Oshkosh Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing also reports unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.
Business context
Oshkosh designs and manufactures specialty vehicles across four segments: access equipment (49% of FY2019 sales), defense (24%), fire & emergency (15%), and commercial (12%). Its markets include construction equipment, military vehicles, firefighting and airport vehicles, concrete mixers, and refuse collection vehicles.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $8,382.0 million | $7,705.5 million | +8.8% |
| Gross income | $1,517.4 million | $1,358.6 million | +11.7% |
| Operating income | $797.0 million | $656.0 million | +21.5% |
| Operating margin | 9.5% | 8.5% | +1.0 percentage point |
| Net income | $579.4 million | $471.9 million | +22.8% |
| Diluted EPS | $8.21 | $6.29 | +30.5% |
| Cash from operations | $568.3 million | $436.3 million | +$132.0 million |
Gross margin was approximately 18.1%, versus 17.6% in FY2018. The company attributed operating income growth chiefly to higher sales, improved price/cost dynamics, and lower restructuring costs; higher materials costs and unfavorable product mix partly offset those benefits. Cash capital expenditures were $147.6 million, up from $95.3 million, largely reflecting construction of the new headquarters. Cash and equivalents were $448.4 million; reported debt was $819.0 million carrying value ($825.0 million principal), and unused revolving-credit capacity was $786.3 million. Debt was 24.0% of total capitalization. Net working capital was $1,666.4 million.
For Q4 FY2019, sales were $2,195.7 million versus $2,057.0 million; operating income was $203.1 million versus $201.9 million; net income was $150.0 million versus $151.3 million; and diluted EPS was $2.17 versus $2.05.
Segment performance and material changes
- Access equipment: Sales rose 8.0% to $4,079.7 million and operating income increased 29.7% to $502.6 million. Telehandler growth and improved production helped; backlog fell 59.5% to $390.1 million as North American and European customers became more cautious.
- Defense: Sales rose 11.1% to $2,032.1 million, primarily from JLTV production. Operating income declined 9.8% to $203.3 million, with margin falling to 10.0% from 12.3%, reflecting product mix, lower international M-ATV sales, and Tennessee facility start-up costs. Backlog rose 34.0% to $2.49 billion, including a $1.7 billion JLTV order.
- Fire & emergency: Sales increased 18.4% to $1,266.1 million and operating income increased 28.3% to $176.5 million. Some sales shifted from FY2018 Q4 into FY2019 Q1.
- Commercial: Sales decreased 3.1% to $1,022.2 million and operating income declined 1.0% to $66.8 million. Severe winter weather and a partial roof collapse disrupted production; the company estimated lost FY2019 sales of about $30 million and lost operating income of about $12.5 million.
Total backlog was $4.14 billion at year-end, down 0.7% from $4.17 billion. Approximately 11% was not expected to be filled in FY2020; backlog is not necessarily a reliable indicator of future sales.
Outlook, commentary, risks and unusual items
- Management forecast FY2020 sales of $7.9–$8.2 billion, operating income of $690–$765 million, and diluted EPS of $7.30–$8.10. The expected sales decline primarily reflects weaker access-equipment demand. Management expected FY2020 operating income to be the third highest in company history.
- FY2020 segment outlook included access-equipment sales of $3.5–$3.8 billion, defense sales of about $2.2 billion, fire & emergency sales of about $1.2 billion, and commercial sales of about $1.05 billion. Management expected access margin of 11.25%–12.25%, defense margin of about 9.0%, fire & emergency margin of 14.5%–15.0%, and commercial margin of 7.0%–7.25%.
- Management projected approximately $590 million of FY2020 operating cash flow and $150 million of capital spending, and expected to return about 50% of free cash flow to shareholders. The quarterly dividend was raised 11.1% to $0.30 per share beginning November 2019.
- The company repurchased approximately 4.9 million shares for $350.1 million in FY2019 and paid $75.5 million in dividends. The board had authorized up to 8,010,181 additional shares for repurchase at year-end.
- ASC 606 revenue recognition was adopted October 1, 2018 using the modified retrospective method, reducing opening retained earnings by $60.4 million. The standard increased FY2019 reported sales by $79.7 million, operating income by $20.6 million, and diluted EPS by $0.22 versus prior guidance. Defense revenue and profit estimates are particularly judgment-sensitive: contract estimate changes increased FY2019 defense operating income by $44.7 million, or $0.49 per diluted share.
- U.S. government sales were approximately 24% of FY2019 sales; 97% of defense-segment sales were to the DoD. Risks include changing defense appropriations, contract timing or competition, fixed-price cost escalation, tariffs and materials prices, cyclical construction demand, supplier constraints, customer credit exposure, foreign exchange, and cybersecurity. The Army had proposed reprogramming about $800 million from the JLTV program.
- The company expected insurance to cover much of the roof-collapse costs and lost profits, but records business-interruption proceeds only upon settlement. FY2019 also included a $7.0 million tax charge related to the U.S. repatriation tax. The auditor issued unqualified opinions on the financial statements and internal controls; defense contract cost estimates were identified as a critical audit matter.
Important facts for investors to verify
- Whether access-equipment demand and the sharp backlog decline stabilize, and whether FY2020 sales and margin guidance is achieved.
- JLTV/FMTV contract economics, delivery orders, cost-to-complete assumptions, and the impact of any defense budget reprogramming.
- How much roof-collapse loss is ultimately recovered from insurers and whether the commercial segment meets its margin outlook.
- The effects of ASC 606 on period-to-period comparability and the sustainability of defense estimate-at-completion gains.
- Customer credit and guarantee exposures, including $748.9 million of guaranteed customer indebtedness and estimated maximum exposure of $136.4 million.
- Execution of projected cash generation, capital spending, shareholder returns, and compliance with debt covenants.