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OSK > SEC Filings for OSK > Form 10-K on 19-Nov-2012All Recent SEC Filings

Show all filings for OSHKOSH CORP

Form 10-K for OSHKOSH CORP


19-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

General

The Company is a leading designer, manufacturer and marketer of a wide range of specialty vehicles and vehicle bodies, including access equipment, defense trucks, fire & emergency vehicles, concrete mixers and refuse collection vehicles. The Company is a leading global manufacturer of aerial work platforms under the "JLG" brand name. The Company is among the worldwide leaders in the manufacturing of telehandlers under the "JLG," "SkyTrak" and "Lull" brand names. Under the "Jerr-Dan" brand name, the Company is a leading domestic manufacturer and marketer of towing and recovery equipment. The Company manufactures defense trucks under the "Oshkosh" brand name and is a leading manufacturer of severe-duty, tactical wheeled vehicles for the U.S. Department of Defense ("DoD"). Under the "Pierce" brand name, the Company is among the leading global manufacturers of fire apparatus assembled on both custom and commercial chassis. Under the "Frontline" brand name, the Company is a leading domestic manufacturer and marketer of broadcast vehicles. The Company manufactures ARFF and airport snow removal vehicles under the "Oshkosh" brand name and ambulances under the "MEDTEC" brand name. Under the "McNeilus," "Oshkosh," "London" and "CON-E-CO" brand names, the Company manufactures rear- and front-discharge concrete mixers and portable and stationary concrete batch plants. Under the "McNeilus" brand name, the Company manufactures a wide range of automated, rear, front, side and top loading refuse collection vehicles. Under the "IMT" brand name, the Company is a leading domestic manufacturer of field service vehicles and truck-mounted cranes.

Major products manufactured and marketed by each of the Company's business segments are as follows:

Access equipment - aerial work platforms and telehandlers used in a wide variety of construction, industrial, institutional and general maintenance applications to position workers and materials at elevated heights, as well as wreckers and carriers. Access equipment customers include equipment rental companies, construction contractors, manufacturing companies, home improvement centers, the U.S. military and towing companies in the U.S. and abroad.

Defense - tactical trucks and supply parts and services sold to the U.S. military and to other militaries around the world.

Fire & emergency - custom and commercial firefighting vehicles and equipment, ARFF vehicles, snow removal vehicles, simulators, ambulances and other emergency vehicles primarily sold to fire departments, airports and other governmental units, and broadcast vehicles sold to broadcasters and TV stations in the U.S. and abroad.

Commercial - concrete mixers, refuse collection vehicles, portable and stationary concrete batch plants and vehicle components sold to ready-mix companies and commercial and municipal waste haulers in the Americas and other international markets and field service vehicles and truck-mounted cranes sold to mining, construction and other companies in the U.S. and abroad.

All estimates referred to in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" refer to the Company's estimates as of November 19, 2012.

Executive Overview

Consolidated net sales increased $613.4 million, or 8.1%, to $8.18 billion in fiscal 2012 compared to fiscal 2011. Replacement driven demand in the access equipment segment, coupled with a slow economic recovery in the United States, resulted in a significant increase in sales in both the access equipment and commercial segments, which more than offset an expected decrease in defense sales as U.S. defense spending for tactical wheeled vehicles declined and is expected to continue to decline for the next few years. While sales were higher, consolidated operating income in fiscal 2012 decreased $142.0 million, or 28.0%, from fiscal 2011 to $366.0 million, or 4.5% of sales. The decrease in consolidated operating income was primarily attributable to the defense segment, which experienced a shift from higher margin Family of Heavy Tactical Vehicles ("FHTV") and MRAP All-Terrain Vehicle ("M-ATV") parts sales to lower margin Family of Medium Tactical Vehicles ("FMTV") sales.


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In the defense segment, the Company recently announced that it received an order for 750 M-ATV units from the United Arab Emirates ("UAE"), which is the Company's first large international order for M-ATVs. The Company expects these M-ATVs to be sold in fiscal 2013. This order reinforces the Company's belief that there are significant opportunities for international sales of the M-ATV and other Oshkosh defense vehicles over the next few years. The Company has been forward deploying business development teams around the world to pursue these opportunities.

In the fire & emergency segment, the Company exited several small, underperforming businesses in fiscal 2012 to allow the Company to focus its resources on improving the performance of its principal product lines in this segment. The exited businesses included the discontinuance of domestic mobile medical trailer production and the sale of the Company's European mobile medical trailer business, Oshkosh Specialty Vehicles (UK), Limited and AK Specialty Vehicles and its wholly-owned subsidiary (together, "SMIT"). In addition, the Company made a decision in the fourth quarter of fiscal 2012 to exit its Medtec ambulance business. The Company had expected that the move of ambulance production from four separate facilities to a dedicated production facility in Florida would result in significantly improved performance. Despite efforts by numerous dedicated individuals and teams, the business continued to operate at a loss and it became apparent that the Medtec product line would not achieve profitability in a reasonable time frame, if at all, and as a result, the Company made a decision to exit the business. Upon completion of on-hand Medtec orders, the Company will exit the ambulance business and reclassify Medtec historical operating results to discontinued operations. With the decision made to exit these businesses, the Company was able to focus on improving operational performance of its principal product lines, which drove the fire & emergency segment to operating income of $0.9 million, or 0.4% of sales, in the fourth quarter of fiscal 2012.

In fiscal 2011, the Company completed a comprehensive strategic planning process to, among other things, assess the outlook for each of its markets, consider strategic alternatives and develop strategic initiatives to address the current difficult market forces then facing the Company. Those difficult market forces involved non-defense markets, which were down 40% to more than 90% from peak, an uncertain economic recovery and a likely sharp downturn in U.S. defense spending beginning in 2011. The study culminated in the creation of the Company's planned roadmap to deliver superior long-term earnings growth and increased shareholder value over the next business cycle and beyond. The Company's roadmap, named MOVE, entails aggressive cost reduction and prudent organic growth initiatives until a market recovery provides an opportunity for both significant earnings leverage and cash flow at which time the Company's strategic options could expand. By focusing on its MOVE strategy, the Company is targeting earnings per share of $4.00 to $4.50 in fiscal 2015.

The MOVE strategy consists of four key strategic initiatives:
Market recovery and growth - The Company believes that the recovery in certain of its non-defense markets began in fiscal 2012. The Company has plans to capture or improve its historical share of a market recovery. The Company believes that even a modest market recovery represents a $220 million operating income opportunity in its non-defense businesses between fiscal 2012 and fiscal 2015 at historical margins and assuming no major market share gains.

Optimize cost and capital structure - The Company plans to optimize its cost and capital structure to provide value for customers and shareholders by aggressively attacking its product, process and overhead costs. The Company is targeting 250 basis points of operating income improvement between fiscal 2012 and 2015 through this initiative. The Company achieved an eight basis point improvement in operating income margins in fiscal 2012 from this initiative and expects that the actions implemented in fiscal 2012 will result in 62 basis points of a targeted 75 basis point operating income margin improvement for all of fiscal 2013 from this initiative. The Company has also announced a prudent capital allocation strategy to be implemented over the next several years, which the Company expects to incrementally benefit earnings as well as returns for shareholders. To this effect, the Company repurchased 546,965 shares of Common Stock during the fourth quarter of fiscal 2012 at a cost of $13.3 million. On November 15, 2012, the Company's Board of Directors increased the Company's stock repurchase authorization such that the Company had authority to repurchase 11,000,000 shares of Common Stock after the Board action. The Company is targeting spending $300 million to repurchase shares over the 12 to 18 months following that date and expects to spend at least $75 million to repurchase shares over the three months following that date.

Value innovation - The Company plans to further strengthen its multi-generational product plans, which incorporate its newest technologies, to drive increased demand for the Company's products and increased penetration into new markets globally. The Company is targeting $350 million of incremental annual revenue by fiscal 2015 compared to fiscal 2012 as a result of this initiative.

Emerging market expansion - The Company plans to drive expansion in international targeted geographies where it believes that there are significant opportunities for growth. The Company is targeting to derive more than 25% of its revenues from outside the U.S. by fiscal 2015.


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The Company is in the early stages of implementing many of its MOVE initiatives. The Company expects the investments that it made in its MOVE strategy in fiscal 2012 to drive an improved cost structure, support the Company's drive for continued product innovation leadership and expand the Company's international sales in future years. As a result of the MOVE strategy, in fiscal 2012 the Company was able to capture a larger portion of the access equipment recovery, turn the FMTV contract to profitability in all four fiscal quarters, exit underperforming businesses and increase international sales by 38% compared to fiscal 2011 to 21.8% of consolidated sales. These actions led to Oshkosh significantly beating Wall Street consensus earnings estimates for each quarter of fiscal 2012. Over the next few years, the Company believes the effective execution of its MOVE strategy will permit the Company to overcome the impact of lower U.S. defense spending for tactical wheeled vehicles on its defense segment and report strong earnings growth and improved returns for shareholders.

The benefits of the MOVE strategy are evident in the Company's outlook for fiscal 2013, as despite a projected decrease in consolidated sales of 4% to 8% as compared to fiscal 2012, the Company expects operating income margins to improve 100 basis points. The Company's sales estimate assumes stable to slightly higher sales in its non-defense segments, as a result of a slow economic recovery in the United States, coupled with an approximate 15% decline in defense segment sales. The improved operating income margins lead the Company to believe that earnings from continuing operations will be $2.35 to $2.60 per share in fiscal 2013. This estimate does not consider any costs, which may be substantial, associated with the Offer (as defined below) and related threatened proxy contest discussed below. The Company believes its first quarter of fiscal 2013 will be the lowest quarter of the year in terms of sales and earnings per share, driven by seasonality of the Company's non-defense businesses and the expectation that the Company will not begin to recognize revenue from M-ATV sales to the UAE until the second fiscal quarter.

On October 17, 2012, Mr. Carl Icahn and related entities (the "Icahn Entities") commenced an unsolicited tender offer for "any and all" issued and outstanding shares of the Company's Common Stock (the "Offer"). On October 26, 2012, the Icahn Entities also submitted to the Company a notice of intent to nominate a slate of candidates to replace the entire Board of Directors of the Company at the Company's 2013 annual meeting of shareholders. The Company's Board of Directors carefully reviewed the Offer, in consultation with the Company's financial and legal advisors, and unanimously determined that the Offer is inadequate, undervalues the Company and is not in the best interests of the Company and its shareholders and recommended that the Company's shareholders reject the Offer and not tender their shares into the Offer. The Company expects to incur significant costs in connection with the Offer and threatened proxy contest.

Results of Operations

Consolidated Net Sales - Three Years Ended September 30, 2012

The following table presents net sales (see definition of net sales contained in
Note 2 of the Notes to Consolidated Financial Statements) by business segment
(in millions):
                               Fiscal Year Ended September 30,
                              2012           2011          2010
Net sales
Access equipment          $   2,919.5     $ 2,052.1     $ 3,011.9
Defense                       3,950.5       4,365.2       7,161.7
Fire & emergency                808.4         783.1         894.2
Commercial                      697.0         564.9         622.1
Intersegment eliminations      (194.5 )      (197.8 )    (1,869.3 )
Consolidated              $   8,180.9     $ 7,567.5     $ 9,820.6


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The following table presents net sales by geographic region based on product shipment destination (in millions):

                                         Fiscal Year Ended September 30,
                                          2012             2011         2010
Net sales
United States                      $    6,397.0         $ 6,275.4    $ 8,873.1
Other North America                       248.3             179.7        110.3
Europe, Africa and the Middle East        974.9             695.1        497.0
Rest of the world                         560.7             417.3        340.2
Consolidated                       $    8,180.9         $ 7,567.5    $ 9,820.6

Fiscal 2012 Compared to Fiscal 2011

Consolidated net sales increased $613.4 million, or 8.1%, to $8.18 billion in fiscal 2012 compared to fiscal 2011 as replacement driven demand in the access equipment segment, coupled with a slow economic recovery in the United States, resulted in a significant increase in sales in both the access equipment and commercial segments, which more than offset an expected decline in defense sales.

Access equipment segment net sales increased $867.4 million, or 42.3%, to $2.92 billion in fiscal 2012 compared to fiscal 2011. Sales to external customers totaled $2.79 billion in fiscal 2012, a 43.7% increase compared to fiscal 2011. The increase in sales to external customers was principally as a result of higher unit volumes ($671.3 million) and the realization of previously announced price increases ($101.7 million). Sales grew by double-digit percentages compared to the prior year in all major regions of the globe, with the largest increase in North America, driven largely by demand for replacement of aged equipment.

Defense segment net sales decreased $414.7 million, or 9.5%, to $3.95 billion in fiscal 2012 compared to fiscal 2011. The decrease was primarily due to a 48% decline in FHTV units and lower aftermarket parts sales primarily resulting from fewer spares kits for M-ATVs ($596.6 million), offset in part by a 162% increase in sales of FMTV trucks and trailers. The Company reached and sustained full rate production under the FMTV contract during the third quarter of fiscal 2012.

Fire & emergency segment net sales increased $25.3 million, or 3.2%, to $808.4 million in fiscal 2012 compared to fiscal 2011. The increase in sales primarily reflected the delivery of Rapid Intervention Vehicles under a contract with the United States Air Force.

Commercial segment net sales increased $132.1 million, or 23.4%, to $697.0 million in fiscal 2012 compared to fiscal 2011. The increase in sales was primarily attributable to a 52% increase in concrete placement vehicle volume compared to very low prior year volume and increased demand for aftermarket parts and services ($26.9 million), offset in part by lower intersegment sales to the defense segment ($39.1 million).

Fiscal 2011 Compared to Fiscal 2010

Consolidated net sales decreased $2.25 billion, or 22.9%, to $7.57 billion in fiscal 2011 compared to fiscal 2010 largely due to the expected decrease in sales under the M-ATV contract, offset in part by increased demand for access equipment and sales under the start-up of the FMTV program. In fiscal 2010, the Company's defense sales increased sharply as the DoD rushed M-ATVs and related spares kits into Afghanistan to protect U.S. troops from improvised explosive devices.

Access equipment segment net sales decreased $959.8 million, or 31.9%, to $2.05 billion in fiscal 2011 compared to fiscal 2010. Sales in fiscal 2011 included $0.11 billion in intersegment M-ATV related sales compared to $1.73 billion in fiscal 2010. Sales to external customers totaled $1.94 billion in fiscal 2011, a 53.5% increase compared to fiscal 2010. The increase in sales to external customers compared with the prior year period was primarily a result of higher replacement of aged equipment in North America (up 88%) and parts of Europe (up 44%).


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Defense segment net sales decreased $2.80 billion, or 39.0%, to $4.37 billion in fiscal 2011 compared to fiscal 2010. The decrease in sales was primarily due to the completion of initial M-ATV production requirements. The start-up of FMTV production added $548.8 million in sales during fiscal 2011, offsetting some of the M-ATV sales decrease. Combined vehicle and parts and services sales related to the M-ATV program totaled $1.25 billion in fiscal 2011, a decrease of $3.24 billion compared to the prior year.

Fire & emergency segment net sales decreased $111.1 million, or 12.4%, to $783.1 million in fiscal 2011 compared to fiscal 2010. The decrease in sales reflected a $120.3 million decrease in fire apparatus volume due to soft demand attributable to weak municipal spending in the U.S.

Commercial segment net sales decreased $57.2 million, or 9.2%, to $564.9 million in fiscal 2011 compared to fiscal 2010. The decrease in sales was primarily the result of a $56.1 million decline in refuse collection vehicles volume due to lower volume with large waste haulers.

Consolidated Cost of Sales - Three Years Ended September 30, 2012

Fiscal 2012 Compared to Fiscal 2011

Consolidated cost of sales was $7.19 billion, or 87.9% of sales, in fiscal 2012 compared to $6.49 billion, or 85.8% of sales, in fiscal 2011. The 210 basis point increase in cost of sales as a percentage of sales in fiscal 2012 was primarily due to adverse product mix, largely in the defense segment (290 basis points), and higher material costs (110 basis points), offset in part by the realization of price increases (130 basis points) and higher absorption of fixed costs associated with higher sales (100 basis points).

Fiscal 2011 Compared to Fiscal 2010

Consolidated cost of sales was $6.49 billion, or 85.8% of sales, in fiscal 2011 compared to $7.85 billion, or 79.9% of sales, in fiscal 2010. The 590 basis point increase in cost of sales as a percentage of sales in fiscal 2011 compared to the prior year was generally due to adverse product mix (290 basis points), under absorption of fixed costs and inefficiencies associated with lower sales and restructuring actions (100 basis points) and higher new product development spending (90 basis points).

Consolidated Operating Income (Loss) - Three Years Ended September 30, 2012

The following table presents operating income (loss) by business segment (in
millions):

                               Fiscal Year Ended September 30,
                              2012            2011         2010
Operating income (loss):
Access equipment          $    229.2       $   65.3     $    97.3
Defense                        236.5          543.0       1,320.7
Fire & emergency               (12.9 )         (1.1 )        88.3
Commercial                      32.1            3.9          19.4
Corporate                     (119.1 )       (107.1 )       (99.0 )
Intersegment eliminations        0.2            4.0          (1.9 )
Consolidated              $    366.0       $  508.0     $ 1,424.8

Fiscal 2012 Compared to Fiscal 2011

Consolidated operating income decreased 28.0%, to $366.0 million, or 4.5% of sales, in fiscal 2012 compared to $508.0 million, or 6.7% of sales, in fiscal 2011. The decrease in consolidated operating income was primarily attributable to the defense segment, where an adverse sales mix negatively impacted operating income comparisons.


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Access equipment segment operating income increased 251.1% to $229.2 million, or 7.9% of sales, in fiscal 2012 compared to $65.3 million, or 3.2% of sales, in fiscal 2011. The improvement in operating income was primarily the result of higher sales volumes and improved price realization ($101.7 million), offset in part by higher material costs ($94.1 million) and increased product development spending ($20.7 million).

Defense segment operating income decreased 56.4% to $236.5 million, or 6.0% of sales, in fiscal 2012 compared to $543.0 million, or 12.4% of sales, in fiscal 2011. The decrease in operating income as a percentage of sales was primarily the result of adverse changes in product mix. Although the FMTV program was profitable in each quarter of fiscal 2012, margins on this program were significantly below the Company's historical margin levels of most other programs in the defense segment, and the Company expects that margins will remain low through the life of the five-year contract.

The fire & emergency segment reported an operating loss of $12.9 million, or 1.6% of sales, in fiscal 2012, compared to an operating loss of $1.1 million, or 0.1% of sales, in fiscal 2011. The increase in the operating loss was primarily the result of additional losses related to the Company's Medtec ambulance business, which the Company announced in July 2012 it would close. The Company had expected that the move of ambulance production from four separate facilities to a dedicated production facility in Florida in April 2011 would result in significantly improved performance. Despite efforts by numerous dedicated individuals and teams, the Medtec business continued to operate at a loss and it became apparent that the Medtec product line would not achieve profitability in a reasonable time frame, if at all, and as a result, the Company decided to exit the business. The Company expects to discontinue production of ambulances in the second quarter of fiscal 2013 following completion of units currently in backlog.

Commercial segment operating income increased 717.9% to $32.1 million, or 4.6% of sales, in fiscal 2012 compared to $3.9 million, or 0.7% of sales, in fiscal 2011. The increase in operating income primarily resulted from improved sales volumes, the realization of price increases in excess of higher material costs ($15.8 million), as the segment continued to recover material cost increases incurred in fiscal 2011, as well as an increased volume of higher priced compressed natural gas vehicles, and improved absorption of overhead on higher sales volume, offset in part by the restoration of higher employee pay and benefits that had been eliminated during the Great Recession.

Corporate operating expenses increased $12.0 million to $119.1 million in fiscal 2012 compared to fiscal 2011, largely due to $6.6 million of costs related to the proxy contest in connection with the Company's 2012 annual meeting of shareholders, higher share-based compensation costs and additional incentive compensation costs, offset in part by cost reductions.

Intersegment profit of $4.0 million in fiscal 2011 resulted from profit on intersegment sales (largely M-ATV related sales between access equipment and defense). When the purchasing segment sells the inventory to an outside party, profits earned by the selling segment are recorded in consolidated earnings through intersegment profit eliminations.

Consolidated selling, general and administrative expenses increased 11.5% to $567.3 million, or 6.9% of sales, in fiscal 2012 compared to $509.0 million, or 6.7% of sales, in fiscal 2011. The increase in selling, general and administrative expenses was due primarily to higher salaries and fringe benefits ($24.2 million) principally in the Company's access equipment segment as a result of the sales growth that it experienced, investments in the Company's MOVE strategy initiatives and costs related to the proxy contest in connection with the Company's 2012 annual meeting of shareholders ($6.6 million). The increase in consolidated selling, general and administrative expenses as a percentage of sales was largely due to a shift in sales to segments that have a higher percentage of selling, general and administrative expenses.

Fiscal 2011 Compared to Fiscal 2010

Consolidated operating income decreased 64.3%, to $508.0 million, or 6.7% of sales, in fiscal 2011 compared to $1.42 billion, or 14.5% of sales, in fiscal 2010. The decrease in operating income was primarily the result of lower sales volumes and a shift from higher margin M-ATV sales to loss generating FMTV sales in the defense segment. Operating income in fiscal 2011 and 2010 included pre-tax, non-cash charges for the impairment of goodwill and other long-lived intangible assets of $2.0 million and $2.3 million, respectively.

In accordance with the provisions of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350-20, Goodwill, the Company reviews goodwill annually for impairment, or more frequently if potential interim indicators exist that could result in impairment. Following the impairment testing, the Company recorded impairment charges for goodwill and other long-lived intangible assets of $2.0 million in the fire & emergency segment during the fourth quarter of fiscal 2011.


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Access equipment segment operating income decreased 32.9% to $65.3 million, or 3.2% of sales, in fiscal 2011 compared to $97.3 million, or 3.2% of sales, in fiscal 2010. The decline in operating results was due to the decrease in intersegment M-ATV related sales and higher material costs ($37.0 million), offset in part by higher sales to external customers and the reversal of . . .

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