Oshkosh Corporation — Q1 Fiscal 2020 Form 10-Q
Reporting period: Three months ended December 31, 2019, compared with the three months ended December 31, 2018. The filing was signed January 29, 2020. Oshkosh operates in access equipment, defense, fire and emergency, and commercial vehicles and equipment.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $1,695.1 million | $1,803.4 million | Down 6.0% |
| Gross income / margin | $289.5 million / 17.1% | $328.3 million / 18.2% | Margin down 1.1 percentage points |
| Operating income / margin | $109.1 million / 6.4% | $160.5 million / 8.9% | Down 32.0% |
| Net income | $75.7 million | $109.0 million | Down 30.6% |
| Diluted EPS | $1.10 | $1.51 | Down $0.41 |
| Dividends declared per share | $0.30 | $0.27 | Higher by $0.03 |
- Access equipment sales fell 13.1% to $717.9 million; operating income rose to $69.0 million from $66.4 million, with margin improving to 9.6% from 8.0%.
- Defense sales rose 6.2% to $493.1 million, but operating income fell to $30.9 million from $71.1 million. Fire and emergency sales fell 11.2% to $262.4 million and operating income fell to $31.0 million. Commercial sales were nearly flat at $224.2 million, with operating income of $17.8 million versus $18.7 million.
- Income tax expense was $20.7 million, an effective rate of 21.4%, compared with $39.7 million and 26.9%. The prior-year quarter included $7.3 million of net discrete tax charges; the current quarter included $1.1 million of net discrete tax benefits.
Cash flow, balance sheet and liquidity
- Operating activities used $149.9 million of cash, versus $85.9 million used a year earlier. Management attributed the greater use primarily to lower net income and a larger increase in inventory. Investing activities used $13.2 million; financing activities used $23.8 million.
- Cash and equivalents were $264.0 million at December 31, down from $448.4 million at September 30, 2019. Inventory rose to $1,430.7 million from $1,249.2 million. The filing reports inventory turns declining to 4.2 from 5.2.
- Total debt was $819.2 million, essentially unchanged from $819.0 million at September 30. No revolving-facility borrowings or current debt maturities were reported. Debt to total capitalization was 23.4%, versus 24.0% at September 30.
- The $850 million revolving credit facility had $786.5 million of available capacity after $63.5 million of letters of credit. The company reported compliance with its credit covenants. Its current ratio was approximately 2.1, based on reported current assets and current liabilities.
- Management expected approximately $590 million of fiscal 2020 operating cash flow and $150 million of capital spending, and expected to return approximately 50% of free cash flow to shareholders through dividends and repurchases. It stated that liquidity should be sufficient for operations over the next 12 months.
Material changes and management commentary
- Management said Q1 EPS was in line with expectations. Lower access equipment sales and substantially lower defense results drove the consolidated decline; improved access equipment performance partly offset those pressures.
- Defense operating income was affected by smaller cumulative contract-margin catch-up adjustments than in the prior-year quarter, adverse product mix, higher development spending, and the absence of a favorable contract-compliance resolution. Contract estimate changes added $3.8 million to current-quarter defense operating income, compared with $30.3 million a year earlier.
- Access equipment demand moderated in North America and Europe, Africa and the Middle East, as rental customers slowed fleet-growth spending. Management also cited continued strong Asia Pacific sales growth and improved access price/cost dynamics.
- Backlog declined 13.3% year over year to $5.43 billion. Access equipment backlog fell 40.4% to $1.01 billion; defense backlog fell 8.0% to $2.94 billion; fire and emergency backlog increased 16.7% to a record $1.11 billion; commercial backlog fell 11.7% to $366.8 million. Approximately 27% of total backlog was not expected to be filled in fiscal 2020.
- Consolidated days sales outstanding rose to 72 days from 63, primarily because of delayed government acceptance of Joint Light Tactical Vehicles (JLTVs). Excluding defense, DSO rose to 55 days from 52.
Outlook, risks and unusual items
- Management reaffirmed fiscal 2020 guidance: net sales of $7.9–$8.2 billion, operating income of $690–$765 million, and diluted EPS of $7.30–$8.10. It expected Q2 sales to be flat year over year and Q2 earnings modestly lower, reflecting higher defense and lower access equipment sales.
- Access equipment FY2020 sales guidance was revised to $3.5–$3.75 billion, with operating margin of 11.25%–12.5%. The company maintained defense guidance of approximately $2.2 billion sales and 9.0% margin; fire and emergency of approximately $1.2 billion sales and 14.5%–15.0% margin; and commercial of approximately $1.05 billion sales and 7.0%–7.25% margin.
- Key disclosed risks include cyclical demand and construction markets; customer fleet investment; input-cost and pricing pressure; foreign exchange and tariffs; government procurement, funding and contract timing; supplier performance; warranty costs; receivable collectability; and execution and acquisition risks. Defense contract estimates rely on significant judgments, and contract changes or settlements may affect profitability.
- The company reported customer credit guarantees covering $740.6 million of indebtedness, with estimated maximum loss exposure of $144.0 million, and residual-value guarantees covering $91.9 million of equipment value, with estimated maximum exposure of $11.4 million. Management did not expect material excess losses, but noted that economic weakness and lower collateral values could increase exposure.
- Product and general liability reserves were $34.6 million. The company was contingently liable for $631.7 million of bid, performance and specialty bonds. Management believed resolution of ordinary-course legal, environmental and other claims would not materially affect results; no legal proceedings were listed in Part II.
- Adoption of the lease standard on October 1, 2019 added $179.0 million to assets and liabilities at transition, without material impact on results or cash flows. At December 31, operating lease liabilities had a reported present value of $173.3 million.
Most important facts for investors to verify
- Whether access-equipment demand, order trends and the sharply lower year-over-year backlog support the reaffirmed full-year guidance.
- JLTV delivery and government acceptance timing, defense contract estimates and catch-up adjustments, and the resulting DSO and cash-collection trends.
- Whether inventory growth and negative quarterly operating cash flow reverse as expected, and whether management’s annual cash-flow and capital-spending assumptions remain achievable.
- Progress against segment sales and margin guidance, especially defense and access equipment, and the impact of product mix, price/cost, supplier constraints and input costs.
- Guarantee exposure, warranty and litigation reserves, covenant headroom, and the planned level of dividends and share repurchases. The filing reports $9.4 million of repurchases in the quarter in management’s discussion, while the cash-flow statement reports $17.9 million for repurchases; investors may wish to reconcile the difference.