Oshkosh Corporation — Q1 Fiscal 2017
Business context and reporting period. This unaudited Form 10-Q covers the three months ended December 31, 2016, compared with the same period in 2015. Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment.
Financial performance and position
- Revenue: Net sales were $1.211 billion, down 3.2% from $1.252 billion. U.S. sales rose to $1.018 billion from $904.4 million, while sales to Europe, Africa and the Middle East declined to $71.6 million from $200.1 million.
- Profit and margins: Gross income increased to $199.7 million from $182.8 million; gross margin was approximately 16.5%, versus 14.6%. Operating income rose 19.4% to $36.2 million, with operating margin of 3.0% versus 2.4%. Net income was $19.2 million, compared with $14.6 million; diluted EPS was $0.26 versus $0.19.
- Segment operating income: Access equipment earned $24.4 million versus $20.4 million; Defense $23.8 million versus $23.2 million; Fire & emergency $17.0 million versus $10.1 million. Commercial declined to $4.6 million from $8.9 million. Corporate costs increased to $33.6 million from $32.3 million.
- Cash flow: Operating activities provided $83.8 million, up from $73.2 million. Investing activities used $22.0 million versus $18.2 million; financing activities used $12.4 million versus $66.6 million. Cash increased $47.7 million to $369.6 million during the quarter.
- Debt and liquidity: Total debt was $826.6 million, down from $846.2 million at September 30, 2016. Cash less total debt was approximately $457 million. The company had no revolving-credit borrowings and $750.2 million of available capacity after letters of credit. Debt was 29.4% of total capitalization, and the company reported compliance with its credit covenants.
- Working capital and equity: Inventory rose to $1.209 billion from $979.8 million; management attributed the increase and lower inventory turns to defense inventory built for anticipated M-ATV deliveries. Shareholders’ equity was $1.980 billion, versus $1.977 billion at September 30.
Material changes versus the prior comparable period
- Sales declines in Access equipment and Defense were partly offset by 12.0% growth in Fire & emergency; Commercial sales were nearly flat.
- Higher operating income reflected improved product mix and contract performance in Access equipment and Defense, and improved pricing and volume in Fire & emergency. Commercial results weakened with lower production and fixed-cost underabsorption.
- SG&A increased 8.4% to $151.0 million, primarily due to higher incentive and share-based compensation and outside services spending. The effective tax rate was 21.8%, versus 10.6%; both periods included discrete tax benefits, of $2.8 million and $3.7 million, respectively.
- Backlog increased 26.4% year over year to $3.96 billion, principally due to Defense; Access equipment backlog fell 18.0% and Commercial backlog fell 12.0%. About 23% of backlog was not expected to be filled in fiscal 2017.
Outlook, commentary, risks and unusual items
- Management said Q1 EPS exceeded expectations, supported by stronger-than-expected Access equipment and Defense results. It expects higher consolidated sales but lower EPS in Q2 fiscal 2017 versus the prior-year quarter, citing restructuring charges and a less favorable segment sales mix.
- Fiscal 2017 GAAP guidance was diluted EPS of $2.50–$2.90 and operating income of $347–$387 million. Excluding expected Access equipment restructuring costs, adjusted EPS guidance was $3.00–$3.40, adjusted operating income $390–$430 million, and sales $6.5–$6.7 billion. These are company non-GAAP measures.
- Management expects Access equipment sales of $2.7–$2.8 billion and adjusted operating margin of 7.75%–8.5%; Defense sales of approximately $1.85 billion and margin of approximately 9.75%; Fire & emergency sales of approximately $1.0 billion and margin of approximately 8.5%; and Commercial sales of approximately $975 million and margin of approximately 6.5%.
- Announced Access equipment restructuring includes facility closures, production transfers and product and workforce reductions. Expected pre-tax implementation costs are $45–$50 million, including about $10 million non-cash; approximately $43 million is expected in fiscal 2017. Management estimates annual savings of $20–$25 million at full run rate in fiscal 2019, with $15–$20 million of benefit in fiscal 2018. Separately, aftermarket-parts distribution changes are expected to save about $6 million annually beginning fiscal 2018.
- A January 11, 2017 explosion and fire at the Dodge Center, Minnesota facility injured five people and damaged the facility. Management did not expect a material overall fiscal 2017 financial impact, but disclosed potential production, cost and lost-business risks if disruption persists or insurance is insufficient.
- Other exposures include customer-debt guarantees of $582.5 million, with estimated maximum loss exposure of $117.0 million; warranty and product-liability claims; defense-contract pricing and schedule uncertainty; and tax audits. Management stated it did not expect ordinary-course legal matters or warranty claims beyond reserves to have a material effect. It could not estimate the ultimate impact of its Canadian military-truck bid challenge.
- Key operating risks include cyclical construction and equipment markets, weaker North American rental replacement demand, currency and steel costs, government defense spending and procurement timing, receivable collectability, restructuring execution, and production or shipment delays.
Important facts for investors to verify
- Whether the Access equipment and Commercial market assumptions support the full-year sales and margin guidance, and whether projected restructuring savings are achieved against the expected $45–$50 million cost.
- Progress and financial effects of the Dodge Center facility recovery, including insurance coverage, production capacity, deliveries and any costs not covered.
- Defense backlog conversion, timing of M-ATV deliveries and the FMTV competition, including the effect of higher bid-and-proposal spending.
- Inventory levels and turns as planned defense deliveries proceed, and the collectability of concentrated notes receivable and customer-guarantee exposures.
- Cash generation, debt repayment and covenant headroom; the filing reports covenant compliance but does not provide actual covenant ratios.
- Effects of discrete tax benefits on reported earnings and the resolution of unrecognized tax benefits.