Oshkosh had improved operating performance and operating income margin across all non-defense segments, but lower defense earnings. Its Q3 results demonstrate that it is on track to the objectives of its MOVE strategy that was implemented over a year ago. Oshkosh is beginning to increase prices to recover price increases it has absorbed over the last 12 to 18 months and has told customers it expects to increase prices in January 2013. Oshkosh's non-defense business will be driving the company's profitability over the next few years.
Access Equipment segment. Access Equipment had 40.4 percent sales growth in all regions. It benefited from replacement demand in North America, equipment utilization, and rental rates. The independent rental companies are still not a big factor in the market as there are still financing issues, but Oshkosh expects it to improve in 2013 as the ability of the independent rental companies to obtain financing is improving. In less developed markets, increased product adoption and infrastructure build out are driving long-term demand. Europe is still a mixed bag and other markets are starting to slow.
Defense segment. Oshkosh recently received its first large international order for M-ATV, which was an initial order from the United Arab Emirates for 750 units and an option to purchase 200 more units. It expects to deliver all 750 units in fiscal year 2013 pending U.S. regulatory approval. The order reinforces Oshkosh's belief that there are opportunities to continue selling M-ATV, and it believes it has the opportunity to sell 3000 M-ATV. The M-ATV will have higher margins than the FMTV.
Performance on the FMTV program improved over Q2. Oshkosh is working with the U.S. Army to adjust FMTV delivery schedules for fiscal 2013 and 2014 and will be building the same quantity of vehicles over the two-year period with some of the production volume shifting to fiscal 2014. The adjustment is to manage production more efficiently. 50 percent of revenue in the defense segment was related to FMTVs. Margins for FMTV improved due to efficiencies, but the margins are still in the low single-digits.
Oshkosh believes there are a lot of events in the Middle East that will help it sustain its defense segment in the long-term.
Commercial segment. Oshkosh was also able to improve margins in its commercial segment. There was slow but positive improvement in residential construction, which is good news for the concrete mixer market. There were relatively strong parts sales, which is a positive sign for future new vehicle demand. Oshkosh is also continuing to ship more CNG-powered units.
The replacement cycle for aerial work platforms (AWPs) can extend for some period of time. Average fleet ages are still very high. There has been some fleet expansion, but not a significant amount.
Fire and Emergency segment. The Fire and Emergency returned to profitability in Q3. The U.S. fire truck market remains down and will continue to be down for some period of time. Oshkosh's focus on overseas markets is delivering results. It secured additional international orders for Pierce fire trucks and Oshkosh ARF and snow unit that support emergency response organizations in major airports. It won some important competitions during Q3 in China, England and India. Oshkosh also made progress in improving the operational efficiency of its fire apparatus manufacturing, which is critical to obtaining higher margins.
Oshkosh will be exiting the ambulance business and the European mobile medical business, two small underperforming business that were negatively impacting the financial results in its Fire and Emergency segment. Although it had expected moving ambulance production to Florida would significantly improve performance for the Med Tech Ambulance product line, Oshkosh has concluded that it will not be able to achieve profitability for Med Tech Ambulances in a reasonable timeframe, if at all. Exiting these lines will help improve profitability and allow Oshkosh to focus on growing its fire apparatus and airport products businesses in the Fire and Emergency segment.
Organizational changes. Oshkosh announced the following organizational changes: Wilson Jones will serve as President and Chief Operating Officer and Frank Nerenhausen will assume Wilson's role as President of the Access Equipment segment. Todd Fierro assume Nerenhausen's role in leading the Commercial segment.
Evaluation of markets
Northern Europe is in reasonably good shape. There is reasonable activity, but not high growth. Oshkosh believes Northern Europe will improve in 2013.
Southern Europe is pretty much dead and it will be a few years before it improves.
Financials.
In Q3, consolidated net sales increased by 7.6 percent. Sales in the Access Equipment segment increased by 40.4 percent. Defense sales declined by 13.4 percent. For fiscal year 2012, Oshkosh is raising sales estimates for the Access Equipment segment to a growth rate of 40 percent, although it expects lower sequential sales in Q4 due to seasonal patterns. Oshkosh expects sales in the defense segment to decline by 10 percent. It expects sales in the Fire and Emergency segment to increase slightly in fiscal year 2012. Oshkosh is raising estimates for the Commercial segment, and it expects sales to increase by 20 percent in fiscal year 2012.
Consolidated operating income inQ3 was 5.7 percent of sales versus 6.2 percent of sales in Q3/2011.
In the defense segment, the shift from higher margin FHTV and after-market parts to lower margin FMTV sales continued. The loss from this shift was offset by improved performance in the non-defense segments. The Access Equipment and Commercial segments had strong incremental margins in Q3.
Oshkosh expects operating margins in the Access Equipment segment in 2012 to be 7.5 to 8.0 percent, although it expects lower sequential margins in Q4 due to seasonal patterns. The company expects operating margins in the defense segment to be between 5 and 5.5 percent in fiscal year 2012. It expects a small loss in the Fire and Emergency segment in fiscal year 2012, but anticipates sequential improvement in profitability in Q3 and Q4 (without including the costs of exiting the two businesses). In the Commercial segment, Oshkosh expects operating margins to be 3.5 to 4 percent.
The company expects its operating margin to decline from Q3 to Q4 due to investments in its MOVE strategy. Corporate expenses will be flat and interest expense will be lower.
EPS in Q3 was $.82 versus $.75 in Q3/2011. Discrete tax benefits represented $.07 of earnings per share in Q3. Oshkosh expects Q4 EPS to be slightly higher than its EPS in Q1 or Q2.
Oshkosh expects to incur pre-tax charges of approximately $15 million to $20 million related to exiting the ambulance and European mobile medical businesses. Approximately $14 million to $18 million will occur in Q4 and most of the remainder Q1/2013.
Oshkosh expects to selectively repurchase stock and its Board of Directors has approved a 4 million increase in the amount of shares authorized for repurchase. The total amount available for repurchase is now 7.2 million. No shares have been repurchased yet. The share buyback plan does not alter the company's views on acquisitions---it would still be opportunistic on acquisitions.
The full transcript of the earnings conference call can be found on Seeking Alpha at the following link:
Copyright 2012 Jaygo's Earnings Conference Call Summaries
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