Oshkosh Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended June 30, 2019. Amounts are in millions of dollars except per-share data. The 2018 comparatives were not recast for the new revenue-recognition standard.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | First 9 months FY2019 | First 9 months FY2018 |
|---|---|---|---|---|
| Net sales | $2,392.7 | $2,175.8 | $6,186.3 | $5,648.5 |
| Operating income | $257.8 | $223.2 | $593.9 | $454.1 |
| Operating margin | 10.8% | 10.3% | 9.6% | 8.0% |
| Net income | $191.9 | $153.4 | $429.4 | $320.6 |
| Diluted EPS | $2.72 | $2.05 | $6.05 | $4.25 |
- Quarterly sales increased 10.0% and operating income 15.5% year over year; nine-month sales rose 9.5% and operating income 30.8%.
- Quarterly gross margin was approximately 18.1%, compared with 18.6%; nine-month gross margin was approximately 18.1%, up from 17.4%. Q3 cost pressures included higher materials and the revenue-standard impact, partly offset by pricing.
- Q3 segment operating income: access equipment $189.9, defense $29.5, fire and emergency $50.7, and commercial $21.5. Access and fire and emergency improved; defense and commercial declined.
- Cash provided by operations for the first nine months was $105.8, down from $220.2, largely due to working-capital movements, including inventory timing. Investing used $71.5 and financing used $337.5. Cash declined to $152.2 from $454.6 at September 30, 2018.
- At June 30, debt was $818.7, equity $2,596.9, and debt-to-capitalization 24.0%. Cash less debt was approximately negative $666.5. No current debt maturities were reported. The company had $784.2 of available revolving-credit capacity after letters of credit; it reported covenant compliance.
- Working capital was $1,673.7 and the current ratio approximately 2.0. Inventory was $1,361.4, up from $1,227.7 at fiscal year-end; inventory turns fell to 4.9 from 5.1. Management attributed higher access-equipment inventory partly to preparation for December 2019 ANSI standard changes.
Material changes and comparability
- ASC 606 adoption on October 1, 2018 reduced opening retained earnings by $60.4 after tax. As reported, the standard increased nine-month sales by $79.8 and net income by $15.4 versus the prior accounting method; for Q3 it increased sales by $26.2 but reduced net income by $9.0. Q3 operating income under the previous method would have been $270.0 rather than $257.8.
- Access-equipment sales grew on higher telehandler volume and pricing. Defense sales benefited from the JLTV program ramp-up. Fire and emergency sales rose on higher apparatus volume, pricing, and accounting changes. Commercial sales declined over nine months, affected by lower volumes and production disruption.
- Share repurchases totaled $283.9 for the first nine months, versus $166.8 in the comparable 2018 period. The company declared dividends of $0.27 per share in Q3, versus $0.24.
Outlook, risks and unusual items
- Management raised FY2019 diluted EPS guidance to $7.80–$8.00, operating income to $760–$775, and projected consolidated sales of approximately $8.30 billion. Excluding an estimated $0.10-per-share Transition Tax adjustment, adjusted EPS guidance was $7.90–$8.10. Management expected operating cash flow of approximately $485 and capital expenditures of approximately $175 for the year, and targeted $350 of share repurchases.
- Segment FY2019 outlook: access-equipment sales approximately $4.05 billion and operating margin 12.0%–12.25%; defense sales approximately $2.0 billion and margin 9.5%–9.75%; fire and emergency sales approximately $1.25 billion and margin approximately 14%; commercial sales approximately $1.025 billion and margin 5.75%–6.0%. These are management estimates, not guarantees.
- Management noted moderating access-equipment orders amid mixed indicators and adverse U.S. weather, and cautioned that North American and European customers may be less aggressive buyers in FY2020 after fleet expansion. Backlog was $4.99 billion, up 3.5% year over year, but access-equipment backlog fell 30.3%; approximately 63% of total backlog was not expected to ship in FY2019.
- A February snow-related partial roof collapse at a Minnesota facility disrupted commercial production. The company recorded $3.3 of related expenses, estimated damaged-property replacement costs at about $10, and had received $10 in insurance proceeds by quarter-end, including an advance for which the accounting reflected $6.3. Insurance recovery and the extent of business interruption effects remain relevant.
- Other risks include cyclical construction and equipment markets, input-cost inflation and pricing execution, government procurement and contract estimates, tariffs and trade tensions, foreign exchange, customer credit and collateral values, warranty claims, supplier performance, and legal or environmental matters. Management said pending claims and proceedings were not expected to have a material effect, but outcomes are uncertain.
- The company reported $88.3 of gross unrecognized tax benefits at June 30, including a $50.0 reserve related to a temporary deferred tax position expected on its FY2019 return. Tax audit resolutions could reduce net unrecognized benefits by approximately $7.0 over the next 12 months.
Most important facts for investors to verify
- How much of reported growth and earnings reflects underlying operations versus ASC 606 timing effects, especially in defense and fire and emergency.
- Whether working-capital use, elevated inventory, and the lower operating cash flow reverse or persist, and whether management achieves its FY2019 cash-flow and capital-spending estimates.
- Whether access-equipment demand and backlog weakness affect FY2020, and whether the JLTV backlog converts to funded orders, deliveries, and expected margins.
- Whether pricing continues to offset materials, labor, and freight costs, and whether defense startup costs and the commercial facility disruption subside.
- Actual insurance recoveries and remaining costs from the roof collapse, and developments in tax reserves and other contingencies.