OSHKOSH CORP quarterly report, Q2 FY2018

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Oshkosh Corporation — Q2 FY2018 Form 10-Q

Reporting period: Three and six months ended March 31, 2018. The company manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles and equipment. Financial amounts are in U.S. dollars.

Financial performance

  • Q2 revenue: $1.886 billion, up 16.6% from $1.618 billion. First-half revenue: $3.473 billion, up 22.7% from $2.830 billion.
  • Q2 earnings: Operating income was $155.9 million, or 8.3% of sales, versus $80.4 million, or 5.0%. Net income was $110.8 million versus $44.3 million; diluted EPS was $1.47 versus $0.58.
  • First-half earnings: Operating income was $229.7 million, or 6.6% of sales, versus $116.6 million, or 4.1%. Net income was $167.2 million versus $63.5 million; diluted EPS was $2.21 versus $0.84.
  • Margins: Q2 gross income was $335.4 million (17.8% of sales), compared with $261.3 million (16.1%). First-half gross income was $577.6 million (16.6%), compared with $461.0 million (16.3%).
  • Cash flow: First-half operating cash flow was $43.9 million, down from $148.1 million. Investing used $36.9 million; financing used $164.4 million. Cash declined to $287.9 million from $447.0 million at September 30, 2017.
  • Debt and liquidity: Total debt was $827.5 million; debt-to-total-capitalization was 26.0%, versus 26.5% at fiscal year-end. Cash plus $760.9 million of unused revolving capacity was available at March 31. The company reported compliance with its then-current credit agreement covenants.
  • Shareholder returns: First-half dividends were $0.48 per share, compared with $0.42. The company repurchased 1.59 million shares for $128.7 million.

Changes versus the prior comparable period

  • Access equipment sales grew 28.3% in both Q2 and the first half, led by aerial work platforms and telehandlers. Access backlog rose 142.4% year over year to $1.79 billion.
  • Q2 defense sales declined 4.0%, partly because international M-ATV sales were absent; first-half defense sales increased 24.5%, reflecting the JLTV ramp-up and higher FMTV sales.
  • Fire & emergency and commercial Q2 sales rose 15.0% and 22.2%, respectively. Growth reflected stronger fire apparatus sales and pricing, and higher refuse vehicle volumes.
  • Operating income improved across all segments except defense in Q2. Companywide improvement reflected greater volume, pricing, and improved segment performance, partly offset by access equipment production ramp-up challenges and restructuring costs.
  • First-half operating cash flow fell substantially, mainly because higher access equipment sales increased receivables and fire & emergency customer advances grew less than in the prior-year period.

Outlook, commentary and notable items

  • Management raised FY2018 revenue guidance to $7.4–$7.6 billion, diluted EPS to $5.10–$5.55, and operating income to $540–$590 million. Adjusted EPS guidance is $5.40–$5.85 and adjusted operating income $575–$625 million; these are non-GAAP measures.
  • Segment FY2018 outlook: access equipment sales $3.6–$3.7 billion, with operating margin of 9.15%–9.65%; defense sales approximately $1.825 billion, margin 10.75%–11.00%; fire & emergency sales approximately $1.1 billion, margin 11.75%–12.00%; commercial sales approximately $975 million, margin 5.30%–5.80%.
  • Management expects approximately $500 million of FY2018 operating cash flow and $100 million of capital spending, and stated it expects sufficient liquidity for the next 12 months. Q3 sales are expected to exceed the prior-year quarter, with higher EPS primarily reflecting a lower tax rate.
  • Management cited tight labor markets, rising commodity and logistics costs, supply-chain strain, and access equipment production ramp-up challenges. Steel and aluminum surcharges are expected to offset only part of higher input costs in FY2018; backlog orders at surcharge implementation were not subject to the surcharges.
  • Access equipment restructuring actions have experienced operational inefficiencies. Estimated total costs for the relevant access equipment actions increased from $48–$53 million to approximately $78 million, including about $35 million of operating costs and inefficiencies. The company expected further costs in the remainder of FY2018.
  • Tax reform lowered the U.S. corporate tax rate to 21% beginning January 1, 2018. First-half tax results included $11.4 million of net discrete tax benefits. The recorded $23.9 million deferred-tax remeasurement benefit and $17.4 million transition-tax charge were provisional; the company had not yet selected an accounting method for GILTI.
  • A customer payment of $19.6 million on a previously non-accrual account led to recognition of $11.5 million of margin, reversal of $2.4 million of bad debt expense, and $6.6 million of interest income. This supported reported results and is not necessarily recurring.
  • After quarter-end, on April 3, the company refinanced its credit facilities with an unsecured $850 million revolving facility and $325 million term loan, both maturing in April 2023. The new agreement includes a maximum leverage ratio of 3.75-to-1.00 and a minimum interest coverage ratio of 2.50-to-1.00.
  • Other disclosed exposures include $674.0 million of customer indebtedness guaranteed, with estimated maximum loss exposure of $121.5 million; $699.9 million of bid, performance and specialty bonds; and product/general liability reserves of $41.9 million. Management did not expect disclosed legal and warranty matters to materially affect results, but outcomes remain uncertain.

Most important facts for investors to verify

  • Whether access equipment backlog converts to sales on schedule and production ramp-up inefficiencies, freight, labor, and supply constraints ease as anticipated.
  • Whether steel and aluminum surcharges and other pricing actions adequately offset input-cost inflation, particularly as backlog orders are delivered.
  • Whether the sizable decline in operating cash flow and increase in receivables reverse as sales are collected; consolidated days sales outstanding rose to 65 days from 56 at September 30, 2017.
  • Progress against the higher access equipment restructuring cost estimate and the updated segment and consolidated guidance.
  • Final tax-reform and GILTI accounting impacts, and the effect of the refinancing’s covenants and unsecured structure on liquidity and capital returns.
  • Collection of concentrated customer receivables and performance of customer guarantees, contingent claims, and the unrecognized Canadian military bid compensation matter, which remained under appeal.