Oshkosh Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2017. Comparisons are with the corresponding 2016 periods; balance-sheet comparisons are with September 30, 2016. Amounts are in U.S. dollars.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $1,618.3 million | $1,524.3 million | $2,829.7 million | $2,776.3 million |
| Gross income | $261.3 million | $259.3 million | $461.0 million | $442.1 million |
| Operating income | $80.4 million | $91.4 million | $116.6 million | $121.7 million |
| Net income | $44.3 million | $56.1 million | $63.5 million | $70.7 million |
| Diluted EPS | $0.58 | $0.76 | $0.84 | $0.95 |
| Operating margin | 5.0% | 6.0% | 4.1% | 4.4% |
Q2 gross margin was approximately 16.1%, versus 17.0% a year earlier; first-half gross margin was approximately 16.3%, versus 15.9%. Q2 cost of sales rose to 83.9% of revenue from 83.0%, primarily reflecting access-equipment restructuring charges. Q2 SG&A increased 9.8% to $169.8 million.
- Segment trends, Q2: Defense sales rose 50.2% to $446.1 million and operating income rose to $48.7 million. Access-equipment sales fell 4.1% to $723.2 million and operating income declined to $42.1 million, including restructuring costs. Fire & emergency sales fell 1.2%, while operating income rose to $21.8 million. Commercial sales fell 8.7% and operating income declined to $6.0 million.
- Cash flow, first half: Operating cash flow was $148.1 million, up from $96.0 million. Investing used $33.7 million and financing used $21.1 million. Cash increased $91.5 million to $413.4 million.
- Balance sheet, March 31: Total debt was $827.1 million, down from $846.2 million; shareholders’ equity was $2,033.3 million. Debt to total capitalization was 28.9%, compared with 30.0% at September 30. Cash plus $749.5 million of available revolving-credit capacity supported liquidity; there were no revolver borrowings.
- Inventories increased to $1,455.1 million from $979.8 million, with management citing seasonal access-equipment build and inventory accumulated for defense deliveries. Inventory turns fell to 3.7 from 4.1.
Material changes and outlook
- Consolidated Q2 sales grew 6.2%, led by Defense, including increased JLTV and M-ATV deliveries. Q2 operating income and EPS declined year over year, chiefly due to $17.2 million of access-equipment restructuring-related costs; increased defense and fire & emergency results partly offset the decline.
- Management raised FY2017 sales guidance to $6.6–$6.7 billion, GAAP diluted EPS to $2.70–$3.00, and GAAP operating income to $372–$402 million. Excluding restructuring-related costs, it forecast adjusted diluted EPS of $3.20–$3.50 and adjusted operating income of $415–$445 million.
- FY2017 segment outlook: access-equipment sales approximately $2.8 billion, with operating margin of 7.20%–7.45%; Defense sales approximately $1.85 billion, with margin of 9.75%–10.0%; Fire & emergency sales approximately $1.0 billion, with margin around 8.5%; Commercial sales approximately $975 million, with margin reduced to 5.0%–5.5%. Corporate expenses were estimated at approximately $145 million.
- Management expected higher Q3 sales and EPS than in Q3 FY2016, with stronger Defense and, to a lesser extent, Fire & emergency sales expected to offset continued lower Access-equipment sales and weaker Commercial margins. Backlog was $3.93 billion, up 10.9% year over year; approximately 31% was not expected to ship in FY2017.
- Access-equipment restructuring includes facility closures, production transfers and product-line changes. Estimated implementation costs are $45–$50 million, with ongoing annual savings expected at $20–$25 million; management projected $15–$20 million of benefits in FY2018 and full run-rate savings in FY2019. The company also planned to close its Orrville parts distribution center as it transitions distribution to a third party.
Risks, contingencies and unusual items
- The January 2017 explosion and fire at a Commercial-segment Dodge Center facility injured five employees and partially shut down production. The company reported $1.3 million of related Q2 costs and cautioned that uninsured costs, extended disruption or lost capacity could affect results; insurance is subject to deductibles and retention.
- Commercial margins faced lower production absorption, adverse mix, increased warranty reserves and facility-accident costs. Management cited challenging market conditions and said further restructuring could be required.
- The company guaranteed $583.5 million of customer indebtedness; estimated maximum loss exposure was $118.1 million. The value of collateral could decline, especially in weak markets. It also had $608.8 million of bid, performance and specialty bonds outstanding.
- Other uncertainties include cyclical construction-related demand, defense procurement and funding, currency and input-cost movements, customer receivable collection, warranty claims, contract negotiations, restructuring execution and potential changes to tax laws. Management said ordinary-course legal and product-liability matters were not expected to have a material effect, but outcomes remain uncertain.
- The credit agreement’s financial covenants were met at quarter-end, and management expected compliance over the next 12 months. Debt includes a term loan and 5.375% senior notes due 2022 and 2025; the credit facility matures in March 2019.
Important facts for investors to verify
- Whether Defense program execution and deliveries, particularly JLTV and M-ATV, sustain the sales and margin contribution underpinning guidance.
- Whether Access-equipment demand, pricing and mix support the revised outlook and whether restructuring stays within the $45–$50 million estimate while delivering forecast savings.
- Whether the Commercial facility recovers as planned and the lower margin outlook adequately reflects production, mix, warranty and accident-related risks.
- Whether elevated inventory converts to sales and cash as anticipated; monitor inventory turns, customer advances and operating cash flow.
- Whether backlog converts on schedule: reported backlog excludes unsigned orders and options, and about 31% was not expected to ship in FY2017.
- Whether customer-credit guarantees, receivable concentrations, insurance recoveries and legal or warranty exposures remain within recorded reserves.