Oshkosh Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2018, ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars.
Business context and results
Oshkosh manufactures access equipment, defense vehicles and services, fire and emergency vehicles, and commercial vehicles and equipment. Third-quarter growth was led by access equipment; lower defense sales reflected the expected absence of international M-ATV sales.
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $2,175.8 million vs. $2,036.9 million (+6.8%) | $5,648.5 million vs. $4,866.6 million (+16.1%) |
| Gross income | $402.9 million vs. $386.9 million | $980.5 million vs. $847.9 million |
| Operating income | $222.4 million vs. $211.9 million; margin 10.2% vs. 10.4% | $452.1 million vs. $328.5 million; margin 8.0% vs. 6.8% |
| Net income | $153.4 million vs. $128.6 million | $320.6 million vs. $192.1 million |
| Diluted EPS | $2.05 vs. $1.69 | $4.25 vs. $2.54 |
| Cash dividends declared per share | $0.24 vs. $0.21 | $0.72 vs. $0.63 |
Financial position and cash flow
- Cash and cash equivalents were $371.9 million at June 30, 2018, down from $447.0 million at September 30, 2017. Net debt was approximately $445.9 million, based on reported debt of $817.8 million and cash.
- Current assets were $3,265.7 million and current liabilities $1,737.4 million. The company reported $762.6 million of unused revolving-credit capacity, after letters of credit.
- For the first nine months, operating cash flow was $220.2 million, versus $123.9 million; investing cash flow was negative $55.3 million, versus negative $30.6 million; financing cash flow was negative $242.0 million, versus negative $32.9 million. Cash declined $75.1 million during the period.
- Debt to total capitalization was 25.3%, compared with 26.5% at September 30, 2017. The company reported compliance with its credit-agreement financial covenants.
Material changes and drivers
- Third-quarter access equipment sales rose 18.4% to $1,160.1 million; segment operating income increased to $149.3 million, though its margin declined to 12.9% from 13.3%. Strong construction demand supported aerial platforms and telehandlers.
- Third-quarter defense sales fell 8.3% to $442.6 million, and operating income declined to $47.5 million from $62.4 million, primarily from adverse product mix and lower sales volume. For the nine months, defense sales and operating income increased year over year.
- Third-quarter fire and emergency operating income rose to $36.4 million from $30.8 million, while commercial operating income increased to $25.1 million from $21.6 million. Nine-month operating income improved in all four segments.
- Quarterly consolidated operating margin eased despite higher operating income. Management cited adverse mix and access-equipment production ramp-up challenges; improved pricing and volume partly offset these pressures.
- Lower income-tax expense materially supported earnings: the effective tax rate was 22.6% in the quarter and 21.1% for the nine months, versus 35.3% and 34.1%, respectively, in 2017. Tax reform and discrete tax items affected comparability.
Outlook, risks and unusual items
- Management raised fiscal 2018 sales guidance to $7.6–$7.65 billion, diluted EPS to $5.65–$5.75, and operating income to $595–$605 million. Adjusted EPS guidance was $6.00–$6.10 and adjusted operating income $630–$640 million; these are non-GAAP measures and exclude specified items.
- Fiscal 2018 segment outlook included access equipment sales of approximately $3.7 billion; defense sales of approximately $1.825 billion; fire and emergency sales of approximately $1.1 billion; and commercial sales of approximately $1.025 billion. Management raised expected operating margins for defense, fire and emergency, and commercial, and cited strong access-equipment demand.
- Management expected approximately $300 million of fiscal 2018 operating cash flow and $100 million of capital spending. Fourth-quarter sales were expected to be flat year over year, with modestly higher EPS, partly due to a lower tax rate.
- Access-equipment restructuring actions are now expected to cost approximately $78 million in total, including about $35 million of operating costs and inefficiencies. The company expected further operational inefficiencies in the remainder of fiscal 2018. Tight labor markets, supply-chain constraints, higher freight and material costs, and tariffs were additional pressures; surcharges were expected to offset only part of higher input costs during fiscal 2018.
- The company refinanced debt, issuing $300 million of 4.6% unsecured notes due 2028 and redeeming its 5.375% notes due 2022, while amending its credit agreement. It recognized $9.9 million of debt-extinguishment expense. The new revolving facility matures in April 2023; variable-rate borrowing and covenant restrictions remain relevant.
- Backlog was $4.83 billion, up 32.0% year over year, including access-equipment backlog up 134.4%. Management cautioned that access-equipment backlog can generally be canceled without penalty; about 60% of total backlog was not expected to be filled in fiscal 2018.
- A customer payment on a previously non-accrual account generated $11.5 million of margin, reversed $2.4 million of bad-debt expense, and contributed $6.6 million of interest income during the nine months. Tax-reform amounts remained provisional; the company had not yet determined the accounting policy or reasonably estimated the impact of GILTI.
- Customer credit guarantees covered $670.2 million of indebtedness, with estimated maximum loss exposure of $115.4 million. The company also reported $629.8 million of bid, performance and specialty bonds. Management did not expect ordinary-course claims, warranty disputes, or other proceedings to materially affect results, but outcomes are uncertain. A Canadian military-contract challenge remained on appeal; no gain was recorded.
Important facts for investors to verify
- Whether access-equipment demand and backlog convert to sales, and whether cancellable orders, production capacity, labor and supply-chain constraints affect delivery and margins.
- Whether pricing surcharges offset persistent commodity, freight and tariff costs, and whether restructuring inefficiencies decline as management expects.
- Whether the $300 million operating-cash-flow forecast is achieved, particularly given the delayed international defense-contract payment and working-capital requirements.
- How provisional tax-reform estimates, GILTI, and discrete tax benefits affect future tax rates and reported EPS.
- Customer-credit and guarantee exposures, defense-program timing and profitability, and compliance with credit covenants and restrictions on distributions.