Oshkosh Corporation — Fiscal 2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are also summarized below. Oshkosh designs and manufactures specialty vehicles across access equipment, defense, fire and emergency, and commercial markets.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $7.71 billion | $6.83 billion |
| Gross income / margin | $1.36 billion / 17.6% | $1.17 billion / 17.2% |
| Operating income / margin | $653.5 million / 8.5% | $463.0 million / 6.8% |
| Net income | $471.9 million | $285.6 million |
| Diluted EPS | $6.29 | $3.77 |
| Cash from operating activities | $436.3 million | $246.5 million |
| Cash and cash equivalents | $454.6 million | $447.0 million |
| Total debt | $818.0 million | $830.9 million |
| Net working capital | $1.58 billion | $1.36 billion |
Sales rose 12.8%; operating income rose 41.1%; diluted EPS rose 66.8%. Access equipment was the main growth driver, with sales up 24.8%. Defense sales increased 0.5%, fire and emergency 3.8%, and commercial 8.7%. All four segments reported higher sales and operating income. Access equipment generated 49% of consolidated sales, defense 24%, fire and emergency 14%, and commercial 13%.
Segment operating income was $387.8 million for access equipment, $222.9 million for defense, $137.2 million for fire and emergency, and $67.5 million for commercial; corporate costs were $161.9 million. Consolidated cost of sales declined to 82.4% of sales from 82.8%, with pricing gains partly offset by higher material and freight costs. The effective tax rate fell to 20.8% from 30.9%, reflecting U.S. tax reform and other discrete tax benefits.
Fourth-quarter FY2018 sales were $2.06 billion, operating income $201.4 million, net income $151.3 million, and diluted EPS $2.05, compared with $1.96 billion, $134.5 million, $93.5 million, and $1.23, respectively, in fourth-quarter FY2017.
Cash, liquidity, debt, and capital allocation
Operating cash flow improved by $189.8 million year over year, while investing activities used $90.4 million and financing activities used $338.9 million. Property, plant and equipment additions were $95.3 million. Current assets were $3.27 billion and current liabilities $1.69 billion. The company reported $764.5 million of available revolving-credit capacity, after outstanding letters of credit.
Debt to total capitalization improved to 24.6% from 26.5%. In April 2018, Oshkosh refinanced its credit agreement with an unsecured facility maturing in 2023. It also issued $300 million of 4.6% notes due 2028 and redeemed its 5.375% notes due 2022. During FY2018 it repurchased approximately 3.3 million shares for $249.3 million and paid $71.2 million in dividends. The quarterly dividend was raised 12.5% to $0.27 per share beginning in November 2018.
Material changes, outlook, and notable items
- Backlog increased 10.1% to $4.17 billion. Access equipment backlog more than doubled to $962.4 million; defense backlog declined 11.0% to $1.86 billion. Approximately 8% of total backlog was not expected to be filled in FY2019.
- Management forecast FY2019 sales of $7.85–$8.15 billion, operating income of $640–$710 million, and diluted EPS of $6.50–$7.25. The EPS outlook assumes an average 71.5 million shares and $350 million of planned FY2019 repurchases. Expected operating cash flow was approximately $615 million and capital spending approximately $165 million, including the new headquarters.
- FY2019 segment outlook: access equipment sales of $3.6–$3.9 billion and operating margin of 10.0%–11.0%; defense sales of approximately $2.0 billion and margin of 9.5%–9.75%; fire and emergency sales of approximately $1.2 billion and margin of 13.25%–13.5%; and commercial sales of approximately $1.05 billion and margin of 7.0%–7.25%.
- Management cited strong access-equipment demand but noted tight labor markets, supply-chain strain, higher steel and other input costs, increased freight expense, and unfavorable foreign exchange. Surcharges were introduced in non-defense segments; about 74% of FY2019 first-quarter non-defense backlog did not carry a surcharge. Management expected price increases to help recover inflation, with possible volume loss and near-term margin pressure.
- The company expected to adopt the new revenue-recognition standard on October 1, 2018, with an approximately $80 million pre-tax reduction to opening retained earnings. Management estimated a favorable FY2019 operating-income effect of approximately $10 million overall, but said defense timing could increase quarterly earnings volatility as firm delivery orders are received.
- FY2018 included a $19.0 million defense litigation-settlement gain, $6.6 million of commercial business-interruption insurance proceeds, and restructuring charges, debt-extinguishment costs, a small product-line sale loss, and tax-reform effects. In aggregate, these identified items represented a net $5.2 million after-tax charge, or $0.07 per share.
Risks and contingencies
Key risks include cyclical construction, rental-equipment, municipal, and defense markets; changes in U.S. government appropriations, procurement timing, contract awards, or competition; fixed-price defense-contract cost overruns; tariffs and commodity inflation; reliance on suppliers, including sole-source suppliers; foreign-exchange exposure; and customer credit and collection risk. The company reported $685.3 million of customer indebtedness guaranteed, with estimated maximum exposure of $121.8 million and a recorded guarantee reserve of $10.4 million. It also reported $36.0 million of estimated net product and general liability claims. Management stated it did not expect pending legal matters to have a material effect, while acknowledging litigation outcomes are uncertain.
Approximately 22% of FY2018 sales were to the U.S. government. The JLTV program remained in low-rate initial production; management expected a full-rate production decision in FY2019. Defense revenues and margins are exposed to government funding, contract changes, cost estimates, and delivery-order timing. Goodwill and indefinite-lived intangibles totaled approximately $1.40 billion, with about 90% concentrated in access equipment; the FY2018 impairment review found no impairment.
Important facts for investors to verify
- Whether access-equipment demand and pricing offset steel, freight, labor, and supply-chain cost increases, particularly on backlog without surcharges.
- JLTV production ramp, the full-rate production decision, and the timing and profitability effects of defense delivery orders under the new revenue-recognition rules.
- Whether the FY2019 sales, operating-income, EPS, cash-flow, capital-spending, and share-repurchase forecasts are achieved.
- Backlog conversion and composition, especially the substantial access-equipment increase and the defense backlog decline.
- Customer receivable and guarantee exposure, including collection timing: consolidated days sales outstanding rose to 63 days from 56, largely due to defense unbilled receivables and payment timing.
- Tax and accounting estimates, including the provisional transition tax and the expected adoption impacts of new accounting standards.