Oshkosh Corporation — FY2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2016; quarterly figures below identify the fourth quarter. Oshkosh designs and manufactures specialty vehicles across four segments: access equipment, defense, fire and emergency, and commercial. Those segments represented 48.0%, 21.5%, 15.0%, and 15.5% of FY2016 sales, respectively.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $6.279 billion | $6.098 billion |
| Gross income | $1.056 billion | $1.039 billion |
| Operating income / margin | $364.0 million / 5.8% | $398.6 million / 6.5% |
| Net income | $216.4 million | $229.5 million |
| Diluted EPS | $2.91 | $2.90 |
| Cash from operations | $577.7 million | $82.5 million |
| Capital expenditures for property, plant and equipment | $92.5 million | $131.7 million |
| Cash and cash equivalents at year-end | $321.9 million | $42.9 million |
| Total debt at year-end | $846.2 million | $927.8 million |
| Debt to total capitalization | 30.0% | 32.7% |
Gross margin was approximately 16.8%, versus 17.0% in FY2015. Operating cash flow rose sharply, principally because access-equipment inventory declined $305.8 million; management expects FY2017 operating cash flow of only $100–$150 million as defense working capital supports international M-ATV deliveries. Net working capital was $1.050 billion. The company reported $739.2 million of unused revolving-credit capacity, after letters of credit, and was in compliance with its credit covenants. Debt included a $355 million variable-rate term loan and $500 million of 5.375% senior notes due 2022 and 2025.
Segment results
| Segment | FY2016 sales | Change vs. FY2015 | FY2016 operating income |
|---|---|---|---|
| Access equipment | $3.012 billion | Down 11.4% | $263.4 million |
| Defense | $1.351 billion | Up 43.8% | $122.5 million |
| Fire and emergency | $953.3 million | Up 16.9% | $67.0 million |
| Commercial | $979.2 million | Up 0.1% | $67.6 million |
Fourth-quarter FY2016 sales were $1.755 billion, operating income $95.5 million, net income $61.5 million, and diluted EPS $0.82. The quarter included a $27.8 million pretax access-equipment impairment and workforce-reduction charge ($17.5 million after tax).
Material changes versus the prior year
- Consolidated sales increased 3.0%, led by defense and fire-and-emergency growth; access-equipment sales fell amid weaker North American replacement demand and pricing pressure.
- Operating income declined 8.7% and operating margin fell 0.7 percentage points. The $26.9 million noncash impairment of an abandoned parts-distribution information system and workforce actions contributed to the decline; access-equipment operating income fell 35.3%.
- Defense operating income rose to $122.5 million from $9.2 million as sales recovered, product mix improved, and company-funded JLTV development costs declined. Fire-and-emergency and commercial operating income also improved.
- Cash from operations increased from $82.5 million to $577.7 million, mainly reflecting inventory reduction; it should not be assumed to represent a recurring run rate.
- Backlog grew 35.7% to $3.54 billion, principally from defense contracts. Approximately 18% of year-end backlog was not expected to be filled in FY2017.
- Oshkosh repurchased approximately 2.5 million shares for $100.1 million and paid $55.9 million in dividends. The quarterly dividend was raised from $0.19 to $0.21 per share beginning November 2016.
Outlook, commentary, risks and unusual items
Management forecast FY2017 sales of $6.5–$6.7 billion, operating income of $390–$430 million, and diluted EPS of $3.00–$3.40, assuming an average share count of about 74.5 million. Segment outlook included access-equipment sales down 7%–10% with 7.75%–8.5% operating margins; defense sales of about $1.85 billion and margins near 9.5%; fire-and-emergency sales of about $1.0 billion and margins near 8.5%; and commercial sales of about $1.0 billion and margins near 6.75%. The company expected a 33% effective tax rate and FY2017 capital spending of about $100 million. Management expected the first fiscal quarter to be the weakest, including no M-ATV sales in that quarter.
- Defense execution and contracts: The JLTV contract is fixed-price over eight years, exposing Oshkosh to cost escalation and estimate-at-completion risk. Management anticipated deliveries of nearly 750 JLTVs in FY2017, 2,000 in FY2018, and 3,000 in FY2019, with full-rate production planned for FY2019 after testing. The DoD had begun recompeting FMTV production; an award was expected in the second half of FY2017. International M-ATV funding or payment delays could disrupt production, shipments, and cash flow.
- Cyclical markets: Management expected ongoing weakness in access-equipment replacement demand, linked to low industry purchases in 2009–2010, cautious rental-fleet spending, and lower oil-and-gas activity. Concrete mixer and refuse-truck demand also faced uncertainty.
- Restructuring: Oshkosh plans to outsource access-equipment aftermarket parts distribution and close its Orrville, Ohio distribution center by August 2017. It expects approximately $6 million in annual savings beginning FY2018 and about $3 million of cash severance costs; realizing savings and maintaining service levels remain execution risks.
- Other exposures: Risks include raw-material inflation, foreign-exchange movements, supplier disruption, customer credit and financing guarantees, government funding and contract protests, and potential impairment of goodwill and intangibles. About 90% of goodwill and indefinite-lived intangibles were concentrated in access equipment; the FY2016 annual test found no goodwill impairment.
- Contingencies and reporting: Maximum estimated exposure on customer-financing guarantees was $116.3 million against $563.2 million of guaranteed customer debt; recorded guarantee reserves were $8.4 million. Product and general liability claims were accrued at $38.3 million. The filing says pending ordinary-course matters are not expected to have a material effect. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether JLTV testing, production ramp, contract cost estimates, and targeted margins track management’s schedule.
- Whether international M-ATV deliveries and customer funding convert backlog into revenue and cash on the expected timetable.
- Whether access-equipment demand and pricing stabilize, and whether the planned distribution outsourcing delivers the projected savings without disrupting service.
- How much of FY2016 operating cash flow resulted from temporary inventory reductions, and whether FY2017 cash generation meets management’s estimate.
- The outcome and economics of the FMTV recompete, and any effect on defense backlog, production capacity, and profitability.
- Whether customer receivables, financing guarantees, and the access-equipment goodwill assumptions remain supportable as market conditions evolve.