expect these matters to have a material adverse effect. Legal proceedings were listed as none under Part II, Item 1.
- Operations and controls: Restructuring continued across several facilities, with approximately $3 of additional Oakes closure charges expected in the fourth quarter. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether FMTV production costs, insourcing, material prices, and margins improve as assumed, and whether any loss-contract charge becomes necessary.
- The actual timing and financial impact of the DoD tire diversion, including whether the projected sales and operating income shift occurs and related costs are reimbursed.
- Defense procurement, funding, and contract developments, including FHTV transition/competition and the decline in M-ATV-related sales.
- Whether access-equipment growth and backlog convert into profitable sales without worsening working capital, receivables, or supplier constraints.
- Debt reduction, covenant headroom, liquidity and cash generation through the fiscal 2012 transition, alongside guarantee and warranty exposures.