Oshkosh Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended December 31, 2018. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparative results are for the three months ended December 31, 2017.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $1,803.4 | $1,586.3 | +13.7% |
| Gross income / margin | $328.3 / 18.2% | $243.0 / 15.3% | Margin +2.9 points |
| Operating income / margin | $160.5 / 8.9% | $74.5 / 4.7% | +115.4%; margin +4.2 points |
| Net income | $109.0 | $56.4 | +93.3% |
| Diluted EPS | $1.51 | $0.74 | +$0.77 |
| Operating cash flow | $(85.9) | $29.2 | Cash use versus generation |
Reported sales and earnings benefited from adopting ASC 606: the standard added $38.1 million to Q1 sales, $25.2 million to operating income, $19.2 million to net income and $0.26 to diluted EPS. On the previous accounting basis, sales were $1,765.3 million and net income was $89.8 million. Prior-year figures were not recast.
Segments and key drivers
- Access equipment: Sales of $826.5 million, up 31.6%; operating income of $66.4 million versus $13.7 million. Growth reflected strong demand, higher North American telehandler volume and improved production rates.
- Defense: Sales of $464.1 million, down 6.0%; operating income of $71.1 million versus $65.8 million. Sales were affected by the absence of prior-year international M-ATV deliveries, partly offset by JLTV ramp-up and accounting changes.
- Fire & emergency: Sales of $295.5 million, up 29.0%; operating income of $39.9 million versus $25.3 million, reflecting delivery timing and ASC 606 effects.
- Commercial: Sales of $222.2 million, down 8.0%; operating income of $18.7 million versus $8.3 million. Lower package sales were partly offset by favorable mix and lower costs.
Consolidated operating income improved with pricing, higher volume, the absence of prior-year restructuring costs and ASC 606; higher material and other inflationary costs partly offset these gains. Q1 defense contract adjustments increased sales by $31.6 million, operating income by $30.3 million, net income by $23.2 million and diluted EPS by $0.32. Management said the Q1 defense accounting benefit was expected to be offset over the rest of FY2019, with an immaterial full-year effect on defense operating income.
Cash, debt and liquidity
- Cash and equivalents were $159.9 million at December 31, 2018, down from $454.6 million at September 30, 2018. Total debt was $818.3 million, nearly unchanged; net debt was approximately $658.4 million.
- Current assets were $2,944.2 million and current liabilities $1,478.2 million. The company reported $762.3 million of available revolving credit capacity after outstanding letters of credit.
- Operating cash use of $85.9 million primarily reflected working-capital needs: lower accounts payable, lower fire & emergency customer advances and higher access equipment inventories. Investing activities used $15.1 million; financing activities used $194.5 million, including $176.9 million of share repurchases and $19.3 million of dividends.
- Debt to total capitalization was 25.3%, versus 24.6% at September 30. The company was in compliance with credit agreement financial covenants. DSO rose to 66 days from 63, largely due to timing of U.S. government payments; inventory turns declined to 4.8 from 5.1.
Outlook, accounting changes and risks
- Management raised FY2019 diluted EPS guidance to $6.90–$7.40 and adjusted EPS guidance to $7.00–$7.50, excluding an estimated $0.10-per-share repatriation-tax adjustment. The outlook includes operating income of $685–$735 million and sales of $8.05–$8.25 billion.
- FY2019 segment outlook: access equipment sales $3.8–$4.0 billion and operating margin 10.75%–11.25% (both raised); defense sales about $2.0 billion and margin 9.5%–9.75%; fire & emergency sales about $1.2 billion and margin 13.25%–13.5%; commercial sales about $1.05 billion and margin 7.0%–7.25%.
- For Q2 FY2019, management expected flat to slightly higher EPS on modestly higher sales, citing nonrecurring prior-year earnings benefits and expected commercial chassis availability constraints.
- Management forecast about $615 million of FY2019 operating cash flow and $165 million of capital spending, including construction of a new global headquarters. It targeted $350 million of FY2019 share repurchases; nearly $170 million had been spent in Q1.
- Backlog was $6.26 billion, up 10.4% year over year, including a $1.7 billion U.S. Army order for approximately 6,100 JLTVs and kits. About 30% of backlog was not expected to be filled in FY2019; access equipment orders can generally be canceled without penalty.
- ASC 606 adoption reduced opening retained earnings by $60.4 million after tax and changed the timing and presentation of some revenue, costs and contract balances. Management noted greater earnings volatility may result from the timing of defense contract orders.
- Risks highlighted include cyclical construction-related markets, input-cost inflation and the ability to recover costs through pricing, foreign exchange and tariffs, government procurement and funding uncertainty, supplier performance, receivable collectability, warranty claims, and execution of strategic plans. The company also guaranteed $692.0 million of customer indebtedness; estimated maximum loss exposure was $122.9 million.
The company reported no legal proceedings under Part II, but disclosed ordinary-course litigation, product liability, environmental and warranty matters; management did not expect their resolution to materially affect financial condition, results or cash flows.
Most important facts for investors to verify
- How much of reported growth and profitability reflects underlying operations versus ASC 606 timing and the sizable Q1 defense contract adjustments.
- Whether access equipment demand, order levels and the higher FY2019 sales and margin guidance are sustained.
- Whether the $6.26 billion backlog converts as expected, given cancellation provisions and the portion scheduled beyond FY2019.
- Whether operating cash flow recovers from Q1 working-capital outflows while the company funds capital spending, dividends and planned repurchases.
- Developments in defense contract estimates, government payment timing, commercial chassis availability, input costs, tax reserves and customer credit exposure.