Oshkosh Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months of fiscal 2017, ended June 30, 2017. All dollar amounts are in millions unless otherwise noted. The filing is unaudited.
Business context and results
Oshkosh manufactures access equipment, defense vehicles and services, fire and emergency vehicles, and commercial vehicles and equipment. Management attributed the quarter’s stronger results to higher sales across all four segments and execution of its MOVE strategy. Defense led sales growth, while stronger rental-equipment demand supported access equipment.
Key financial metrics
| Metric | Q3 FY2017 | Q3 FY2016 | Nine months FY2017 | Nine months FY2016 |
|---|---|---|---|---|
| Net sales | $2,036.9 | $1,747.5 | $4,866.6 | $4,523.8 |
| Gross income | $386.9 | $314.6 | $847.9 | $756.7 |
| Operating income | $211.9 | $146.8 | $328.5 | $268.5 |
| Net income | $128.6 | $84.2 | $192.1 | $154.9 |
| Diluted EPS | $1.69 | $1.13 | $2.54 | $2.08 |
| Operating margin | 10.4% | 8.4% | 6.8% | 5.9% |
Q3 gross margin was approximately 19.0%, versus 18.0% a year earlier. Q3 operating income included $10.6 million of access-equipment restructuring costs; nine-month results included $27.8 million of those costs. Nine-month cash from operations was $123.9 million, down from $163.5 million, principally due to inventory increases. Investing activities used $30.6 million and financing activities used $32.9 million. Cash increased $51.3 million to $373.2 million.
At June 30, 2017, total debt was $830.5 million and shareholders’ equity was $2,179.1 million; debt-to-capitalization was 27.6%, compared with 30.0% at September 30, 2016. Cash less total debt implies net debt of approximately $457.3 million. The company had $751.7 million of unused revolving-credit capacity, after letters of credit. Current assets were $3,050.2 million and current liabilities $1,773.1 million. The company reported compliance with its credit covenants and expected to remain compliant over the next 12 months.
Material changes versus comparable periods
- Q3 sales rose 16.6% and operating income rose 44.3% year over year. Defense sales increased 82.6%, primarily from international M-ATV sales and the JLTV ramp-up. Fire and emergency sales rose 13.8%; access equipment rose 2.9%; commercial rose 2.5%.
- For the first nine months, sales increased 7.6%. Defense sales rose 39.1% and fire and emergency rose 8.1%; access equipment declined 2.0% and commercial declined 2.0%.
- Nine-month operating income improved in defense and fire and emergency, but declined in access equipment, partly due to restructuring charges, and in commercial, amid lower volume and operating inefficiencies.
- Backlog was $3.66 billion, down 1.8% year over year. Non-defense backlog increased; defense backlog declined 16.8% to $1.90 billion. Approximately 56% of total backlog was not expected to be filled in FY2017.
- Inventory was $1,410.7 million, up from $979.8 million at September 30, 2016, contributing to weaker operating cash flow.
Guidance, management commentary, and risks
Management raised FY2017 sales guidance to approximately $6.75 billion, from a prior range of $6.6–$6.7 billion. It raised diluted EPS guidance to $3.33–$3.43 and adjusted diluted EPS guidance to $3.80–$3.90, excluding expected restructuring costs. Expected operating income was $439–$449 million, or $480–$490 million adjusted. The company forecast approximately $90 million of FY2017 capital spending and did not expect share repurchases during the remainder of the fiscal year.
- Access equipment: FY2017 sales expected at approximately $2.95 billion; operating margin guidance 8.35%–8.60%. Restructuring is expected to cost $45–$50 million and generate annual savings of approximately $20–$25 million, with $15–$20 million of benefits expected in FY2018 and full run-rate savings in FY2019.
- Defense: FY2017 sales expected at approximately $1.825 billion and operating margin at 11.0%–11.2%. Management cited a $1.2 billion FY2018 backlog and a $195 million JLTV order received in July 2017; it expected visibility to $1.7 billion of FY2018 segment sales by September 30, 2017.
- Fire and emergency: FY2017 sales expected at approximately $1.025 billion and operating margin at approximately 9.7%.
- Commercial: FY2017 sales expected at approximately $950 million and operating margin at 4.5%–5.0%, both weaker than earlier expectations due to continuing operational challenges.
- Expected FY2017 corporate expenses were approximately $150 million; expected effective tax rate was approximately 34.5% (32.5% adjusted).
Key risks include cyclical construction and rental markets; government defense budgets, procurement timing, and contract execution; restructuring disruption and the possibility that planned savings are not achieved; material costs and pricing; receivable collectability; foreign exchange; warranty claims; and changes in tax laws. The company guaranteed $580.0 million of customer indebtedness, with estimated maximum loss exposure of $108.6 million. It also disclosed ordinary-course litigation and claims, product-liability reserves, and uncertainty over the potential impact of its Canadian military-truck procurement challenge. Management did not expect disclosed claims and matters to have a material effect, but outcomes remain uncertain.
Important facts for investors to verify
- Whether defense production, contract deliveries, and the FY2018 sales outlook develop as management anticipated, including the July JLTV order.
- Whether access-equipment restructuring stays within the $45–$50 million estimate and delivers the forecast savings without disrupting production or deliveries.
- Whether commercial-segment operational issues improve enough to support the reduced FY2017 guidance.
- Whether inventory growth converts to sales and cash, given nine-month operating cash flow declined year over year.
- Whether customer-credit, guarantee, warranty, tax, and legal exposures remain within recorded reserves and management’s expectations.
- Whether FY2017 EPS and sales guidance, which includes estimates and adjusted non-GAAP measures, is achieved; review the filing’s reconciliation of adjusted and GAAP guidance.