Oshkosh Corporation — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2016. Amounts are in U.S. dollars; financial statements are unaudited. Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $1,747.5m | $1,612.3m | $4,523.8m | $4,519.8m |
| Gross income / margin | $314.6m / 18.0% | $284.0m / 17.6% | $756.7m / 16.7% | $789.5m / 17.5% |
| Operating income / margin | $146.8m / 8.4% | $136.6m / 8.5% | $268.5m / 5.9% | $312.0m / 6.9% |
| Net income | $84.2m | $89.9m | $154.9m | $179.2m |
| Diluted EPS | $1.13 | $1.13 | $2.08 | $2.25 |
| Operating cash flow | Not separately presented for quarter | $161.9m | $(36.6)m |
Q3 sales rose 8.4% and operating income rose 7.5%, while diluted EPS was unchanged. Nine-month sales were essentially flat, but operating income fell 13.9% and net income fell 13.6%. Q3 operating margin edged down despite improved gross margin; the nine-month margin contraction reflected weaker Access Equipment results and start-up costs at a shared Mexico facility. The Q3 effective tax rate was 36.6%, versus 28.1% a year earlier, including $1.8m of discrete tax charges; the prior-year quarter benefited from $7.5m of tax benefits. Nine-month effective tax rates were 31.5% and 31.3%, respectively.
Balance sheet, liquidity and capital
- At June 30, cash was $45.5m; total debt was $967.0m, including $107.0m drawn on the revolver and $20.0m of current maturities. Debt was $938.5m at September 30, 2015. Debt to total capitalization was 33.2%, versus 32.9%.
- Revolver availability was $631.2m after borrowings and letters of credit. The company reported compliance with debt covenants and expected to remain compliant for the next 12 months.
- Current assets were $2,644.4m and current liabilities $1,617.4m. Receivables increased to $1,198.4m from $964.6m; inventory declined to $1,254.9m from $1,301.7m.
- Nine-month investing cash use was $61.0m, including $62.3m of property, plant and equipment additions and $30.9m of rental-equipment additions, partially offset by rental-equipment sale proceeds. Financing cash use was $103.4m, including $100.1m of share repurchases and $41.9m of dividends.
- The company repurchased 2.5m shares in the first nine months for $100.1m; 7.5m shares remained authorized. Dividends declared were $0.19 per share in Q3.
Changes by business and outlook
Q3 segment sales were $952.5m for Access Equipment (+2.1%), $264.3m for Defense (+36.1%), $248.5m for Fire & Emergency (+24.4%) and $287.9m for Commercial (-2.1%). Defense and Fire & Emergency gains more than offset slightly lower Commercial sales. Access Equipment operating income declined to $122.1m from $136.4m amid pricing pressure and adverse mix; Defense moved to $19.1m operating income from a $7.1m loss, while Fire & Emergency and Commercial operating income improved to $19.7m and $23.8m.
Management raised FY2016 diluted EPS guidance to $2.60–$2.80 from $2.30–$2.70, with sales forecast at $6.0–$6.1bn and operating income at $340–$360m. Estimated operating cash flow was raised to approximately $500m, largely on expected collections from international defense contracts. Segment outlook includes Defense sales of approximately $1.25bn and a 7.75% operating margin; Fire & Emergency sales of approximately $950m and a 6.75% margin. Access Equipment sales were estimated at $2.90–$2.95bn, with a 9.5%–9.75% margin. Corporate costs were forecast at $150–$155m and the tax rate at 32%.
Management commentary, risks and unusual items
- Management cited continued softness in North American access-equipment replacement demand, selective rental-company spending and competitive pricing. It expected the access-equipment slowdown to continue into FY2017.
- Defense backlog growth and an international order for more than 1,000 M-ATVs supported the outlook. The company expected to deliver approximately 175 M-ATVs in Q4; timing of international contract funding and customer payments remains uncertain. Defense segment days sales outstanding rose to 90 days from 38 at September 30, 2015; a large customer payment arrived in early July.
- Total backlog was $3.72bn, up 43.7% year over year, largely due to Defense. Approximately 67% was not expected to be filled in FY2016; backlog is not a guarantee of future sales.
- Other key risks include cyclical construction and municipal markets, U.S. defense-budget and contract-competition uncertainty, foreign-exchange movements, material costs, execution of production ramp-ups, and customer credit and collection risk. A stronger U.S. dollar reduced nine-month sales by $21m.
- Customer debt guarantees totaled $583.6m, with estimated maximum loss exposure of $122.2m. Warranty liability and unearned extended-warranty premiums totaled $90.4m. Management did not expect ordinary-course legal, warranty or product-liability matters to have a material financial effect, while noting outcomes remain uncertain.
- JLTV contract revenue was first recorded in Q3 using a cost-to-cost input method; approximately $25m of revenue had been recognized to date. The filing also reports no material changes to previously disclosed contractual-obligation and off-balance-sheet disclosures.
Important facts for investors to verify
- Whether the expected international defense payments and M-ATV deliveries occurred on schedule, and whether defense receivables and DSO normalized.
- Whether FY2016 EPS, sales, operating-income and cash-flow guidance was achieved, especially given access-equipment weakness and the revised segment margin outlooks.
- Whether Access Equipment pricing, volumes and inventory levels improved, and whether Mexico facility start-up costs declined.
- Whether customer-guarantee exposure, receivable concentrations, and potential credit losses changed materially.
- How much reported earnings benefited from share repurchases and discrete tax items, and the company’s remaining capacity for buybacks and dividends under debt covenants.