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OSK > SEC Filings for OSK > Form 10-K on 13-Nov-2013All Recent SEC Filings

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Form 10-K for OSHKOSH CORP


13-Nov-2013

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. 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, agricultural, 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, trailers 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 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 13, 2013.

Executive Overview

Fiscal 2013 was a strong year for the Company, one that the Company believes demonstrated the power of the Company's MOVE strategy. Despite slightly lower revenues as a result of a 22.8% decline in defense segment sales, the Company recorded higher earnings and grew revenues in each of its non-defense segments and operating income margins in all of its segments. Full year earnings from continuing operations of $3.53 per share were $0.93 per share above the high end of the Company's fiscal 2013 estimate of $2.60 per share that the Company conveyed at its September 2012 Analyst Day. Full year earnings included $0.12 per share in costs related to an unsolicited tender offer for the Company's Common Stock and a threatened proxy contest, a $0.06 per share non-cash impairment charge and a $0.03 per share charge related to the ratification of a five-year union contract extension in the defense segment, that were not included in the September 2012 Analyst Day estimate range. The Company also generated operating cash flows of $438 million and returned $202 million of capital to the Company's shareholders through share repurchases.

Consolidated net sales decreased $476.0 million, or 5.8%, to $7.67 billion in fiscal 2013 compared to fiscal 2012. Replacement driven demand in the access equipment segment, coupled with a slow economic recovery in the United States, resulted in a


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significant increase in sales in the Company's non-defense segments in fiscal 2013 compared to fiscal 2012. However, the increase in sales in the Company's non-defense segments was not enough to overcome the decrease in defense sales, which the Company expected as U.S. defense spending for tactical wheeled vehicles has declined.

While sales were lower, consolidated operating income in fiscal 2013 increased 30.4%, to $505.7 million, or 6.6% of sales, compared to $387.7 million, or 4.8% of sales, in fiscal 2012. The increase in consolidated operating income was largely attributable to the gross profit associated with higher sales in the Company's non-defense segments, improved performance in the Company's non-defense segments as a result of operational and processes improvements and price realization, along with higher margins in the defense segment associated with international sales and improved operational efficiencies. The Company continued to invest in new products, processes and systems to further the Company's MOVE strategy during fiscal 2013. Operating income in fiscal 2013 included costs of $16.3 million incurred by the Company in connection with an unsolicited tender offer for the Company's Common Stock and a threatened proxy contest, a non-cash intangible asset impairment charge in the access equipment segment of $9.0 million and charges of $3.8 million related to the ratification of a five-year union contract extension in the defense segment. Operating income in fiscal 2012 included costs incurred by the Company in connection with a proxy contest of $6.6 million.

During fiscal 2013, the defense segment rightsized its production and salaried workforces consistent with substantially reduced DoD demand. The defense segment also delivered 22 Light Combat All-Terrain Vehicle ("L-ATV") test vehicles to the DoD under the Joint Light Tactical Vehicle ("JLTV") Engineering, Manufacturing & Development ("EMD") contract. The Company's vehicles, along with vehicles from two other competitors, are currently undergoing 14 months of testing to be completed in fiscal 2015. Finally, the defense segment secured orders for MRAP All-Terrain Vehicles ("M-ATVs") from the Kingdom of Saudi Arabia.

The Company expects consolidated sales will decrease between 10% and 14% in fiscal 2014 compared to fiscal 2013, resulting in consolidated sales of between $6.6 billion and $6.9 billion. This estimate assumes higher sales in the Company's non-defense segments as a result of the expected continued economic recovery around the world coupled with an approximate 40% decline in defense segment sales. The Company expects consolidated operating income will be in the range of $455 million to $490 million leading to earnings per share of approximately $3.10 to $3.40.

As a result of the Company's strong financial performance in fiscal 2013, execution of the Company's MOVE strategy and positive outlook, the Company has reinstated payment of a quarterly cash dividend by declaring a dividend of $0.15 per share payable December 2, 2013 to shareholders of record on November 18, 2013.

MOVE Strategy

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.

The MOVE strategy consists of four key strategic initiatives:
Market recovery and growth - The Company plans to capture or improve its historical share of a market recovery. The Company estimated in September 2012 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. The Company believes that the recovery in certain of its non-defense markets began in fiscal 2012. In fiscal 2013, the Company experienced continued improvement in the North American access equipment market and in the U.S. concrete mixer market. In addition, quoting activity and orders for fire apparatus increased late in fiscal 2013. The European and Australian access equipment markets underperformed expectations in fiscal 2013 and the Company currently believes that this initiative is on pace to finish below the fiscal 2015 target of $220 million incremental operating income, due to expected weaker recovery in certain markets compared to its September 2012 estimates.

Optimize cost and capital structure - The Company is executing plans to optimize its cost and capital structure ("O" initiative) to provide value for customers and shareholders by aggressively attacking its product, process and overhead costs. The Company has targeted 250 basis points of operating income improvement between fiscal 2012 and 2015 through this initiative. The Company made good progress on the Company's "O" initiative in fiscal 2013, which contributed to a 430 basis point increase in operating income margins in the Company's largest segment, access equipment. The Company expects to exceed its fiscal 2015 consolidated operating income margin improvement target of 250 basis


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points. The Company expects that the actions implemented in fiscal 2013 for this initiative will result in approximately 110 basis points of the 130 basis point operating income margin improvement that had been targeted for fiscal 2014. The Company is also executing a prudent capital allocation strategy, which the Company expects to incrementally benefit earnings as well as returns for shareholders. As part of this strategy, the Company repurchased approximately 6.1 million shares of its Common Stock during fiscal 2013 at an aggregate cost of $201.8 million. Earnings per share in fiscal 2013 improved $0.11 compared to the prior year as a result of lower average shares outstanding. Subsequent to the end of its fiscal year, the Company announced as part of its capital allocation strategy that it was reinstating a quarterly cash dividend by declaring a dividend of $0.15 per share payable on December 2, 2013 to shareholders of record on November 18, 2013.
Value innovation - The Company has maintained its emphasis on new product development as it seeks to expand sales and margins by leading its core markets in the introduction of new or improved products and new technologies. The Company has targeted this initiative to achieve $350 million of incremental annual revenue by fiscal 2015 compared to fiscal 2012. The Company's value innovation initiative did not meet the Company's target for incremental revenue from new products in fiscal 2013. The Company made engineering management changes mid-year, re-allocated resources and made structural changes to the Company's product development stage gate review process to bring this initiative back on track. The Company expects that its countermeasures will drive incremental new product launches in fiscal 2014 and 2015 and expects this initiative to be back on target by fiscal 2015.

Emerging market expansion - The Company is driving expansion in targeted international geographies where it believes that there are significant opportunities for growth. The Company's target is to derive more than 25% of its revenues from outside the U.S. by fiscal 2015. The Company achieved its fiscal 2013 target for international sales. The Company has continued to invest in international business development resources and believes it is on track to achieving its fiscal 2015 target.

The Company believes the successful execution of its MOVE strategy significantly contributed to the Company's strong financial results in fiscal 2013. The Company raised its fiscal 2013 performance outlook several times during fiscal 2013 and ultimately exceeded the high end of the Company's fiscal 2013 estimate of $2.60 per share that the Company conveyed at its September 2012 Analyst Day by $0.93 per share. By focusing on its MOVE strategy, the Company believes that, in the aggregate, it is on track to achieve its fiscal 2015 targeted earnings per share range of $4.00 to $4.50, while the Company is executing countermeasures to drive certain initiatives that are behind schedule to become back on target.

Results of Operations

Consolidated Net Sales - Three Years Ended September 30, 2013

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,
                              2013           2012          2011
Net sales
Access equipment          $   3,120.8     $ 2,919.5     $ 2,052.1
Defense                       3,049.7       3,950.5       4,365.2
Fire & emergency                792.4         768.6         754.1
Commercial                      766.9         697.0         564.9
Intersegment eliminations       (64.7 )      (194.5 )      (197.8 )
Consolidated              $   7,665.1     $ 8,141.1     $ 7,538.5


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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,
                                          2013             2012         2011
Net sales
United States                      $    6,034.5         $ 6,357.2    $ 6,246.8
Other North America                       235.2             248.3        179.7
Europe, Africa and the Middle East        898.7             974.9        695.0
Rest of the world                         496.7             560.7        417.0
Consolidated                       $    7,665.1         $ 8,141.1    $ 7,538.5

Fiscal 2013 Compared to Fiscal 2012

Consolidated net sales decreased $476.0 million, or 5.8%, to $7.67 billion in fiscal 2013 compared to fiscal 2012 due to an expected decline in defense segment sales. Sales increased in all non-defense segments in fiscal 2013 compared to fiscal 2012.

Access equipment segment net sales increased $201.3 million, or 6.9%, to $3.12 billion in fiscal 2013 compared to fiscal 2012. Access equipment segment sales in fiscal 2012 included $125.1 million of inter-company sales to the defense segment. Access equipment segment sales to external customers in fiscal 2013 increased $326.4 million, or 11.7%, compared to fiscal 2012. Access equipment segment sales to external customers increased principally as a result of higher unit volumes (up $198 million), the realization of previously announced price increases (up $90 million) and improved aftermarket sales (up $50 million).

Defense segment net sales decreased $900.8 million, or 22.8%, to $3.05 billion in fiscal 2013 compared to fiscal 2012. The decrease in defense segment sales was primarily due to lower M-ATV aftermarket parts & service sales (down $545 million), lower shipments under the Company's existing programs of record (down $436 million) as the DoD is nearing its acquisition objective quantities for these programs, the completion of the M-ATV contract for the DoD in fiscal 2012 (down $222 million), and lower non-M-ATV aftermarket parts sales (down $95 million), offset in part by increased sales to international customers (up $398 million).

Fire & emergency segment net sales increased $23.8 million, or 3.1%, to $792.4 million in fiscal 2013 compared to fiscal 2012. The increase in fire & emergency segment sales primarily reflected the sale of a higher percentage of units built on custom built chassis, which have higher prices than units built on commercial chassis (up $58 million) and the realization of previously announced price increases (up $18 million), offset in part by lower unit sales volume (down $59 million).

Commercial segment net sales increased $69.9 million, or 10.0%, to $766.9 million in fiscal 2013 compared to fiscal 2012. The increase in commercial segment sales was primarily attributable to increased concrete placement products volume due to increased demand in the concrete mixer market (up $115 million) and improved aftermarket parts & service sales (up $27 million), offset in part by lower refuse collection vehicle volume (down $59 million).

Fiscal 2012 Compared to Fiscal 2011

Consolidated net sales increased $602.6 million, or 8.0%, to $8.14 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 (up $671 million) and the realization of previously announced price increases (up $102 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.


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Defense segment net sales decreased $414.7 million, or 9.5%, to $3.95 billion in fiscal 2012 compared to fiscal 2011. The decrease in sales was primarily due to a 48% decline in Family of Heavy Tactical Vehicles ("FHTV") units and lower aftermarket parts sales primarily resulting from fewer spares kits for M-ATVs (down $597 million), offset in part by a 162% increase in sales of Family of Medium Tactical Vehicle ("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 $14.5 million, or 1.9%, to $768.6 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 (up $27 million), offset in part by lower intersegment sales to the defense segment (down $39 million).

Consolidated Cost of Sales - Three Years Ended September 30, 2013

Fiscal 2013 Compared to Fiscal 2012

Consolidated cost of sales was $6.47 billion, or 84.5% of sales, in fiscal 2013 compared to $7.13 billion, or 87.6% of sales, in fiscal 2012. The 310 basis point decrease in cost of sales as a percentage of sales in fiscal 2013 was primarily due to higher sales prices (160 basis points) and favorable product mix (140 basis points) largely as a result of a higher mix of M-ATVs, which have higher margins and lower relative costs of sales, and improved performance on the FMTV contract in the defense segment (90 basis points), offset in part by lower absorption of fixed costs associated with lower sales volumes (90 basis points) in the defense segment.

Fiscal 2012 Compared to Fiscal 2011

Consolidated cost of sales was $7.13 billion, or 87.6% of sales, in fiscal 2012 compared to $6.45 billion, or 85.5% 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, as a result of the shift in mix of unit sales volume from M-ATVs and FHTVs, which have higher margins and lower relative cost of sales, to FMTVs, which have lower-margins and higher relative cost of sales (290 basis points), and material cost increases (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).

Consolidated Operating Income (Loss) - Three Years Ended September 30, 2013

The following table presents operating income (loss) by business segment (in
millions):
                               Fiscal Year Ended September 30,
                              2013             2012         2011
Operating income (loss):
Access equipment          $    379.6       $    229.2     $  65.3
Defense                        224.9            236.5       543.0
Fire & emergency                23.8              8.8        17.0
Commercial                      41.3             32.1         3.9
Corporate                     (163.9 )         (119.1 )    (107.1 )
Intersegment eliminations          -              0.2         4.0
Consolidated              $    505.7       $    387.7     $ 526.1


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Fiscal 2013 Compared to Fiscal 2012

Consolidated operating income increased 30.4%, to $505.7 million, or 6.6% of sales, in fiscal 2013 compared to $387.7 million, or 4.8% of sales, in fiscal 2012. The increase in consolidated operating income was largely attributable to the gross profit associated with higher sales in the Company's non-defense segments, improved performance in the Company's non-defense segments as a result of operational and processes improvements and price realization, along with higher margins in the defense segment associated with international sales of M-ATVs. Operating income in fiscal 2013 included costs of $16.3 million incurred by the Company in connection with an unsolicited tender offer for the Company's Common Stock and a threatened proxy contest, a non-cash intangible asset impairment charge in the access equipment segment of $9.0 million and charges of $3.8 million related to the ratification of a five-year union contract extension in the defense segment. Operating income in fiscal 2012 included costs incurred by the Company in connection with a proxy contest of $6.6 million.

Access equipment segment operating income increased 65.6% to $379.6 million, or 12.2% of sales, in fiscal 2013 compared to $229.2 million, or 7.9% of sales, in fiscal 2012. The increase in operating income was primarily the result of the realization of previously announced price increases (up $90 million), the gross profit associated with higher sales volume (up $36 million), as well as product and process cost reductions (up $32 million), offset in part by the absence of intercompany sales to the defense segment.

Defense segment operating income decreased 4.9% to $224.9 million, or 7.4% of sales, in fiscal 2013 compared to $236.5 million, or 6.0% of sales, in fiscal 2012. The decrease in operating income was largely due to lower gross profit on lower sales volume, offset in part by the timing of contractual price increases (up $25 million) and operational improvements (up $29 million). In addition, the defense segment recorded favorable contract adjustments related to undefinitized contracts of $13.8 million in fiscal 2013 as compared to $7.8 million in fiscal 2012.

Fire & emergency segment operating income increased 169.9% to $23.8 million, or 3.0% of sales, in fiscal 2013, compared to $8.8 million, or 1.1% of sales, in fiscal 2012. Operating results for fiscal 2013 were positively impacted by improved price realization (up $18 million), favorable product mix as a result of increased custom content (up $7 million) and product and process cost reductions (up $2 million), offset in part by lower gross profit associated with lower unit sales volume.

Commercial segment operating income increased 28.8% to $41.3 million, or 5.4% of sales, in fiscal 2013 compared to $32.1 million, or 4.6% of sales, in fiscal 2012. The increase in operating income was primarily a result of the gross margin associated with higher sales volume, offset in part by restructuring-related costs of $2.5 million.

Corporate operating expenses increased $44.8 million to $163.9 million in fiscal 2013 compared to fiscal 2012, largely due to costs related to an unsolicited tender offer for the Company's Common Stock and threatened proxy contest, which were $10 million higher than costs for a proxy contest in fiscal 2012, an increase in incentive, share-based compensation costs (up $12 million) due in part to the impact of a significantly higher share price on variable awards, higher information technology spending (up $11 million) and investments in research & development spending (up $2 million).

Consolidated selling, general and administrative expenses increased 10.5% to $620.5 million, or 8.1% of sales, in fiscal 2013 compared to $561.5 million, or 6.9% of sales, in fiscal 2012. The increase in selling, general and administrative expenses was due primarily to higher variable incentive compensation expense (up $16 million) on improved financial results, costs related to an unsolicited tender offer for the Company's Common Stock and threatened proxy contest ($10 million higher than costs for a proxy contest in fiscal 2012) and an increase in share-based compensation expense (up $12 million) due in part to the impact of a significantly higher share price on variable awards. 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. The Company's defense segment generally has lower selling, general and administrative costs as a percentage of sales compared to its other segments, in large part due to concentration of business with the DoD. For example, the defense segment has limited sales and marketing costs and has operations/locations primarily in the United States, as compared to the Company's access equipment segment, which has a diverse customer base with a significant number of customers, significant sales and marketing costs and operations/locations in various regions of the world. As the Company's defense segment sales decreased and the Company's non-defense segment sales increased, . . .

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