Oshkosh Corporation — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparative period is the three months ended December 31, 2016. Results are unaudited. Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment.
Financial results and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $1,586.3 million | $1,211.4 million |
| Gross income / margin | $242.2 million / 15.3% | $199.7 million / 16.5% |
| Operating income / margin | $73.8 million / 4.7% | $36.2 million / 3.0% |
| Net income | $56.4 million | $19.2 million |
| Diluted EPS | $0.74 | $0.26 |
| Operating cash flow | $29.2 million | $83.8 million |
Revenue rose 30.9%; operating income more than doubled. Gross margin declined as higher material costs and restructuring-related charges and inefficiencies offset improved manufacturing performance. The 7.8% effective tax rate benefited from $10.3 million of discrete tax benefits, including a $6.5 million net benefit related to U.S. tax reform. Reported EPS included $0.18 per share of after-tax restructuring charges and inefficiencies and benefited by $0.08 per share from tax-reform discrete benefits.
At December 31, 2017, cash was $379.1 million, total debt was $833.1 million and shareholders’ equity was $2,293.4 million. Debt-to-capitalization was 26.6%. Net debt was approximately $454 million. The company had $755.1 million of available revolving credit capacity, after letters of credit, and was in compliance with its credit covenants. The credit facility and term loan mature in March 2019.
Operating cash flow fell year over year primarily because of timing of payments on an international defense contract. Investing activities used $18.2 million and financing activities used $79.0 million, including $63.7 million for share repurchases and $18.0 million of dividends. Cash declined $67.9 million during the quarter.
Material changes and segment performance
- Access equipment: Sales increased 28.4% to $628.2 million, mainly on stronger aerial work platform and telehandler demand. Operating income fell 43.4% to $13.8 million, reflecting restructuring inefficiencies and charges, higher materials costs, legal and inventory reserve adjustments, unfavorable mix and foreign exchange.
- Defense: Sales increased 67.6% to $493.5 million, largely from the U.S. JLTV ramp-up and international M-ATV sales. Operating income rose to $65.2 million from $23.8 million.
- Fire & emergency: Sales decreased 1.5% to $229.1 million, while operating income increased to $25.1 million from $17.0 million, supported by pricing and manufacturing performance.
- Commercial: Sales increased 21.2% to $241.4 million; operating income rose to $8.3 million from $4.6 million, including $2.5 million of restructuring charges.
- Backlog increased 21.0% year over year to $4.79 billion. Access equipment backlog rose 165.3% to $1.58 billion; defense backlog fell 16.7% to $1.85 billion. Approximately 15% of total backlog was not expected to be filled in FY2018.
Outlook, risks and unusual items
Management raised FY2018 guidance: sales of $7.1–$7.3 billion; GAAP diluted EPS of $4.75–$5.20; and operating income of $520–$570 million. Adjusted EPS guidance is $5.00–$5.45 and adjusted operating income is $550–$600 million. The adjusted measures exclude restructuring costs and inefficiencies and specified tax-reform items. Forecast operating cash flow is approximately $500 million, up from a prior estimate of $450 million; capital spending is expected to be approximately $100 million.
Access equipment sales guidance rose to $3.3–$3.4 billion, but its GAAP operating margin outlook was reduced to 9.95%–10.5% because of restructuring costs, inefficiencies and mix. Management now estimates total costs for the access-equipment restructuring actions at approximately $73 million, up from $48–$53 million previously, including about $30 million of operating costs; expected annual savings remain $20–$25 million once fully implemented. Defense and fire & emergency margin outlooks were raised. Commercial sales guidance was tightened to approximately $975 million, while its GAAP margin outlook was reduced due to restructuring charges.
The Tax Cuts and Jobs Act resulted in provisional tax accounting entries: a $23.9 million benefit from remeasuring deferred tax balances and a $17.4 million transition-tax charge. Estimates may change as guidance develops; the company had not yet determined its accounting policy or estimated the effect of GILTI provisions. Management expects an FY2018 effective tax rate of approximately 21.8%, and approximately 22%–24% longer term before discrete tax benefits.
Key risks include cyclical demand in access, commercial, and fire markets; defense procurement, contract timing and funding; input-cost and foreign-exchange exposure; restructuring execution and cost savings; receivable collectibility; warranty claims; and legal, regulatory and cybersecurity matters. Oshkosh guaranteed $665.3 million of customer indebtedness, with estimated maximum loss exposure of $122.8 million. It did not recognize a gain from its Canadian military-truck bid challenge, anticipating a government appeal. Management stated that ordinary-course litigation and warranty matters were not expected to materially affect financial condition, results or cash flows.
Investor verification priorities
- Track whether access-equipment restructuring costs and operational inefficiencies remain within the revised $73 million estimate, and whether expected annual savings of $20–$25 million are achieved.
- Compare subsequent results with FY2018 sales, operating-income, EPS, cash-flow and segment margin guidance; distinguish GAAP from adjusted measures.
- Assess backlog conversion and quality, including the decline in defense backlog and the portion not expected to ship in FY2018.
- Monitor defense-contract cash collections and receivables: consolidated days sales outstanding rose to 65 days, primarily due to payment timing on a large international defense order.
- Check final tax-reform and GILTI accounting impacts, and review customer guarantee exposure, covenant compliance and the March 2019 credit-facility maturity.