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OSK > SEC Filings for OSK > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for OSHKOSH CORP

Form 10-Q for OSHKOSH CORP


30-Apr-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Cautionary Statement About Forward-Looking Statements

This Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q contain statements that Oshkosh Corporation (the "Company") believes to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding the Company's future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations, including those under the caption "Executive Overview" are forward-looking statements. When used in this Quarterly Report on Form 10-Q, words such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe," "should," "project" or "plan" or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond the Company's control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These factors include the cyclical nature of the Company's access equipment, commercial and fire & emergency markets, which are particularly impacted by the pace of U.S. and European economic recoveries; the strength of emerging market growth and projected adoption rate of work at height machinery; the expected level and timing of U.S. Department of Defense ("DoD") and international defense customer procurement of products and services and funding thereof; risks related to reductions in government expenditures in light of U.S. defense budget pressures, sequestration and an uncertain DoD tactical wheeled vehicle strategy, including the Company's ability to successfully manage the cost reductions required as a result of lower customer orders in the defense segment; the Company's ability to win a U.S. Joint Light Tactical Vehicle ("JLTV") production contract award; the Company's ability to increase prices to raise margins or offset higher input costs; increasing commodity and other raw material costs, particularly in a sustained economic recovery; risks related to facilities consolidation and alignment, including the amounts of related costs and charges and that anticipated cost savings may not be achieved; the duration of the ongoing global economic uncertainty, which could lead to additional impairment charges related to many of the Company's intangible assets and/or a slower recovery in the Company's cyclical businesses than Company or equity market expectations; risks related to the collectability of receivables, particularly for those businesses with exposure to construction markets; the cost of any warranty campaigns related to the Company's products; risks related to production or shipment delays arising from quality or production issues; risks associated with international operations and sales, including foreign currency fluctuations and compliance with the Foreign Corrupt Practices Act; the Company's ability to comply with complex laws and regulations applicable to U.S. government contractors; the impact of severe weather or natural disasters that may affect either the Company, the Company's suppliers or its customers; the impact of cyber security risk and costs of defending against, mitigating and responding to a data security breach; and risks related to the Company's ability to successfully execute on its strategic road map and meet its long-term financial goals. Additional information concerning these and other factors that could cause actual results to differ materially from those in the forward-looking statements is contained from time to time in the Company's U.S. Securities and Exchange Commission ("SEC") filings, including, but not limited to, the Company's Current Report on Form 8-K filed with the SEC on April 30, 2014 and Item 1A. of Part II of this Quarterly Report on Form 10-Q.

All forward-looking statements, including those under the caption "Executive Overview," speak only as of the date the Company files this Quarterly Report on Form 10-Q with the SEC. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Quarterly Report on Form 10-Q. Investors should be aware that the Company may not update such information until the Company's next quarterly earnings conference call, if at all.

All references herein to earnings per share refer to earning per share assuming dilution.

General

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, 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.


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Fire & emergency - custom and commercial firefighting vehicles and equipment, aircraft rescue and firefighting vehicles, snow removal vehicles, simulator shelters and other emergency vehicles sold primarily to fire departments, airports and other governmental units, and broadcast vehicles sold to broadcasters and television 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.

Executive Overview

Strong results in the Company's access equipment segment in the second quarter of fiscal 2014 were not enough to fully offset the impact on earnings of an expected 42% decline in defense segment sales, as the Company reported a $0.13 per share decline in earnings compared to the second quarter of fiscal 2013. Results for the quarter included $11.0 million ($7.0 million, or $0.08 per share, after-tax) of debt extinguishment costs related to the refinancing of the Company's credit agreement and senior notes due 2017. Results for the quarter also included a tax benefit of $12.1 million ($0.14 per share) related to the reduction of a net operating loss valuation allowance upon securing a favorable tax ruling. Similar to recent quarters, the access equipment segment benefited from strong replacement demand for access equipment and continued, improved operating performance, resulting in operating income margins that were 190 basis points above the prior year quarter in spite of numerous weather-related challenges in the United States.

The Company has been managing a decline in U.S. defense spending for tactical wheeled vehicles in its defense segment through periodic reductions to fixed and variable costs consistent with production rate declines. The Company expects production rates to decline again in July 2014, and as a result, the Company announced in early April that it will reduce its workforce in the defense segment by approximately 760 people to match the lower production volumes.

The Company has successfully managed through the decline in defense segment sales over the last two years by focusing on disciplined execution of the Company's MOVE strategy. Market conditions have improved in all non-defense segments and a slow recovery in U.S. construction continued in the quarter. The Company launched multiple new products for the access equipment and commercial segments at the ConExpo construction equipment trade show in March 2014 and for the fire & emergency segment at the Fire Department Instructors Conference ("FDIC") trade show in April. In addition, international orders for the first half of fiscal 2014 grew at a double-digit rate in our access equipment segment compared to the first half of fiscal 2013. The MOVE strategy and the Oshkosh Operating System have directly impacted each of the Company's non-defense segments resulting in increased gross income margins compared to the second quarter of fiscal 2013.

Consolidated net sales for the second quarter of fiscal 2014 were $1.68 billion, a 15.4% decrease from the second quarter of fiscal 2013. Significantly lower defense segment sales were offset in part by higher sales in the access equipment segment. Consolidated operating income for the second quarter of fiscal 2014 was $119.4 million, or 7.1% of sales, compared to $134.6 million, or 6.8% of sales, in the second quarter of fiscal 2013. Operating income margins increased in the second quarter of fiscal 2014 as a result of favorable performance in the Company's access equipment segment, offset in part by lower defense segment sales.

The Company expects its earnings per share for full-year fiscal 2014 will be between $3.43 to $3.68 per share. Excluding pension curtailment charges, debt refinancing costs and a benefit related to a reduction in a net operating loss valuation allowance, the Company maintained its estimated adjusted earnings per share range for full-year fiscal 2014 of $3.40 to $3.65 per share. The Company now expects consolidated sales for fiscal 2014 will be between $6.7 billion and $6.8 billion, compared to the Company's previous consolidated sales estimate range of $6.65 billion to $6.85 billion. The Company believes that consolidated operating income will be in the range of $486 million to $516 million. Excluding the pension curtailment charge in the defense segment, the Company believes that consolidated adjusted operating income will be in the range of $490 million to $520 million for fiscal 2014, unchanged from the Company's previous expectations.


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The Company now expects access equipment segment sales will be between $3.40 billion and $3.45 billion for fiscal 2014, up from the Company's previous sales estimate range of $3.35 billion to $3.40 billion. The Company now believes that operating income margins in the access equipment segment for fiscal 2014 will be in the 14.5% to 14.75% range, up from the Company's previous estimate range of 14.25% to 14.5%, reflecting the impact of increased leverage from the higher sales volume.

The Company now expects sales in the defense segment will be between $1.725 billion and $1.75 billion for fiscal 2014, down from the Company's previous sales estimate range of $1.75 billion to $1.80 billion. Due largely to the favorable settlement of several matters with this segment's U.S. government customer and suppliers, the Company now believes operating income margins in the defense segment for fiscal 2014 will be between 4.25% and 4.5%, slightly higher than its previous estimate range of 3.75% to 4.0%. Excluding the pension curtailment charge recorded in the second quarter of fiscal 2014, the Company believes adjusted operating income margins in the defense segment for fiscal 2014 will be between 4.5% and 4.75%.

The Company expects sales in the fire & emergency segment will be approximately $800 million in fiscal 2014, which is at the lower end of the Company's previous sales estimate range of $800 million to $825 million. The Company believes that fire & emergency segment operating income margins will be in the 3.5% to 3.75% range for fiscal 2014, down from the Company's previous estimate range of 4.0% to 4.5%, reflecting a delay in the realization of benefits associated with planned operational initiatives.

The Company believes that sales in the commercial segment for fiscal 2014 will be in the range of $850 million to $875 million, reflecting a slight decrease in the high end of the Company's previous sales estimate range. The Company believes that operating income margins in the commercial segment for fiscal 2014 will be in the 6.0% to 6.25% range, down from the Company's previous estimate range of 6.75% to 7.0%, reflecting an adverse product mix versus previous estimates, including lower estimated refuse collection vehicles sales, and incremental investments in organic growth initiatives.

The Company expects that corporate expenses will be approximately $157 million for fiscal 2014, up approximately $10 million from the Company's previous operating expense estimate, reflecting higher incentive compensation, including higher stock-based compensation as a result of an increase in the Company's stock price, and to a lesser extent, additional funding for the Company's Enterprise Resource Planning replacement program and costs associated with the support of the MOVE strategy. The Company continues to believe that its fiscal 2014 effective income tax rate will approximate 29%, including an approximate 300 basis point benefit from the release of a net operating loss valuation allowance in the second quarter of fiscal 2014. The Company's expectations assume an average full-year fiscal 2014 share count of approximately 86 million shares. The Company believes that capital expenditures for fiscal 2014 will be approximately $80 million, consistent with the Company's previous estimates.

The Company expects that earnings per share in the third quarter of fiscal 2014 will be the highest of any quarter of the fiscal year and then decline in the fourth quarter of fiscal 2014 as a result of seasonal sales patterns and a decrease in sales volume in the defense segment.

Results of Operations

Analysis of Consolidated Net Sales

The following table presents net sales by business segment (in millions):
                             Second Quarter Fiscal         First Six Months Fiscal
                              2014           2013            2014            2013
Net sales:
Access equipment          $     866.0     $   817.4     $    1,534.6      $ 1,398.7
Defense                         484.4         827.6            965.7        1,656.3
Fire & emergency                156.1         174.0            354.1          356.1
Commercial                      182.3         185.5            374.9          362.8
Intersegment eliminations       (10.9 )       (20.1 )          (21.2 )        (39.7 )
Consolidated              $   1,677.9     $ 1,984.4     $    3,208.1      $ 3,734.2


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Second Quarter Fiscal 2014 Compared to 2013

Consolidated net sales decreased $306.5 million, or 15.4%, to $1.68 billion in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. Significantly lower defense segment sales were offset in part by higher sales in the access equipment segment.

Access equipment segment net sales increased $48.6 million, or 5.9%, to $866.0 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The increase in access equipment segment sales was principally the result of higher unit volumes (up $53 million), improved aftermarket parts & service sales (up $10 million) and favorable pricing (up $8 million), offset in part by the absence of U.S. military telehandler sales (down $25 million) under a contract that was completed in the fourth quarter of fiscal 2013.

Defense segment net sales decreased $343.2 million, or 41.5%, to $484.4 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The decrease in defense segment sales was primarily due to an expected decline in sales to the DoD (down $264 million) and lower international sales of Mine Resistant Ambush Protected All-Terrain Vehicles ("M-ATV").

Fire & emergency segment net sales decreased $17.9 million, or 10.3%, to $156.1 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The decrease in fire & emergency segment sales primarily reflected lower sales volume as a result of production delays (down $9 million) and lower international deliveries (down $6 million).

Commercial segment net sales decreased $3.2 million, or 1.7%, to $182.3 million in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The decrease in commercial segment sales was primarily attributable to lower package sales (down $8 million), which include both a body and chassis, and lower intersegment defense sales (down $5 million), offset in part by higher shipments of front-discharge concrete mixer rebuild units (up $9 million). Severe weather in the United States contributed to longer lead times and delays in chassis supplier deliveries, which impacted the Company's ability to ship completed units to customers during the current year quarter.

First Six Months of Fiscal 2014 Compared to 2013

Consolidated net sales decreased $526.1 million, or 14.1%, to $3,208.1 million in the first six months of fiscal 2014 compared to the first six months of fiscal 2013. An expected decline in the Company's defense segment sales was partially offset by increased sales in the Company's access equipment and commercial segments.

Access equipment segment net sales increased $135.9 million, or 9.7%, to $1,534.6 million in the first six months of fiscal 2014 compared to the first six months of fiscal 2013. The increase in access equipment segment sales was principally the result of higher unit demand (up $127 million), favorable pricing (up $24 million) and improved aftermarket parts & service sales (up $16 million), offset in part by lower U.S. military telehandler sales (down $38 million) under a contract that was completed in the fourth quarter of fiscal 2013.

Defense segment net sales decreased $690.6 million, or 41.7%, to $965.7 million in the first six months of fiscal 2014 compared to the first six months of fiscal 2013. The decrease in defense segment sales was primarily due to an expected decline in sales to the DoD.

Fire & emergency segment net sales decreased $2.0 million, or 0.6%, to $354.1 million in the first six months of fiscal 2014 compared to the first six months of fiscal 2013. The decrease in fire & emergency segment sales primarily reflected lower sales volume, offset in part by improved pricing.

Commercial segment net sales increased $12.1 million, or 3.3%, to $374.9 million in the first six months of fiscal 2014 compared to the first six months of fiscal 2013. The increase in commercial segment sales was primarily attributable to improved volumes in concrete placement (up $13 million) and improved aftermarket parts & services sales (up $12 million), offset in part by a reduction in intersegment defense sales (down $12 million).


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Analysis of Consolidated Cost of Sales

The following table presents cost of sales by business segment (in millions):
                             Second Quarter Fiscal         First Six Months Fiscal
                              2014           2013            2014            2013
Cost of sales:
Access equipment          $     670.6     $   648.0     $    1,182.7        1,117.7
Defense                         431.4         736.1            866.9        1,477.5
Fire & emergency                139.7         156.9            314.5          317.4
Commercial                      155.0         158.7            317.1          309.5
Intersegment eliminations       (10.0 )       (18.7 )          (19.4 )        (37.3 )
Consolidated              $   1,386.7     $ 1,681.0     $    2,661.8      $ 3,184.8

Second Quarter Fiscal 2014 Compared to 2013

Consolidated cost of sales was $1.39 billion, or 82.6% of sales, in the second quarter of fiscal 2014 compared to $1.68 billion, or 84.7% of sales, in the second quarter of fiscal 2013. The 210 basis point decrease in cost of sales as a percentage of sales in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 was primarily due to favorable segment sales mix (100 basis points), the favorable impact of cost reduction initiatives (90 basis points), higher sales prices (50 basis points) and improved warranty performance (50 basis points), offset in part by higher new product development spending (100 basis points). The favorable product mix was largely a result of a lower mix of Family of Medium Tactical Vehicle ("FMTV") sales in the defense segment, which have lower margins and higher relative costs of sales, and a higher mix of aerial work platform sales in the access equipment segment, which have higher margins and lower relative costs of sales.

Access equipment segment cost of sales was $670.6 million, or 77.4% of sales, in the second quarter of fiscal 2014 compared to $648.0 million, or 79.3% of sales, in the second quarter of fiscal 2013. The 190 basis point decrease in cost of sales as a percentage of sales in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 was primarily due to the favorable impact of cost reduction initiatives (160 basis points), higher sales prices (70 basis points) and favorable product mix (30 basis points), offset in part by higher new product development spending (110 basis points).

Defense segment cost of sales was $431.4 million, or 89.1% of sales, in the second quarter of fiscal 2014 compared to $736.1 million, or 88.9% of sales, in the second quarter of fiscal 2013. The 20 basis point increase in cost of sales as a percentage of sales in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 was primarily due to continued investment in new product development on lower sales (110 basis points), offset in part by favorable warranty performance (80 basis points).

Fire & emergency segment cost of sales was $139.7 million, or 89.4% of sales, in the second quarter of fiscal 2014 compared to $156.9 million, or 90.2% of sales, in the second quarter of fiscal 2013. The 80 basis point decrease in cost of sales as a percentage of sales in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 was primarily due to favorable pricing (100 basis points) and improved warranty performance (70 basis points), offset in part by continued investment in new product development on lower sales (80 basis points).

Commercial segment cost of sales was $155.0 million, or 85.0% of sales, in the second quarter of fiscal 2014 compared to $158.7 million, or 85.6% of sales, in the second quarter of fiscal 2013. The 60 basis point decrease in cost of sales as a percentage of sales in the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013 was primarily due to improved warranty performance (110 basis points).

First Six Months of Fiscal 2014 Compared to 2013

Consolidated cost of sales was $2.66 billion, or 83.0% of sales, in the first six months of fiscal 2014 compared to $3.18 billion, or 85.3% of sales, in the first six months of fiscal 2013. The 230 basis point decrease in cost of sales as a percentage of sales in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily due to favorable product mix (170 basis points), the favorable impact of cost reduction initiatives (90 basis points) and higher sales prices (80 basis points), offset in part by higher new product development spending (90 basis points). The favorable product mix was largely a result of


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a lower mix of FMTV sales in the defense segment, which have lower margins and higher relative costs of sales, and a higher mix of aerial work platform sales in the access equipment segment, which have higher margins and lower relative costs of sales.

Access equipment segment cost of sales was $1.18 billion, or 77.1% of sales, in the first six months of fiscal 2014 compared to $1.12 billion, or 79.9% of sales, in the first six months of fiscal 2013. The 280 basis point decrease in cost of sales as a percentage of sales in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily due to the favorable impact of cost reduction initiatives (160 basis points), higher sales prices (120 basis points) and improved product mix (70 basis points), offset in part by higher new product development spending (80 basis points).

Defense segment cost of sales was $866.9 million, or 89.8% of sales, in the first six months of fiscal 2014 compared to $1.48 billion, or 89.2% of sales, in the first six months of fiscal 2013. The 60 basis point increase in cost of sales as a percentage of sales in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily due to relatively flat new product development spending on lower sales (100 basis points).

Fire & emergency segment cost of sales was $314.5 million, or 88.8% of sales, in the first six months of fiscal 2014 compared to $317.4 million, or 89.1% of sales, in the first six months of fiscal 2013. The 30 basis point decrease in cost of sales as a percentage of sales in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily due to favorable pricing (140 basis points) and improved warranty performance (40 basis points), offset in part by production inefficiencies (100 basis points) and higher new product development spending (50 basis points).

Commercial segment cost of sales was $317.1 million, or 84.6% of sales, in the first six months of fiscal 2014 compared to $309.5 million, or 85.3% of sales, in the first six months of fiscal 2013. The 70 basis point decrease in cost of sales as a percentage of sales in the first six months of fiscal 2014 compared to the first six months of fiscal 2013 was primarily due to improved absorption of fixed costs (120 basis points), offset in part by adverse warranty performance (60 basis points).

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