UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-31371
Oshkosh Corporation
(Exact name of registrant as specified in its charter)
Wisconsin | 39-0520270 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
P.O. Box 2566 Oshkosh, Wisconsin | 54903-2566 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (920) 235-9151
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock ($.01 par value) | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ý Yes o No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | |
Non-accelerated filer o | Smaller reporting company o | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes ý No
At March 31, 2016, the aggregate market value of the registrant’s Common Stock held by non-affiliates was $2,989,656,153 (based on the closing price of $40.87 per share on the New York Stock Exchange as of such date).
As of November 15, 2016, 74,465,359 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the 2017 Annual Meeting of Shareholders (to be filed with the Commission under Regulation 14A within 120 days after the end of the registrant’s fiscal year and, upon such filing, to be incorporated by reference into Part III).
OSHKOSH CORPORATION
FISCAL 2016 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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As used herein, the “Company,” “we,” “us” and “our” refers to Oshkosh Corporation and its consolidated subsidiaries. “Oshkosh” refers to Oshkosh Corporation, not including JLG Industries, Inc. and its wholly-owned subsidiaries (JLG), Oshkosh Defense, LLC and its wholly-owned subsidiary (including its predecessor, Oshkosh Defense), Pierce Manufacturing Inc. (Pierce), McNeilus Companies, Inc. (McNeilus) and its wholly-owned subsidiaries, Oshkosh Airport Products, LLC (Airport Products), Kewaunee Fabrications, LLC (Kewaunee), Oshkosh Commercial Products, LLC (Oshkosh Commercial), Concrete Equipment Company, Inc. and its wholly-owned subsidiary (CON-E-CO), London Machinery Inc. and its wholly-owned subsidiary (London) and Iowa Mold Tooling Co., Inc. (IMT) or any other subsidiaries.
The “Oshkosh®,” “JLG®,” “Oshkosh Defense®,” “Pierce®,” “McNeilus®,” “Jerr-Dan®,” “Frontline™,” “CON-E-CO®,” “London®,” “IMT®,” “Command Zone™,” “TAK-4®,” “PUC™,” “Saber®,” “Hercules™,” “Husky™,” “Ascendant™,” “SkyTrak®,” “TerraMax™,” “ProPulse®” and “Power Towers™” trademarks and related logos are trademarks or registered trademarks of the Company. All other product and service names referenced in this document are the trademarks or registered trademarks of their respective owners.
All references herein to earnings per share refer to earnings per share assuming dilution, unless noted otherwise.
For ease of understanding, the Company refers to types of specialty vehicles for particular applications as “markets.” When the Company refers to “market” positions, these comments are based on information available to the Company concerning units sold by those companies currently manufacturing the same types of specialty vehicles and vehicle bodies as the Company and are therefore only estimates. Unless otherwise noted, these market positions are based on sales in the United States of America. There can be no assurance that the Company will maintain such market positions in the future.
Cautionary Statement About Forward-Looking Statements
The Company believes that certain statements in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other statements located elsewhere in this Annual Report on Form 10-K are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report, including, without limitation, statements regarding the Company’s future financial position, business strategy, targets, projected sales, costs, earnings, capital expenditures, debt levels and cash flows, and plans and objectives of management for future operations, including those under the captions “Executive Overview” and “Fiscal 2017 Outlook” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” are forward-looking statements. When used in this Annual Report on Form 10-K, words such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “believe,” “should,” “project” or “plan” or the negative thereof or variations thereon or similar terminology are generally intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties, assumptions and other factors, some of which are beyond the Company’s control, which could cause actual results to differ materially from those expressed or implied by such forward-looking statements.
These factors include the cyclical nature of the Company’s access equipment, commercial and fire & emergency markets, which are particularly impacted by the strength of U.S. and European economies and construction seasons; the Company’s estimates of access equipment demand which, among other factors, is influenced by customer historical buying patterns and rental company fleet replacement strategies; the strength of the U.S. dollar and its impact on Company exports, translation of foreign sales and purchased materials; the expected level and timing of U.S. Department of Defense (DoD) and international defense customer procurement of products and services and acceptance of and funding or payments for such products and services; the outcome of a competitor’s protest of orders we received from the DoD; higher material costs resulting from production variability due to uncertainty of timing of funding or payments from international defense customers; risks related to reductions in government expenditures in light of U.S. defense budget pressures, sequestration and an uncertain DoD tactical wheeled vehicle strategy; the impact of any DoD solicitation for competition for future contracts to produce military vehicles, including a future Family of Medium Tactical Vehicle (FMTV) production contract; the Company’s ability to increase prices to raise margins or offset higher input costs; increasing commodity and other raw material costs, particularly in a sustained economic recovery; risks related to facilities expansion, consolidation and alignment, including the amounts of related costs and charges and that anticipated cost savings may not be achieved; global economic uncertainty, which could lead to additional impairment charges related to many of the Company’s intangible assets and/or a slower recovery in the Company’s cyclical businesses than Company or equity market expectations; projected adoption rates of work at height machinery in emerging markets; the impact of severe weather or natural disasters that may affect the Company, its suppliers or its customers; risks related to the collectability of receivables, particularly for those businesses with exposure to construction markets; the cost of any warranty campaigns related to the Company’s products; risks related to production or shipment delays arising from quality or production issues; risks associated with international operations and sales, including compliance with the Foreign Corrupt Practices Act (FCPA); the Company’s ability to comply with complex laws and regulations applicable to U.S. government contractors; cybersecurity risks and costs of defending against, mitigating and responding to a data security breach; and risks related to the Company’s ability to successfully execute on its strategic road map and meet its long-term financial goals. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in Item 1A of Part I of this report.
All forward-looking statements, including those under the caption “Executive Overview” and “Fiscal 2017 Outlook” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” speak only as of November 22, 2016. The Company assumes no obligation, and disclaims any obligation, to update information contained in this Annual Report on Form 10-K. Investors should be aware that the Company may not update such information until the Company’s next quarterly earnings conference call, if at all.
PART I
ITEM 1. BUSINESS
The Company
Oshkosh Corporation is a leading designer, manufacturer and marketer of a broad range of specialty vehicles and vehicle bodies. The Company partners with customers to deliver superior solutions that safely and efficiently move people and materials at work, around the globe, and around the clock. The Company began business in 1917 as an early pioneer of four-wheel drive technology, and off road mobility technology remains one of its core competencies. The Company maintains four reportable segments for financial reporting purposes: access equipment, defense, fire & emergency and commercial, which comprised 48.0%, 21.5%, 15.0% and 15.5%, respectively, of the Company’s consolidated net sales in fiscal 2016. These segments, in some way, all share common customers and distribution channels, leverage common components and suppliers, utilize common technologies and manufacturing processes and share employees and manufacturing and distribution facilities, which results in the Company being an integrated specialty vehicle manufacturer. The Company made approximately 19%, 15% and 24% of its net sales for fiscal 2016, 2015 and 2014, respectively, to the U.S. government, a substantial majority of which were under multi-year contracts and programs in the defense vehicle market. See Note 22 of the Notes to Consolidated Financial Statements for financial information related to the Company’s business segments.
JLG, a global manufacturer of aerial work platforms and telehandlers used in a wide variety of construction, agricultural, industrial, institutional and general maintenance applications to position workers and materials at elevated heights, forms the base of the Company’s access equipment segment. JLG’s customers include equipment rental companies, construction contractors, manufacturing companies and home improvement centers. The access equipment segment also includes Jerr-Dan-branded tow trucks (wreckers) and roll-back vehicle carriers (carriers) sold to towing companies in the U.S. and abroad.
The Company's defense segment has manufactured and sold military tactical wheeled vehicles to the DoD for more than 90 years. In 1981, Oshkosh Defense was awarded the first Heavy Expanded Mobility Tactical Truck (HEMTT) contract for the DoD and thereafter developed into the DoD’s leading supplier of severe-duty, heavy-payload tactical trucks. Since that time, Oshkosh Defense has broadened its product offerings to become the leading manufacturer of severe-duty, heavy- and medium-payload tactical trucks for the DoD, manufacturing vehicles that perform a variety of demanding tasks such as hauling tanks, missile systems, ammunition, fuel, troops and cargo for combat units and light-payload tactical vehicles, through its Mine Resistant Ambush Protected All Terrain Vehicles (M-ATV). In October 2011, Oshkosh Defense introduced the Light Combat All-Terrain Vehicle (L-ATV) to continue to expand its light protected tactical wheeled vehicle offering. The L-ATV incorporates field-proven technologies, advanced armor solutions and expeditionary levels of off-road mobility to redefine safety and performance standards. The L-ATV also is designed for future growth, with the ability to accept additional armor packages and technology upgrades as the mission requires. The L-ATV was Oshkosh Defense's entrant in the DoD's Joint Light Tactical Vehicle (JLTV) competition. In August 2015, the DoD awarded the Company an eight-year fixed price contract valued at $6.7 billion for the production and delivery of approximately 17,000 (subsequently increased to over 18,000) vehicles and sustaining services under the U.S. Army and Marine Corps JLTV program. The JLTV program is expected to be a 20-year, $30 billion program for the production of up to 55,000 vehicles as well as support services and engineering. The Company believes that international interest in the JLTV will contribute to strong demand for this revolutionary new defense vehicle.
The Company’s fire & emergency segment manufactures custom and commercial firefighting vehicles and equipment, aircraft rescue and firefighting (ARFF) vehicles, snow removal vehicles, simulators and other emergency vehicles primarily sold to fire departments, airports and other governmental units in the Americas and abroad and broadcast vehicles sold to broadcasters and television stations in the Americas and abroad.
The Company’s commercial segment manufactures rear- and front-discharge concrete mixers, refuse collection vehicles, portable and stationary concrete batch plants and vehicle components sold to ready-mix companies and commercial and municipal waste haulers in North America and other international markets and field service vehicles and truck-mounted cranes sold to mining, construction and other companies in the Americas and abroad.
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Competitive Strengths
The following competitive strengths support the Company’s business strategy:
Strong Market Positions. The Company has developed strong market positions and brand recognition in its core businesses, which it attributes to its reputation for quality products, advanced engineering, innovation, vehicle performance, reliability, customer service and low total product life cycle costs. The Company maintains leading market shares in all its businesses and is the sole-source supplier of a number of vehicles to the DoD.
Diversified Product Offering. The Company believes its broad product offerings and target markets serve to diversify its sources of revenues, mitigate the impact of economic cycles and provide multiple platforms for potential organic growth and acquisitions. The Company’s product offerings provide extensive opportunities for bundling of products for sale to customers, co-location of manufacturing, leveraging purchasing power and sharing technology within and between segments. For each of its target markets, the Company has developed or acquired a broad product line in an effort to become a single-source provider of specialty vehicles, vehicle bodies, parts and service and related products to its customers. In addition, the Company has established an extensive domestic and international distribution system for specialty vehicles and vehicle bodies tailored to each market.
Quality Products and Customer Service. The Company has developed strong brand recognition for its products as a result of its commitment to meet the stringent product quality and reliability requirements of its customers in the specialty vehicle and vehicle body markets it serves. The Company frequently achieves premium pricing due to the durability and low life cycle costs for its products. The Company also provides high quality customer service through its extensive parts and service support programs, which are generally available to customers 365 days a year in all product lines throughout the Company’s distribution systems.
Innovative and Proprietary Components. The Company’s advanced design and engineering capabilities have contributed to the development of innovative and/or proprietary, severe-duty components that enhance vehicle performance, reduce manufacturing costs and strengthen customer relationships. The Company’s advanced design and engineering capabilities have also allowed it to integrate many of these components across various product lines, which enhances its ability to compete for new business and reduces its costs to manufacture its products compared to manufacturers who simply assemble purchased components.
Flexible and Efficient Manufacturing. The Company believes it has competitive advantages over larger vehicle manufacturers in its specialty vehicle markets due to its product quality, manufacturing flexibility, vertical integration, purchasing power in specialty vehicle components and tailored distribution systems. In addition, the Company believes it has competitive advantages over smaller vehicle and vehicle body manufacturers due to its relatively higher volumes of similar products that permit the use of moving assembly lines and which allow it to leverage purchasing power and technology opportunities across product lines.
Strong Management Team. The Company is led by President and Chief Executive Officer Wilson R. Jones who has been employed by the Company since 2005. Mr. Jones succeeds the former Chief Executive Officer, Charles L. Szews, who retired from the Company effective December 31, 2015. Mr. Jones is complemented by an experienced senior management team that has been assembled through internal promotions and new hires. The management team has successfully executed a strategic reshaping and expansion of the Company's business, which has positioned the Company to be a global leader in the specialty vehicle and vehicle body markets.
Business Strategy
The Company is focused on increasing its net sales, profitability and cash flow and maintaining a strong balance sheet by capitalizing on its competitive strengths and pursuing an integrated business strategy. The Company completed a comprehensive strategic planning process in fiscal 2011 with the assistance of a globally-recognized consulting firm that culminated in the creation of the Company’s roadmap, named MOVE, to deliver outstanding long-term shareholder value. The Company reassessed the MOVE strategy in fiscal 2016 and concluded that opportunities remained for MOVE to continue to guide the Company's path forward. The Company has recommitted itself to a refreshed MOVE strategy and expects to continue to pursue and measure itself against MOVE initiatives in 2017 and beyond.
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The updated MOVE strategy consists of the following four key initiatives:
Market Leader Delighting Customers. This initiative focuses on growing profitability by maintaining intense focus on customer experience. By tapping into the voice of the customer, the Company aims to deliver superior products and services under this initiative. The Company drives consistent customer experience through the use of standard processes and tools throughout the organization. Customers derive value by working with a partner that provides total customer care throughout the product life cycle. The Company's goal is to delight its customers.
Optimize Cost and Capital Structure. This initiative focuses on optimizing the Company's cost and capital structure (“O” initiative) to provide value for customers and shareholders by aggressively attacking its product, process and overhead costs and opportunistically using its expected free cash flow to return capital to shareholders or invest in acquisition opportunities. The Company utilizes a comprehensive lean enterprise focus to drive to be a low cost producer in all of its product lines while sustaining premium product features and quality and to deliver low product life cycle costs for its customers. Lean is a methodology to eliminate non-value added work from a process stream. The Company also embraces organizational simplification by focusing on what drives value to customers and objectively allocating time and resources in these areas. As a result of its focus on cost optimization, the Company expects to more efficiently utilize its manufacturing facilities, increase inventory turns, reduce product, process and overhead costs, lower manufacturing lead times and new product development cycle times and increase its operating income margins. The Company is targeting a $55 million year over year cost reduction under the “O” initiative in fiscal 2017.
Value Innovation. This initiative focuses on emphasizing the Company's new product development as it seeks to expand sales and margins by leading its core markets in the introduction of new or improved products and technologies. The Company primarily uses internal development but also uses licensing of technology and strategic acquisitions to execute multi-generational product plans in each of the Company’s businesses. The Company actively seeks to commercialize emerging technologies that are capable of expanding customer uses of its products. The Company is targeting that new product sales will drive 15% - 20% of its fiscal 2017 revenue.
Emerging Market Growth. This initiative focuses on the Company's continued expansion into those specialty vehicle and vehicle body markets globally where it has acquired or can acquire strong market positions over time and where it believes it can leverage synergies in purchasing, manufacturing, technology and distribution to increase sales and profitability. Business development teams actively pursue new customers in targeted developing countries in Asia, Eastern Europe, the Middle East, Latin America and Africa. In pursuit of this strategy, the Company has sales and service offices in Russia, India, Saudi Arabia, China, South Korea and Japan to pursue various opportunities in each of those countries. In addition, the Company recently expanded its sales and aftermarket personnel in multiple countries in Europe, Latin America, Asia and the Middle East. The Company would also consider selectively pursuing strategic acquisitions to enhance the Company’s product offerings and expand its international presence in the specialty vehicle and vehicle body markets. The Company is targeting a 15% - 20% increase in international sales under this initiative in fiscal 2017.
Products
The Company is focused on the following core segments of the specialty vehicle and vehicle body markets:
Access equipment segment. JLG manufactures aerial work platforms and telehandlers used in a wide variety of construction, agricultural, industrial, institutional and general maintenance applications to position workers and materials at elevated heights. In addition, through a long-term license with Caterpillar Inc. that extends through 2025, JLG produces Caterpillar-branded telehandlers for distribution through the worldwide Caterpillar Inc. dealer network. JLG also produces a line of telehandlers for the European agricultural market under a license from SAME Deutz-Fahr and sells SAME Deutz-Fahr-branded telehandlers directly to SAME Deutz-Fahr's dealer network. Through its acquisition of Power Towers Ltd. in 2015, the Company is a leading manufacturer and marketer of low level access equipment in the United Kingdom, Europe and the Middle East. Power Towers Ltd. offers a range of award-winning low level lifts, both self-propelled and push around types, to meet the demands of the rapidly expanding low level access market within the access equipment industry.
Access equipment customers include equipment rental companies, construction contractors, manufacturing companies and home improvement centers. JLG’s products are marketed worldwide through independent rental companies and distributors that purchase these products and then rent or sell them and provide service support, as well as through other sales and service branches or organizations in which the Company holds equity positions.
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JLG also arranges equipment financing and leasing solutions for its customers, primarily through third-party funding arrangements with independent financial companies, and occasionally provides credit support in connection with these financing and leasing arrangements. Financing arrangements that JLG offers or arranges through this segment include various types of rental fleet loans and leases, as well as floor plan and retail financing. Terms of these arrangements vary depending on the type of transaction, but typically range between 36 and 72 months and generally require the customer to be responsible for insurance, taxes and maintenance of the equipment, and to bear the risk of damage to or loss of the equipment.
The Company, through its Jerr-Dan brand, is a leading manufacturer and marketer of towing and recovery equipment in the U.S. The Company believes Jerr-Dan is recognized as an industry leader in quality and innovation. Jerr-Dan offers a complete line of both carriers and wreckers. In addition to manufacturing equipment, Jerr-Dan provides its customers with one-stop service for carriers and wreckers and generates revenue from the installation of equipment, as well as the sale of chassis and service parts.
Defense segment. The Company, through Oshkosh Defense, has sold products to the DoD for over 90 years. Oshkosh Defense also exports tactical wheeled vehicles to approved foreign customers. By successfully responding to the DoD's changing vehicle requirements, Oshkosh Defense has become the leading manufacturer of Heavy, Medium, and Mine Resistant Ambush Protected (MRAP) tactical wheeled vehicles and related service and sustainment for the DoD and has expanded its product offerings to include light tactical wheeled vehicles. Oshkosh Defense manufactures vehicles that perform a variety of demanding tasks such as hauling tanks, missile systems, ammunition, fuel, troops and cargo for a broad range of missions. Oshkosh Defense's proprietary military product line of heavy-payload tactical wheeled vehicles includes the HEMTT, the Heavy Equipment Transporter (HET), the Palletized Load System (PLS), and the Logistic Vehicle System Replacement (LVSR). Oshkosh Defense's proprietary military medium-payload tactical wheeled vehicles include the Medium Tactical Vehicle Replacement (MTVR). Oshkosh Defense's proprietary M-ATV was specifically designed with superior survivability as well as extreme off-road mobility for use in conditions similar to those encountered in the conflict in Afghanistan.
In June 2009, the DoD awarded Oshkosh Defense a sole source contract for M-ATVs and associated aftermarket parts packages. Since receiving the initial contract award Oshkosh Defense has delivered over 8,700 M-ATVs domestically and over 1,600 M-ATVs internationally. In fiscal 2016 Oshkosh Defense completed contract requirements to deliver 273 M-ATVs to an international customer and began to perform under a separate international contract delivering 325 M-ATVs. The Company expects to deliver approximately 1,000 more M-ATVs under this contract in fiscal 2017.
In August 2009, the DoD awarded Oshkosh Defense a contract to be the sole producer of FMTVs under the U.S. Army's FMTV Rebuy program. Originally a five-year requirements contract, in fiscal 2015 the DoD extended the FMTV Rebuy program to allow for the delivery of vehicles and trailers through February 2017. In September 2016, the U.S. Army extended the FMTV contract through a contract modification that included orders to Oshkosh Defense to produce FMTV trucks and trailers through July 2018. A competitor filed a protest with the Government Accountability Office (GAO) challenging the contract extension to Oshkosh Defense. This protest was subsequently withdrawn.
In June 2015, the DoD awarded Oshkosh Defense a new Family of Heavy Tactical Vehicles (FHTV) contract for the recapitalization of HEMTT, HET and PLS vehicles as well as associated logistics and configuration management support. The contract is a five-year requirements contract for the continued remanufacturing of FHTV vehicles through fiscal 2020. The contract is fixed-price incentive firm where the price paid to the Company is subject to adjustment based on actual costs incurred. The impact of pricing adjustments under fixed-price incentive firm contracts are generally shared by the Company and the customer. The Company delivered 1,319 vehicles under this contract in fiscal 2016, with remaining vehicles under contract expected to be delivered through early fiscal 2018.
In August 2015, the DoD awarded Oshkosh Defense an eight-year, fixed price JLTV contract valued at $6.7 billion for production and delivery of approximately 17,000 (subsequently increased to over 18,000) vehicles and sustaining services. The JLTV program is expected to be a 20-year, $30 billion program for the production of up to 55,000 vehicles, support services and engineering. The Company began work on the contract in fiscal 2016, delivering its first production JLTV vehicles to the U.S. Army in September 2016.
In addition to retaining its current defense truck contracts, the Company’s objective is to continue to diversify into other areas of the U.S. and international defense vehicle markets by expanding applications, uses and vehicle body styles of its current tactical truck lines and growing aftermarket product and service offerings.
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Fire & emergency segment. Through Pierce, the Company is the leading domestic manufacturer of fire apparatus assembled on custom chassis, designed and manufactured to meet the special needs of firefighters. Pierce also manufactures fire apparatus assembled on commercially available chassis, which are produced for multiple end-customer applications. Pierce’s engineering expertise allows it to design its vehicles to meet stringent industry guidelines and government regulations for safety and effectiveness. Pierce primarily serves domestic municipal customers, but also sells fire apparatus to the DoD, airports, universities and large industrial companies, and increasingly in international markets. Pierce’s history of innovation and research and development in consultation with firefighters has resulted in a broad product line that features a wide range of innovative, high-quality custom and commercial firefighting equipment with advanced fire suppression capabilities. In an effort to be a single-source supplier for its customers, Pierce offers a full line of custom and commercial fire apparatus and emergency vehicles, including pumpers, aerial platform, ladder and tiller trucks, tankers, light-, medium- and heavy-duty rescue vehicles, wildland rough terrain response vehicles, mobile command and control centers, bomb squad vehicles, hazardous materials control vehicles and other emergency response vehicles.
The Company, through Airport Products, is among the leaders in sales of ARFF vehicles to domestic and international airports. These highly-specialized vehicles are required to be in service at most airports worldwide to support commercial airlines in the event of an emergency. Many of the world’s largest airports, including LaGuardia International Airport, O’Hare International Airport, Hartsfield-Jackson International Airport, Denver International Airport, Baltimore-Washington International Airport, and Dallas/Fort Worth International Airport in the U.S., are served by the Company’s ARFF vehicles. The U.S. Government also maintains a fleet of ARFF vehicles that are used to support military operations throughout the world. Internationally, the Company's vehicles serve, among others, Beijing, China and more than twenty other airports in China; Singapore; Toronto and Quebec, Canada; Abu Dhabi, UAE; Birmingham, Cardiff, Manchester and Liverpool, United Kingdom; and Moscow, Russia. The Company has recently delivered ARFF vehicles to multiple airports throughout Kuwait, Southeast Asia, Papua New Guinea, Mexico, Chile and Argentina. The Company believes that the performance and reliability of its ARFF vehicles contribute to the Company’s strong position in this market.
The Company, through Airport Products, is a global leader in airport snow removal vehicles. The Company’s specially designed airport snow removal vehicles are used by some of the largest airports in the world, including Dallas/Fort Worth International Airport, Hartsfield-Jackson International Airport, Minneapolis-St. Paul International Airport and O’Hare International Airport in the U.S. and Beijing, China; Incheon, South Korea; and Toronto and Montreal, Canada internationally. The Company believes that the reliability of its high-performance snow removal vehicles and the speed with which they clear airport runways contribute to its strong position in this market.
The Company, through its Frontline brand, is a leading manufacturer, system designer and integrator of broadcast and communication vehicles, including electronic field production trailers, satellite news gathering and electronic news gathering vehicles for broadcasters and command trucks for local and federal governments along with being a leading supplier of military simulator shelters and trailers. The Company’s vehicles have been used worldwide to broadcast the NFL Super Bowl, the FIFA World Cup and the Olympics.
The Company offers three- to fifteen-year municipal lease financing programs to its fire & emergency segment customers in the U.S. through Oshkosh Equipment Finance, LLC, doing business as Oshkosh Capital. Programs include competitive lease financing rates, creative and flexible finance arrangements and the ease of one-stop shopping for customers’ equipment and financing. The Company executes the lease financing transactions through a private label arrangement with an independent third-party finance company. The Company typically provides credit support in connection with these financing and leasing arrangements.
Commercial segment. Through Oshkosh Commercial, McNeilus, London and CON-E-CO, the Company is a leading manufacturer of front- and rear-discharge concrete mixers and portable and stationary concrete batch plants for the concrete ready-mix industry throughout the Americas. Through McNeilus, the Company is a leading manufacturer of refuse collection vehicles for the waste services industry throughout the Americas.
Through IMT, the Company is a leading North American manufacturer of field service vehicles and truck-mounted cranes for the construction, equipment dealer, building supply, utility, tire service, railroad and mining industries. The Company believes its commercial segment vehicles and equipment have a reputation for efficient, cost-effective, dependable and low maintenance operation.
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The Company also arranges equipment financing and leasing solutions for its customers, primarily through third-party funding arrangements with independent financial companies, and occasionally provides credit support in connection with these financing and leasing arrangements.
Marketing, Sales, Distribution and Service
The Company believes it differentiates itself from many of its competitors by tailoring its distribution to the needs of its specialty vehicle and vehicle body markets and with its national and global sales and service capabilities. Distribution personnel demonstrate to customers how to use the Company’s vehicles and vehicle bodies properly. In addition, the Company’s flexible distribution is focused on meeting customers on their terms, whether on a job site, in an evening public meeting or at a municipality’s offices, compared to the showroom sales approach of the typical dealers of large vehicle manufacturers. The Company backs all products with same-day parts shipment, and its service technicians are available in person or by telephone to domestic customers 365 days a year. The Company believes its dedication to keeping its products in-service in demanding conditions worldwide has contributed to customer loyalty.
The Company provides its salespeople, representatives and distributors with product and sales training on the operation and specifications of its products. The Company’s engineers, along with its product managers, develop operating manuals and provide field support at vehicle delivery.
U.S. dealers and representatives enter into agreements with the Company that allow for termination by either party generally upon 90 days' notice, subject to applicable laws. Dealers and representatives, except for those utilized by JLG and IMT, are generally not permitted to market and sell competitive products.
Access equipment segment. JLG’s products are marketed across six continents through independent rental companies and distributors that purchase JLG products and then rent or sell them and provide service support, as well as through other Company owned sales and service branches. JLG maintains a broad internal sales force that is comprised of employees worldwide. Sales employees are dedicated to specific major customers, channels or geographic regions. JLG’s international sales employees are spread among JLG’s approximately 20 international sales and service offices.
JLG produces a variety of its own branded telehandlers and manufactures the Caterpillar-branded telehandlers under a license to Caterpillar Inc. for their worldwide Caterpillar Inc. distribution network. JLG also produces a line of telehandlers for the European agricultural market under a license from SAME Deutz-Fahr and sells SAME Deutz-Fahr-branded telehandlers directly to SAME Deutz-Fahr’s dealer network.
The Company markets its Jerr-Dan-branded carriers and wreckers through its network of approximately 60 independent distributors.
Defense segment. Oshkosh Defense sells substantially all of its domestic defense products directly to principal branches of the DoD and has sold its defense products to more than 20 international militaries around the globe. Oshkosh Defense maintains a liaison office in Washington, D.C. to represent its interests with the U.S. Congress, the offices of the Executive Branch of the U.S. government, the Pentagon, as well as international embassies and government agencies. Oshkosh Defense locates its business development, consultants and engineering professionals near its customers' principal commands, both domestically and internationally. Oshkosh Defense also sells and services defense products to approved international governments as Direct Commercial Sales or Foreign Military Sales via U.S. government channels. Oshkosh Defense supports international sales through international sales offices, as well as through dealers, distributors and representatives.
In addition to marketing its current tactical wheeled vehicle offerings and competing for new contracts, Oshkosh Defense actively works with the U.S. Armed Services to develop new applications for its vehicles and expand its services.
Logistics services are increasingly important in the defense market. The Company believes that its proven worldwide logistics capabilities and internet-based ordering, invoicing and electronic payment systems have significantly contributed to the expansion of its defense parts and service business since fiscal 2002, following the commencement of Operation Iraqi Freedom and Operation Enduring Freedom. Oshkosh Defense maintains a large parts distribution warehouse in Milwaukee, Wisconsin to fulfill stringent parts delivery schedule requirements, as well as satellite facilities near DoD bases in the U.S., Europe, Asia and the Middle East.
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Fire & emergency segment. The Company believes the geographic breadth, size and quality of its Pierce fire apparatus sales and service organization are competitive advantages in a market characterized by a few large manufacturers and numerous small, regional competitors. Pierce’s fire apparatus are sold through approximately 30 independent sales and service organizations with hundreds of sales representatives in the U.S. and Canada, which combine broad geographical reach with frequency of contact with fire departments and municipal government officials. These sales and service organizations are supported by product and marketing support professionals and contract administrators at Pierce. The Company believes frequency of contact and local presence are important to cultivate major, and typically infrequent, purchases involving the city or town council, fire department, purchasing, finance and mayoral offices, among others, that may participate in a fire apparatus bid and selection process. After the sale, Pierce’s nationwide local parts and service capability is available to help municipalities maintain peak readiness for this vital municipal service. Pierce also sells directly to the DoD and other U.S. government agencies. Many of the Pierce fire apparatus sold to the DoD are placed in service at U.S. military bases, camps and stations overseas. Additionally, Pierce sells fire apparatus to numerous international municipal and industrial fire departments through a network of international dealers. The Company markets its Frontline-branded broadcast vehicles through sales representatives and its Frontline-branded command vehicles through both sales representatives and dealer organizations that are directed at government and commercial customers.
The Company markets its Oshkosh-branded ARFF vehicles through a combination of direct sales representatives domestically and an extensive network of representatives and distributors in international markets. Certain of these international representatives and distributors also handle Pierce products. The Company's snow removal business uses a combination of internal sales and service representatives and distributor locations to focus on the sale of snow removal vehicles, principally to airports, but also to municipalities, counties and other governmental entities in the U.S. and Canada. In addition, the Company maintains offices in Abu Dhabi, UAE; Beijing, China; Moscow, Russia; Tonneins, France; and Singapore to support airport product vehicle sales and aftermarket sales and support in Europe, the Middle East, China, Russia, South America and Southeast Asia.
Commercial segment. The Company operates 28 distribution centers with hundreds of in-house sales and service representatives in North America to sell and service refuse collection vehicles, rear- and front-discharge concrete mixers and concrete batch plants. These centers are in addition to sales and service activities at the Company’s manufacturing facilities, and they provide sales, service and parts distribution to customers in their geographic regions. The Company also uses independent sales and service organizations to market its CON-E-CO-branded concrete batch plants. The Company believes this network represents one of the largest concrete mixer, concrete batch plant and refuse collection vehicle distribution networks in the U.S.
The Company believes its direct distribution to customers is a competitive advantage in concrete mixer and refuse collection vehicle markets, particularly in the U.S. waste services industry where principal competitors distribute through dealers and to a lesser extent in the ready mix concrete industry, where several competitors in part use dealers. The Company believes direct distribution permits a more focused sales force in the U.S. concrete mixer and refuse collection vehicle markets, whereas dealers frequently offer a very broad and mixed product line, and accordingly, the time dealers tend to devote to concrete mixer and refuse collection vehicle sales activities is limited.
The Company also has established an extensive network of representatives and dealers throughout the Americas for the sale of Oshkosh-, McNeilus-, CON-E-CO- and London-branded concrete mixers, concrete batch plants and refuse collection vehicles. The Company coordinates among its various businesses to respond to large international sales tenders with its most appropriate product offering for the tender.
IMT distributes its products through approximately 90 dealers in over one hundred locations worldwide, including approximately 30 international dealers. International dealers are primarily located in Central and South America, Australia and Asia and are primarily focused on mining and construction markets.
McNeilus owns a 49% interest in Mezcladoras Trailers de Mexico, S.A. de C.V. (Mezcladoras), a manufacturer of concrete mixers and small refuse collection vehicle bodies for distribution in Mexico and Latin America.
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Manufacturing
As of November 22, 2016, the Company manufactures vehicles and vehicle bodies at 31 manufacturing facilities. To reduce production costs, the Company maintains a continuing emphasis on the development of proprietary components, self-sufficiency in fabrication, just-in-time inventory management, improvement in production flows, interchangeability and simplification of components among product lines, creation of jigs and fixtures to ensure repeatability of quality processes, utilization of robotics, and performance measurement to assure progress toward cost reduction targets. The Company encourages employee involvement to improve production processes and product quality. The Company opened a new state of the art manufacturing facility in Leon, Mexico during fiscal 2015 that is designed to supply components to multiple Company businesses and that is expected to contribute to the attainment of the Company's production initiatives.
The Company uses a common Quality Management System globally in an effort to deliver consistent, high quality products and services to customers. The Company educates and trains all employees at its facilities in quality principles. The Company encourages employees at all levels of the Company to understand customer and supplier requirements, measure performance, develop systems and procedures to prevent nonconformance with requirements and produce continuous improvement in all work processes. The Company utilizes quality gates at its manufacturing facilities to catch quality issues earlier in the process and to perform a root cause analysis at their source, resulting in improved quality, fewer defects and less rework. ISO 9001 is a set of internationally-accepted quality requirements established by the International Organization for Standardization. ISO 9001 certification indicates that a company has established and follows a rigorous set of requirements aimed at achieving customer satisfaction by preventing nonconformity in design, development, production, installation and servicing of products. Most of the Company’s facilities are ISO 9001 certified.
The Company has a team of employees dedicated to leading the implementation of the Oshkosh Operating System (OOS). The team is comprised of members with diverse backgrounds in quality, lean, finance, product and process engineering, and culture change management. OOS is a business system that defines and seeks to enhance customers' experiences with the Company's products and services. OOS includes lean tools to eliminate waste out of the Company's processes to provide better value for customers. OOS also assesses customer satisfaction and implements countermeasures to improve the Company's customers' experiences with Oshkosh. OOS enables the Company to execute its MOVE strategy, delivering value to both customers and shareholders. Within the Company’s facilities, OOS improvement projects have contributed to manufacturing efficiency gains, materials management improvements, steady quality improvements and reduction of lead times. OOS improvement projects have also enabled the Company to free up manufacturing space, allowing it to pursue a program focused on increased vertical integration.
Engineering, Research and Development
The Company believes its extensive engineering, research and development capabilities have been key drivers of the Company’s marketplace success. The Company maintains seven facilities for new product development and testing with a staff of approximately 1,200 engineers and technicians who are dedicated to improving existing products, development and testing of new vehicles, vehicle bodies and components and sustaining its production activities. The Company prepares multi-year new product development plans for each of its markets and measures progress against those plans each month.
Virtually all of the Company’s sales of fire apparatus and broadcast vehicles require some level of custom engineering to meet the customer’s specifications and changing industry standards. Engineering is also a critical factor in defense vehicle markets due to the severe operating conditions under which the Company’s vehicles are utilized, new customer requirements and stringent government documentation requirements. In the access equipment and commercial segments, product innovation is highly important to meet customers’ changing requirements. Accordingly, in addition to new product development engineers and technicians, the Company maintains an additional permanent staff of engineers and engineering technicians to sustain its production activities, and it regularly outsources some engineering activities in connection with new product development projects.
For fiscal 2016, 2015 and 2014, the Company incurred research and development expenditures of $103.1 million, $147.9 million and $142.0 million, respectively, portions of which were recoverable from customers, principally the U.S. government. Lower spending in fiscal 2016 generally was due to completion of the product design costs associated with Tier IV engine emission requirements in the Company's access equipment segment and JLTV development costs in the defense segment.
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Competition
In all of the Company’s segments, competitors include smaller, specialized manufacturers as well as large, mass producers. The Company believes that, in its specialty vehicle and vehicle body markets, it has been able to effectively compete against large, mass producers due to its product quality, manufacturing flexibility, vertical integration, purchasing power in specialty vehicle components and tailored distribution systems. In addition, the Company believes it has competitive advantages over smaller vehicle and vehicle body manufacturers due to its relatively higher volumes of similar products that permit the use of moving assembly lines and which allow it to leverage purchasing power and technology opportunities across product lines. The Company believes that its competitive cost structure, strategic global purchasing capabilities, engineering expertise, product quality and global distribution and service systems have enabled it to compete effectively.
Certain of the Company’s competitors have greater financial, marketing, manufacturing, distribution and governmental affairs resources than the Company. There can be no assurance that the Company’s products will continue to compete effectively with the products of competitors or that the Company will be able to retain its customer base or improve or maintain its profit margins on sales to its customers, all of which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.
Access equipment segment. JLG operates in the global construction, maintenance, industrial and agricultural equipment markets. JLG’s competitors range from some of the world’s largest multi-national construction equipment manufacturers to small single-product niche manufacturers. Within this global market, competition for sales of aerial work platform equipment includes Genie Industries, Inc. (a subsidiary of Terex Corporation), Skyjack Inc. (a subsidiary of Linamar Corporation), Haulotte Group, Aichi Corporation (a subsidiary of Toyota Industries Corporation) and over 50 other manufacturers. Global competition for sales of telehandler equipment includes the Manitou Group, J C Bamford Excavators Ltd., Merlo SpA, Genie Industries, Inc. and over 30 other manufacturers. In addition, JLG faces competition from numerous manufacturers of other niche products such as boom vehicles, cherry pickers, skid steer loaders, mast climbers, straight mast and vehicle-mounted fork-lifts, rough-terrain and all-terrain cranes, vehicle-mounted cranes, portable material lifts, various types of material handling equipment, scaffolding and the common ladder that offer functionality that is similar to or overlaps that of JLG’s products. Principal methods of competition include brand awareness, product innovation and performance, price, quality, service and support, product availability and the extent to which a company offers single-source customer solutions. The Company believes its competitive strengths include: premium brand names; broad and single-source product offerings; product quality; product residual values that are generally higher than competitors units; worldwide distribution; safety record; service and support network; global procurement scale; extensive manufacturing capabilities; and cross-division synergies with other segments within Oshkosh Corporation.
The principal competitor for Jerr-Dan-branded products is Miller Industries, Inc. Principal methods of competition for carriers and wreckers include product quality and innovation, product performance, price and service. The Company believes its competitive strengths in this market include its high quality, innovative and high-performance product line and its low-cost manufacturing capabilities.
Defense segment. Oshkosh Defense produces heavy- and medium-payload, MRAP and light-payload tactical wheeled vehicles for the military and security forces around the world. Competition for sales of these vehicles includes, among others, Man Group plc, Mercedes-Benz (a subsidiary of Daimler AG), Navistar Defense LLC (a subsidiary of Navistar International Corporation), General Dynamics Corporation, Lockheed Martin, AM General, BAE Systems plc and Textron Inc. The principal method of competition in the defense segment involves a competitive bid that takes into account factors as determined by the customer, such as price, product performance, product life cycle costs, small and disadvantaged business participation, product quality, adherence to bid specifications, production capability, project management capability, past performance and product support. Usually, the Company's vehicle systems must also pass extensive testing. The Company believes that its competitive strengths include: strategic global purchasing capabilities leveraged across multiple business segments; extensive pricing/costing and defense contracting expertise; a significant installed base of vehicles currently in use throughout the world; flexible and high-efficiency vertically-integrated manufacturing capabilities; patented and/or proprietary vehicle components such as TAK-4 family of independent suspension systems, Oshkosh power transfer cases and Command Zone integrated vehicle diagnostics; weapons and communications integration; ability to develop new and improved product capabilities responsive to the needs of its customers; product quality; and aftermarket parts sales and service capabilities.
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The Weapon Systems Acquisition Reform Act requires competition for defense programs in certain circumstances. Accordingly, it is possible that the U.S. Army and U.S. Marine Corps will conduct competitions for programs for which the Company currently has contracts upon the expiration of the existing contracts. Competition for these and other domestic programs could result in future contracts being awarded based upon different competitive factors than those described above and would primarily include price, production capability and past performance. Current economic conditions have also put significant pressure on the U.S. Federal budget. The overall military drawdowns in Iraq and Afghanistan and stated defense budget reductions have resulted in lower demand for tactical wheeled vehicles, and future program competitions could involve weighting price more heavily than the past competitive factors described above. In addition, the U.S. government has become more aggressive in seeking to acquire the design rights to the Company's current and potential future programs to facilitate competition for manufacturing our vehicles. The willingness of the bidders to license their design rights to the DoD was an evaluation factor in the JLTV contract competition.
The Competition in Contracting Act requires competition for U.S. defense programs in most circumstances. Competition for DoD programs that we currently have could result in the U.S. government awarding future contracts to another manufacturer or the U.S. government awarding the contracts to us at lower prices and operating margins than we experience under current contracts. In particular, the DoD has begun a process to recompete the FMTV program. In October 2016, the DoD issued requests for proposal to qualified bidders to submit a proposal to produce FMTVs for a five year period beginning in January 2020. The deadline for proposal submissions is January 2017, and a new FMTV production contract award to the successful bidder is expected in the second half of fiscal 2017.
Fire & emergency segment. The Company produces and sells custom and commercial firefighting vehicles in the U.S. and abroad under the Pierce brand and broadcast vehicles in the U.S. and abroad under the Frontline brand. Competitors for firefighting vehicles include Rosenbauer International AG, Emergency One, Inc. and Kovatch Mobile Equipment Corp. (both owned by REV Group, Inc.), and numerous smaller, regional manufacturers. The principal competition for broadcast vehicles is from Accelerated Media Technologies and Television Engineering Corporation. Principal methods of competition include brand awareness, ability to meet or exceed customer specifications, price, the extent to which a company offers single-source customer solutions, product innovation, product quality, dealer distribution, and service and support. The Company believes that its competitive strengths include: recognized, premium brand name; nationwide network of independent Pierce dealers; extensive, high-quality and innovative product offerings, which include single-source customer solutions for aerials, pumpers and rescue units; large-scale and high-efficiency custom manufacturing capabilities; and proprietary technologies such as the PUC vehicle configuration, TAK-4 independent suspension system, Hercules and Husky foam systems, Command Zone electronics and the new Ascendant 107' aerial fire truck utilizing a single rear axle.
Airport Products manufactures ARFF vehicles for sale in the U.S. and abroad. Oshkosh’s principal competitor for ARFF vehicle sales is Rosenbauer International AG. Airport Products also manufactures snow removal vehicles, principally for U.S. and Canadian airports. The Company’s principal competitors for snow removal vehicle sales are M-B Companies, Inc. and Wausau-Everest LP (owned by Alamo Group, Inc.). Principal methods of competition are product performance, price, service, product quality and innovation. The Company believes its competitive strengths in these airport markets include its high-quality, innovative products and strong dealer support network.
Commercial segment. The Company produces front- and rear-discharge concrete mixers and batch plants for the Americas under the Oshkosh, McNeilus, CON-E-CO and London brands. Competition for concrete mixer and batch plant sales includes Beck Industrial, Con-Tech Manufacturing, Inc., Terex Corporation, Continental Mixer Solutions LLC (owned by Specialty Truck Holdings LLC) and other regional competitors. Principal methods of competition are price, service, product features, product quality and product availability. The Company believes its competitive strengths include: strong brand recognition; large-scale and high-efficiency manufacturing; extensive product offerings; high product quality; ability to offer factory-installed compressed natural gas fuel systems; a significant installed base of concrete mixers in use in the marketplace; and its nationwide, Company-owned network of sales and service centers.
McNeilus also produces refuse collection vehicles for North America and international markets. Competitors include The Heil Company (a subsidiary of Dover Corporation), Labrie Enviroquip Group, New Way (a subsidiary of Scranton Manufacturing Company, Inc.) and other regional competitors. The principal methods of competition are product quality, product performance, service and price. The Company competes for municipal business and large commercial business in the Americas, which is generally based on lowest qualified bid. The Company believes its competitive strengths in the Americas refuse collection vehicle markets include: strong brand recognition; comprehensive product offerings; a reputation for high-quality products; ability to offer factory-installed compressed natural gas fuel systems; large-scale and high-efficiency manufacturing; and an extensive network of Company-owned sales and service centers located throughout the U.S.
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IMT is a manufacturer of field service vehicles and truck-mounted cranes for the construction, equipment dealer, building supply, utility, tire service, railroad and mining industries. IMT’s principal field service vehicle competition is from Auto Crane Company (owned by Gridiron Capital), Stellar Industries, Inc., Maintainer Corporation of Iowa, Inc. and other regional companies. Competition in truck-mounted cranes comes primarily from European companies including Palfinger AG, Cargotec Corporation and Fassi Group SpA. Principal methods of competition are product quality, price and service. The Company believes its competitive strengths include its high-quality products, global distribution network and low-cost manufacturing capabilities.
Customers and Backlog
Sales to the U.S. government comprised approximately 19% of the Company’s net sales in fiscal 2016. No other single customer accounted for more than 10% of the Company’s net sales for this period. A substantial majority of the Company’s net sales are derived from the fulfillment of customer orders that are received prior to commencing production.
The Company’s backlog as of September 30, 2016 increased 35.7% to $3.54 billion compared to $2.61 billion at September 30, 2015 due largely to an increase in the defense segment backlog as a result of new contracts in fiscal 2016. Access equipment segment backlog decreased 14.5% to $179.3 million at September 30, 2016 compared to $209.7 million at September 30, 2015 primarily due to the slowdown in North American replacement demand. Defense segment backlog increased 65.0% to $2.33 billion at September 30, 2016 compared to $1.41 billion at September 30, 2015 primarily due to the receipt of a large international contract for the delivery of M-ATVs, higher order levels on the FHTV and FMTV programs and increased funding for the JLTV program. Defense segment backlog at September 30, 2016 includes orders under the recently extended FMTV contract. A third party protest of the FMTV contract extension was subsequently withdrawn. Fire & emergency segment backlog increased 7.9% to $852.9 million at September 30, 2016 compared to $790.7 million at September 30, 2015 due largely to increased orders for domestic fire trucks as a result of continued market recovery and share gains. Commercial segment backlog decreased 10.2% to $173.3 million at September 30, 2016 compared to $193.0 million at September 30, 2015. Unit backlog for concrete mixers and refuse collection vehicles as of September 30, 2016 was down 18.8% and 29.7%, respectively, compared to September 30, 2015 due to continued softness in the concrete mixer market and the timing of fleet replacement demand for refuse collection vehicles.
Reported backlog excludes purchase options and announced orders for which definitive contracts have not been executed. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of the Company’s future sales to the DoD versus its sales to other customers. Approximately 18% of the Company’s September 30, 2016 backlog is not expected to be filled in fiscal 2017.
Government Contracts
Approximately 19% of the Company’s net sales for fiscal 2016 were made to the U.S. government, a substantial majority of which were under multi-year contracts and programs in the defense vehicle market. Accordingly, a significant portion of the Company’s sales are subject to risks specific to doing business with the U.S. government, including uncertainty of economic conditions, changes in government policies and requirements that may reflect rapidly changing military and political developments, the availability of funds and the ability to meet specified performance thresholds. Multi-year contracts may be conditioned upon continued availability of congressional appropriations and are being impacted by the uncertainty regarding the federal budget pressures. Variances between anticipated budget and congressional appropriations may result in a delay, reduction or termination of these contracts. In addition, continued weak economic conditions have put significant pressure on the U.S. federal budget. The two-year U.S. federal budget agreement signed by the President in December 2015 removed the threat of sequestration in the U.S. federal government’s fiscal 2016 and 2017 budgets, but absent future budget agreements, the full effect of sequestration could return in the government’s fiscal 2018 budget. The magnitude of the adverse impact that federal budget pressures will have on funding for our defense programs is unknown. Budgetary concerns could result in future defense vehicle contracts being awarded more on price than the past competitive factors described above.
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Oshkosh Defense's sales into defense vehicle markets are substantially dependent upon periodic awards of new contracts and the purchase of base vehicle quantities and the exercise of options under existing contracts. The funding of U.S. government programs is subject to an annual congressional budget authorization and appropriation process. In years when the U.S. government has not completed its budget process before the end of its fiscal year, government operations are typically funded pursuant to a “continuing resolution,” which allows federal government agencies to operate at spending levels approved in the previous budget cycle but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, delays can occur in the procurement of the products, services and solutions that we provide and may result in new initiatives being delayed or canceled, or funds could be reprogrammed away from our programs to pay for higher priority operational needs. The U.S. government is currently operating under a continuing resolution budget that funds the federal government through December 9, 2016. In years when the U.S. government fails to complete its budget process or to provide for a continuing resolution, a federal government shutdown may result. This could in turn result in the delay or cancellation of key programs, which could have a negative effect on our cash flows and adversely affect our future results. In addition, payments to contractors for services performed during a federal government shutdown may be delayed, which would have a negative effect on our cash flows.
Defense contract awards that Oshkosh Defense receives may be subject to protests by competing bidders, which protests, if successful, could result in the DoD revoking part or all of any defense contract it awards to Oshkosh Defense and an inability of Oshkosh Defense to recover amounts it has expended during the protest period in anticipation of initiating work under any such contract.
Under firm, fixed-price contracts with the U.S. government, the price paid to the Company is generally not subject to adjustment to reflect the Company’s actual costs, except costs incurred as a result of contract changes ordered by the U.S. government. Under fixed-price incentive firm contracts with the U.S. government, the price paid to the Company is subject to adjustment based on the actual costs incurred. The impact of pricing adjustments under the fixed-price incentive firm contracts are generally shared by the Company and its customer. The Company generally attempts to negotiate with the U.S. government the amount of increased compensation to which the Company is entitled for government-ordered changes that result in higher costs. If the Company is unable to negotiate a satisfactory agreement to provide such increased compensation, then the Company may file an appeal with the Armed Services Board of Contract Appeals or the U.S. Claims Court. The Company has no such appeals pending. The Company seeks to mitigate risks with respect to fixed-price contracts by executing firm, fixed-price contracts with a substantial majority of its suppliers for the duration of the Company’s contracts.
U.S. government contracts generally permit the government to terminate a contract, in whole or part, at the governments convenience. If the U.S. government exercises its rights under this clause the contractor is entitled to payment for the allowable costs incurred and a reasonable profit on the work performed to date. The U.S. government can also terminate a contract for default. If a contract is terminated for default, the contractor is generally entitled to payment for work that has been accepted by the U.S. government. Termination for default may expose the Company to loss on work not yet accepted by the government and have a negative impact on the Company's ability to obtain future orders and contracts. The U.S. governments right to terminate its contracts has not had a material effect on the operations or financial condition of the Company.
The Company, as a U.S. government contractor, is subject to financial audits and other reviews by the U.S. government relating to the performance of, and the accounting and general practices relating to, U.S. government contracts. Like most large government contractors, the Company is audited and reviewed by the government on a continual basis. Costs and prices under such contracts may be subject to adjustment based upon the results of such audits and reviews. Additionally, such audits and reviews can lead to civil, criminal or administrative proceedings. Such proceedings could involve claims by the government for fines, penalties, compensatory and treble damages, restitution and/or forfeitures. Under government regulations, a company or one or more of its subsidiaries can also be suspended or debarred from government contracts, or lose its export privileges based on the results of such proceedings. The Company believes that the outcome of all such audits and reviews that are now pending will not have a material effect on its financial condition, results of operations or cash flows.
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Suppliers
The Company is dependent on its suppliers and subcontractors to meet commitments to its customers, and many components are procured or subcontracted on a sole-source basis with a number of domestic and foreign companies. Components for the Company’s products are generally available from a number of suppliers, although the transition to a new supplier may require several months to conclude. The Company purchases chassis components, such as vehicle frames, engines, transmissions, radiators, axles, tires, drive motors, bearings and hydraulic components and vehicle body options, such as cranes, cargo bodies and trailers, from third-party suppliers. These body options may be manufactured specific to the Company’s requirements; however, most of the body options could be manufactured by other suppliers or the Company itself. Through reliance on this supply network for the purchase of certain components, the Company is able to reduce many of the pre-production and fixed costs associated with the manufacture of these components and vehicle body options. The Company purchases a large amount of fabrications and outsources certain manufacturing services, each generally from small companies located near its facilities. While providing low-cost services and product surge capability, such companies often require additional management attention during difficult economic conditions or contract start-up. The Company also purchases complete vehicle chassis from truck chassis suppliers in its commercial segment and, to a lesser extent, in its fire & emergency and access equipment segments. Increasingly, the Company is sourcing components globally, which may involve additional inventory requirements and introduces additional foreign currency exposures. The Company maintains an extensive qualification, on-site inspection, assistance and performance measurement system to attempt to control risks associated with reliance on suppliers. The Company occasionally experiences problems with supplier and subcontractor performance and component, chassis and body availability and must identify alternate sources of supply and/or address related warranty claims from customers.
While the Company purchases many costly components such as chassis, engines and transmissions, it manufactures certain proprietary components and systems. These components include front drive steer axles, transfer cases, transaxles, cabs, the TAK-4 independent suspension system, Hercules and Husky compressed air foam systems, the Command Zone vehicle control system, body structures and many smaller parts that add uniqueness and value to the Company’s products. The Company believes controlling the production of these components provides a significant competitive advantage and also serves to reduce the production costs of the Company’s products. The Company intends to continue to pursue vertical integration opportunities to further increase its competitive advantage.
Intellectual Property
Patents and licenses are important in the operation of the Company's business. One of management's objectives is developing proprietary components to provide the Company's customers with advanced technological solutions at attractive prices. The Company holds in excess of 800 active domestic and foreign patents. The Company believes patents for the TAK-4 independent suspension system, which expire between 2017 and 2029, provide the Company with a competitive advantage in the defense and fire & emergency segments. In the defense segment, the TAK-4 independent suspension system has been incorporated into the U.S. Marine Corps' MTVR and LVSR programs, the U.S. Army's PLS A1 program, the MRAP - Joint Program Office M-ATV program and the JLTV program. The Company believes the TAK-4 independent suspension system provided a performance and cost advantage that contributed to the Company winning these programs. In the fire & emergency segment, TAK-4 independent suspension systems are standard on all Pierce custom fire trucks, as well as Striker and Global Striker ARFF vehicles, which the Company believes brings a similar competitive advantage to these markets.
In 2012, the Company introduced the newest TAK-4 independent suspension system configuration, TAK-4i, where the “i” stands for “intelligent.” The TAK-4i, which has been developed for rigorous military applications, provides 20 inches of wheel travel, a 25% improvement compared to the original TAK-4, and incorporates an adjustable ride height feature. The Company believes that the TAK-4i was a key factor in the Company's successful JLTV production contract award.
The Company believes that patents for certain components of its ProPulse hybrid electric drive system, Command Zone electronics system and TerraMax autonomous vehicle systems offer potential competitive advantages to product lines across all its segments. To a lesser extent, other proprietary components provide the Company a competitive advantage in each of the Company's segments.
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As part of the Company’s long-term alliance with Caterpillar Inc., the Company acquired a non-exclusive, non-transferable worldwide license to use certain Caterpillar Inc. intellectual property through 2025 in connection with the design and manufacture of Caterpillar Inc.’s current telehandler products. Additionally, Caterpillar Inc. assigned to JLG certain patents and patent applications relating to the Caterpillar-branded telehandler products. JLG also produces a line of telehandlers for the European agricultural market under a license from SAME Deutz-Fahr and sells SAME Deutz-Fahr-branded telehandlers directly to SAME Deutz-Fahr’s dealer network.
The Company holds trademarks for “Oshkosh,” “Oshkosh Defense,” “TAK-4,” “ProPulse,” “JLG,” “SkyTrak,” “Pierce,” “McNeilus,” “Jerr-Dan,” “CON-E-CO,” “London” and “IMT” among others. These trademarks are considered to be important to the future success of the Company’s business.
Employees
As of September 30, 2016, the Company had approximately 13,800 employees. The United Auto Workers union (UAW) represented approximately 1,800 production employees at the Company’s Oshkosh, Wisconsin facilities; the Boilermakers, Iron Shipbuilders, Blacksmiths and Forgers Union (Boilermakers) represented approximately 215 employees at the Company’s Kewaunee, Wisconsin facility; and the International Brotherhood of Teamsters Union (Teamsters) represented approximately 135 employees at the Company’s Garner, Iowa facility. The Company's agreement with the UAW expires in September 2021. The Company's new five-year agreement with the Boilermakers extends through June 2022. The Company’s new five-year agreement with the Teamsters extends through May 2021. In addition, the majority of the Company’s approximately 2,200 employees located outside of the U.S. are represented by separate works councils or unions. The Company believes its relationship with employees is satisfactory.
Seasonal Nature of Business
In the Company’s access equipment and commercial segments, business tends to be seasonal with an increase in sales occurring in the spring and summer months that constitute the traditional construction season in the northern hemisphere. In addition, sales are generally lower in the first fiscal quarter in all segments due to the relatively high number of holidays which reduce available shipping days.
Industry Segments
Financial information concerning the Company’s industry segments is included in Note 22 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Foreign and Domestic Operations and Export Sales
The Company manufactures products in the U.S., Belgium, the United Kingdom, Canada, France, Australia, Romania, China and Mexico for sale throughout the world. Sales to customers outside of the U.S. were 24%, 21% and 23% of the Company’s consolidated sales for fiscal 2016, 2015 and 2014, respectively.
Financial information concerning the Company’s foreign and domestic operations and export sales is included in Note 22 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Available Information
The Company maintains a website with the address www.oshkoshcorporation.com. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. The Company makes available free of charge (other than an investor’s own Internet access charges) through its website its Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such materials with, or furnishes such materials to, the Securities and Exchange Commission (SEC).
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ITEM 1A. RISK FACTORS
The Company's financial position, results of operations and cash flows are subject to various risks, many of which are not exclusively within the Company's control, which may cause actual performance to differ materially from historical or projected future performance. Investors should consider carefully information in this Annual Report on Form 10-K in light of the risk factors described below.
Our markets are highly cyclical. Declines in these markets could have a material adverse effect on our operating performance.
The high levels of sales in our defense segment between fiscal 2008 and 2013 were due in significant part to demand for defense tactical wheeled vehicles, replacement parts and services (including armoring) and vehicle remanufacturing arising from the conflicts in Iraq and Afghanistan. Events such as these are unplanned, as is the demand for our products that arises out of such events. Significantly lower U.S. involvement in those conflicts has resulted in significant reductions in the level of defense funding. In addition, current economic and political conditions continue to put significant pressure on the U.S. federal budget, including the defense budget. Current and projected DoD budgets have significantly lower funding for our vehicles than we experienced during the height of the Iraq and Afghanistan conflicts. In addition, the Budget Control Act of 2011 contains an automatic sequestration feature that may require additional cuts to defense spending through fiscal 2023 if the budget caps within the agreement are exceeded. The two-year U.S. federal budget agreement signed by the President in December 2015 removed the threat of sequestration in the U.S. federal government’s fiscal 2016 and 2017 budgets, but absent future budget agreements, the full effect of sequestration could return in the government’s fiscal 2018 budget. The magnitude of the adverse impact that federal budget pressures will have on funding for our defense programs is unknown.
The access equipment market is highly cyclical and impacted (i) by the strength of economies in general, (ii) by residential and non-residential construction spending, (iii) by the ability of rental companies to obtain third-party financing to purchase revenue generating assets, (iv) by capital expenditures of rental companies in general, including the rate at which they replace aged rental equipment, which is impacted in part by historical purchase levels, including lower levels of purchasing during the Great Recession, which we believe is contributing to a decrease in access equipment sales, (v) by the timing of engine emissions standards changes, and (vi) by other factors, including oil and gas related activity. The ready-mix concrete market that we serve is highly cyclical and impacted by the strength of the economy generally, by the number of housing starts and by other factors that may have an effect on the level of concrete placement activity, either regionally or nationally. Refuse collection vehicle markets are also cyclical and impacted by the strength of economies in general, by municipal tax receipts and by the size and timing of capital expenditures by large waste haulers. Fire & emergency markets are cyclical later in an economic downturn and are impacted by the economy generally and by municipal tax receipts and capital expenditures.
The global economic recovery has progressed at a slow pace, which has negatively impacted sales volumes for our access equipment and concrete placement products as compared to historical levels. Lower U.S. and European housing starts and non-residential construction spending compared to historical levels are limiting potential sales volume increases in the access equipment and commercial segments. In addition, lower U.S. housing starts since fiscal 2008 versus historical levels also adversely impacted municipal tax revenue, which negatively impacted demand for refuse collection vehicles and fire trucks and delayed the recovery in these markets. During the second half of fiscal 2015 and in fiscal 2016, we experienced a slowdown in access equipment orders and purchases due to the impact of lower oil and gas prices on access equipment rental utilization and lower cyclical replacement demand. Less access equipment was purchased during the Great Recession, resulting in less aged equipment that needs to be replaced at this time. We believe this slowdown will continue in fiscal 2017. A lack of sustained improvement in residential and non-residential construction spending generally may result in our inability to achieve our sales expectations or cause future weakness in demand for our products. We currently believe construction-driven demand will not be adequate to fully offset anticipated reduced access equipment replacement demand resulting from very low industry purchases in 2009 and 2010 leading to an expected 7% to 10% sales decline in our access equipment segment in fiscal 2017. Despite modest U.S. construction growth over the past year, access equipment and concrete mixer customers have adopted a cautious approach to fleet replacement/expansion, generally wanting to confirm that construction activity in the U.S. will support solid rental fleet utilization and rental rates. All of these factors, whether taken together or individually, could result in lower demand for our products. We cannot provide any assurance that the slow economic recovery will not progress even more slowly than what we or the market expect. If the global economic recovery progresses more slowly than what we or the market expect, then there could be a material adverse effect on our net sales, financial condition, profitability and/or cash flows.
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Our dependency on contracts with U.S. and foreign government agencies subjects us to a variety of risks that could materially reduce our revenues or profits.
We are dependent on U.S. and foreign government contracts for a substantial portion of our business. Approximately 19% of our sales in fiscal 2016 were to the DoD. That business is subject to the following risks, among others, that could have a material adverse effect on our operating performance:
• | Our business is susceptible to changes in the U.S. defense budget, which changes may reduce revenues that we expect from our defense business, especially in light of federal budget pressures, lower levels of U.S. ground troops deployed in foreign conflicts, including Iraq and Afghanistan, sequestration and the level of defense funding that will be allocated to the DoD's tactical wheeled vehicle strategy generally. |
• | The U.S. government may not budget for or appropriate funding that we expect for our U.S. government contracts, including funding we expect from the President’s 2017 budget request, which may prevent us from realizing revenues under current contracts or receiving additional orders that we anticipate we will receive. The DoD could also seek to reprogram certain funds originally planned for the purchase of vehicles manufactured by us under the current defense budget allocations. |
• | The funding of U.S. government programs is subject to an annual congressional budget authorization and appropriation process. In years when the U.S. government has not completed its budget process before the end of its fiscal year, government operations are typically funded pursuant to a “continuing resolution,” which allows federal government agencies to operate at spending levels approved in the previous budget cycle but does not authorize new spending initiatives. When the U.S. government operates under a continuing resolution, delays can occur in the procurement of the products, services and solutions that we provide and may result in new initiatives being delayed or canceled, or funds could be reprogrammed away from our programs to pay for higher priority operational needs. The U.S. government is currently operating under a continuing resolution budget that funds the federal government through December 9, 2016. In years when the U.S. government fails to complete its budget process or to provide for a continuing resolution, a federal government shutdown may result. This could in turn result in the delay or cancellation of key programs, which could have a negative effect on our cash flows and adversely affect our future results. In addition, payments to contractors for services performed during a federal government shutdown may be delayed, which would have a negative effect on our cash flows. |
• | Competitions for the award of defense tactical wheeled vehicle contracts are intense, and we cannot provide any assurance that we will be successful in the defense tactical wheeled vehicle procurement competitions in which we participate. |
• | Certain of our government contracts for the U.S. Army and U.S. Marine Corps could be delayed or terminated, and all such contracts expire in the future and may not be replaced, which could reduce revenues that we expect under the contracts and negatively affect margins in our defense segment. |
• | The Competition in Contracting Act requires competition for U.S. defense programs in most circumstances. Competition for DoD programs that we currently have could result in the U.S. government awarding future contracts to another manufacturer or the U.S. government awarding the contracts to us at lower prices and operating margins than we experience under the current contracts. In particular, the DoD has begun a process to recompete the FMTV program. The U.S. government issued requests for proposal from interested parties in October 2016 to produce FMTVs for a five year period starting approximately January 2020. The proposal submissions are due in January 2017, and we expect a new FMTV production contract award to the successful bidder in the second half of fiscal 2017. |
• | Defense tactical wheeled vehicles contract awards that we receive may be subject to protests or lawsuits by competing bidders, which protests or lawsuits, if successful, could result in the DoD revoking part or all of any defense tactical wheeled vehicles contract it awards to us and our inability to recover amounts we have expended in anticipation of initiating production under any such contract. |
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• | Most of our contracts with the DoD are multi-year firm, fixed-price contracts. These contracts typically contain annual sales price increases. Under the JLTV contract, we bear the risk of material, labor and overhead cost escalation for the full eight years of the contract, which is 3 to 5 years longer than has been the case under our other defense contracts. We attempt to limit the risk related to raw material price fluctuations in the defense segment by obtaining firm pricing from suppliers at the time a contract is awarded. However, if these suppliers do not honor their contracts, then we could face margin pressure. Furthermore, if our actual costs on any of these contracts exceed our projected costs, it could result in profits lower than historically realized or than we anticipate or net losses under these contracts. |
• | We account for the JLTV contract utilizing the cost to cost method of percentage-of-completion accounting, which requires the use of estimates. This accounting requires judgment relative to assessing risks, estimating revenues and costs and making assumptions for delivery schedule and technical issues. Due to the size and nature of the JLTV contract, the estimation of total revenues and cost at completion is complicated and subject to many variables. We must make assumptions regarding the expected increases in wages and employee benefits, productivity and availability of labor, material costs and allocated fixed costs. Changes to model mix, production costs and rates, learning curve, supplier performance and/or certification issues can also impact these estimates. Any change in estimates relating to JLTV program costs may adversely affect future financial performance. Changes in underlying assumptions, circumstances or estimates could have a material adverse effect on our net sales, financial condition, profitability and/or cash flows. |
• | We must spend significant sums on product development and testing, bid and proposal activities, and pre-contract engineering, tooling and design activities in competitions to have the opportunity to be awarded these contracts. |
• | Our defense products undergo rigorous testing by the customer and are subject to highly technical requirements. Our products are inspected extensively by the DoD prior to acceptance to determine adherence to contractual technical and quality requirements. The recently awarded JLTV contract contains product testing requirements that are generally more extreme than our other DoD contracts. Any failure to pass these tests or to comply with these requirements could result in unanticipated retrofit and rework costs, vehicle design changes, delayed acceptance of vehicles, late or no payments under such contracts or cancellation of the contract to provide vehicles to the U.S. government. |
• | As a U.S. government contractor, our U.S. government contracts and systems are subject to audit and review by the Defense Contract Audit Agency and the Defense Contract Management Agency. These agencies review our performance under our U.S. government contracts, our cost structure and our compliance with laws and regulations applicable to U.S. government contractors. Systems that are subject to review include, but are not limited to, our accounting systems, estimating systems, material management systems, earned value management systems, purchasing systems and government property systems. If improper or illegal activities, errors or system inadequacies come to the attention of the U.S. government, as a result of an audit or otherwise, then we may be subject to civil and criminal penalties, contract adjustments and/or agreements to upgrade existing systems as well as administrative sanctions that may include the termination of our U.S. government contracts, forfeiture of profits, suspension of payments, fines and, under certain circumstances, suspension or debarment from future U.S. government contracts for a period of time. Whether or not illegal activities are alleged and regardless of materiality, the U.S. government also has the ability to decrease or withhold certain payments when it deems systems subject to its review to be inadequate. These laws and regulations affect how we do business with our customers and, in many instances, impose added costs on our business. |
• | Our defense business may fluctuate significantly from time to time as a result of the start and completion of existing and new domestic and international contract awards that we may receive. Our defense tactical wheeled vehicle contracts are large in size and require significant personnel and production resources, and when our defense tactical wheeled vehicle customers allow such contracts to expire or significantly reduce their vehicle requirements under such contracts, we must make adjustments to personnel and production resources. The start and completion of existing and new contract awards that we may receive can cause our defense business to fluctuate significantly. Between June 2013 and December 2014, we had significant reductions to our production and office workforce within our defense segment. If we are unable to effectively ramp up our workforce, as we are currently doing to support sales of international M-ATVs and the JLTV program, our future earnings and cash flows would be adversely affected. |
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• | We face uncertainty regarding timing of funding or payments on key large international defense tactical wheeled vehicle contracts, including contracts for M-ATVs. We have made commitments to purchase materials and components based on the expectation that we would receive timely funding or payments under those M-ATV contracts. If we do not receive timely funding or payments under those M-ATV contracts, disruptions may result to our manufacturing and delivery schedules, and correspondingly to our suppliers, that could cause us to record higher product costs and potentially charges for excess or obsolete inventory to the extent we build product and are unable to complete contracts or find alternate uses for the materials and components and cannot otherwise realize value for them. Uncertainty regarding timing of funding or payment could also cause us to delay shipment of products which could impact our ability to recognize revenue in fiscal 2017. |
• | We periodically experience difficulties with sourcing sufficient vehicle carcasses from the U.S. military to maintain our defense tactical wheeled vehicles remanufacturing schedule, which can create uncertainty and inefficiencies for this area of our business. |
We may not be able to execute on our MOVE strategy.
During our September 2016 Analyst Day, we announced our evolved MOVE strategy, which is our strategy to deliver long-term growth and earnings for our shareholders. We cannot provide any assurance we will be able to successfully execute our MOVE strategy, which is subject to a variety of risks, including the following:
• | Our inability to adopt the use of standard processes and tools to drive improve customer satisfaction; |
• | Our inability to expand our aftermarket parts and service availability; |
• | Our inability to improve our product quality; |
• | Our inability to improve margins through simplification actions; |
• | Our failure to realize product, process and overhead cost reduction targets; |
• | Our inability to design new products that meet our customers’ requirements and bring them to market; |
• | Higher costs than anticipated to launch new products or delays in new product launches; and |
• | Slow adoption of our products in emerging markets and/or our inability to successfully execute our emerging market growth strategy. |
We expect to incur costs and charges as a result of restructuring of facilities or operations that we expect will reduce on-going costs. These actions may be disruptive to our business and may not result in anticipated cost savings.
In the past, we have restructured facilities and operations in an effort to make our business more efficient, and we expect to continue to review our overall manufacturing and distribution footprint. During the fourth quarter of fiscal 2016 we announced our plan to outsource aftermarket parts distribution in the access equipment segment to a third party logistics company. In conjunction with this decision, we recorded charges of $27.8 million for asset impairments and workforce reductions. In the future, we may incur additional costs, asset impairments and restructuring charges in connection with such consolidations, workforce reductions and other cost reduction measures that have adversely affected, and to the extent incurred in the future would adversely affect, our future earnings and cash flows. This is particularly true in our access equipment and commercial segments where additional restructuring actions may be required as a result of challenging market conditions we are experiencing in these segments. Such actions may be disruptive to our business. This may result in production inefficiencies, product quality issues, late product deliveries or lost orders as we begin production at consolidated facilities or outsource activities to third parties, which would adversely impact our sales levels, operating results and operating margins. Furthermore, we may not realize the cost savings that we expect to realize as a result of such actions.
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Raw material price fluctuations may adversely affect our results.
We purchase, directly and indirectly through component purchases, significant amounts of steel, aluminum, petroleum-based products and other raw materials annually. Steel, aluminum, fuel and other commodity prices have historically been highly volatile. It is foreseeable that costs for these items may increase in the future due to one or more of the following: a sustained economic recovery, political unrest in certain countries or a weakening U.S. dollar. Increases in commodity costs negatively impact the profitability of orders in backlog as prices on those orders are usually fixed. If we are not able to recover commodity cost increases through price increases to our customers on new orders, then such increases will have an adverse effect on our financial condition, profitability and/or cash flows. Additionally, if commodity costs decrease and we are unable to negotiate timely component cost decreases commensurate with any decrease in commodity costs, then our higher component prices could put us at a material disadvantage as compared to our competition which could have a material adverse effect on our net sales, financial condition, profitability and/or cash flows.
A disruption or termination of the supply of parts, materials, components and final assemblies from third-party suppliers could delay sales of our vehicles and vehicle bodies.
We have experienced, and may in the future experience, significant disruption or termination of the supply of some of our parts, materials, components and final assemblies that we obtain from sole source suppliers or subcontractors. We may also incur a significant increase in the cost of these parts, materials, components or final assemblies. These risks are increased in a weak economic environment and when demand increases coming out of an economic downturn. Such disruptions, terminations or cost increases have resulted and could further result in manufacturing inefficiencies due to us having to wait for parts to arrive on the production line, could delay sales and could result in a material adverse effect on our net sales, financial condition, profitability and/or cash flows.
We are subject to fluctuations in exchange rates associated with our non-U.S. operations that could adversely affect our results of operations and may significantly affect the comparability of our results between financial periods.
Approximately 24% of our net sales in fiscal 2016 were attributable to products sold outside of the United States, of which approximately 70% involved export sales from the United States. The majority of export sales are denominated in U.S. dollars. Sales that originate outside the United States are typically transacted in the local currencies of those countries. Fluctuations in foreign currency, as we experienced during fiscal 2015 and 2016, can have an adverse impact on our sales and profits as amounts that are measured in foreign currency are translated back to U.S. dollars. We have sales of inventory denominated in U.S. dollars to certain of our subsidiaries that have functional currencies other than the U.S. dollar. The exchange rates between many of these currencies and the U.S. dollar have fluctuated significantly in recent years and may fluctuate significantly in the future. On June 23, 2016, the United Kingdom held a referendum in which a majority of voters voted for the United Kingdom to exit the European Union (Brexit), the announcement of which resulted in a significant devaluation of the British pound sterling. Such fluctuations, in particular those with respect to the Euro, the Chinese renminbi, the Canadian dollar, the Mexican peso, the Brazilian real, the Australian dollar and the British pound sterling, may have a material effect on our net sales, financial condition, profitability and/or cash flows and may significantly affect the comparability of our results between financial periods. In addition, any appreciation in the value of the U.S. dollar in relation to the value of the local currency of those countries where our products are sold will increase our costs of goods in our foreign operations, to the extent such costs are payable in U.S. dollars, and impact the competitiveness of our product offerings in international markets.
We may experience losses in excess of our recorded reserves for doubtful accounts, finance receivables, notes receivable and guarantees of indebtedness of others.
As of September 30, 2016, we had consolidated gross receivables of $1.07 billion. In addition, we were subject to obligations to guarantee customer indebtedness to third parties of $563.2 million, under which we estimate our maximum exposure to be $116.3 million. We evaluate the collectibility of open accounts, finance receivables, notes receivable and our guarantees of indebtedness of others based on a combination of factors and establish reserves based on our estimates of potential losses. In circumstances where we believe it is probable that a specific customer will have difficulty meeting its financial obligations, a specific reserve is recorded to reduce the net recognized receivable to the amount we expect to collect, and/or we recognize a liability for a guarantee we expect to pay, taking into account any amounts that we would anticipate realizing if we are forced to repossess the equipment that supports the customer's financial obligations to us. We also establish additional reserves based upon our perception of the quality of the current receivables, the current financial position of our customers and past collections experience. Prolonged or more severe economic weakness may result in additional requirements for specific reserves. During periods of economic weakness, the collateral underlying our guarantees of indebtedness of customers or receivables can decline
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sharply, thereby increasing our exposure to losses. We also face a concentration of credit risk as the access equipment segment's ten largest debtors at September 30, 2016 represented approximately 29% of our consolidated gross receivables. Some of these customers are highly leveraged. We may incur losses in excess of our recorded reserves if the financial condition of our customers were to deteriorate or the full amount of any anticipated proceeds from the sale of the collateral supporting our customers' financial obligations is not realized. Our cash flows and overall liquidity may be materially adversely affected if any of the financial institutions that finance our customer receivables become unable or unwilling, due to unfavorable economic conditions, a weakening of our or their financial position or otherwise, to continue providing such credit.
An impairment in the carrying value of goodwill and other indefinite-lived intangible assets could negatively affect our operating results.
We have a substantial amount of goodwill and other indefinite-lived intangible assets on our balance sheet as a result of acquisitions we have completed. At September 30, 2016, approximately 90% of these intangibles were concentrated in the access equipment segment. We evaluate goodwill and indefinite-lived intangible assets for impairment at least annually, or more frequently if potential interim indicators exist that could result in impairment. Events and conditions that could result in impairment include a prolonged period of global economic weakness, a further decline in economic conditions or a slow, weak economic recovery, a sustained decline in the price of our common stock, adverse changes in the regulatory environment, adverse changes in the market share of our products, adverse changes in interest rates, or other factors leading to reductions in the long-term sales or profitability that we expect. Determination of the fair value of a reporting unit includes developing estimates which are highly subjective and incorporate calculations that are sensitive to minor changes in underlying assumptions. Management's assumptions change as more information becomes available. Changes in these events and conditions or other assumptions could result in an impairment charge in the future, which could have a significant adverse impact on our reported earnings.
Financing costs and restrictive covenants in our current debt facilities could limit our flexibility in managing our business and increase our vulnerability to general adverse economic and industry conditions.
Our credit agreement contains financial and restrictive covenants which, among other things, require us to satisfy quarter-end financial ratios, including a leverage ratio, a senior secured leverage ratio and an interest coverage ratio. Our ability to meet the financial ratios in such covenants may be affected by a number of risks or events, including the risks described in this Report on Form 10-K and events beyond our control. The indentures governing our senior notes also contain restrictive covenants. Any failure by us to comply with these restrictive covenants or the financial and restrictive covenants in our credit agreement could have a material adverse effect on our financial condition, results of operations and debt service capability.
Our access to debt financing at competitive risk-based interest rates is partly a function of our credit ratings. Our current long-term credit ratings are BB+ with “stable” outlook from Standard & Poor's Rating Services and Ba2 with “stable” outlook from Moody's Investors Service. A downgrade to our credit ratings could increase our interest rates, could limit our access to public debt markets, could limit the institutions willing to provide us credit facilities, and could make any future credit facilities or credit facility amendments more costly and/or difficult to obtain.
We had $855 million of debt outstanding as of September 30, 2016, which consisted primarily of a $355 million term loan under our credit agreement maturing in March 2019 and $500 million of senior notes, $250 million of which mature in March 2022 and $250 million of which mature in March 2025. Our ability to make required payments of principal and interest on our debt will depend on our future performance, which, to a certain extent, is subject to general economic, financial, competitive, political and other factors, some of which are beyond our control. As we discussed above, our dependency on contracts with U.S. and foreign government agencies subjects us to a variety of risks that, if realized, could materially reduce our revenues, profits and cash flows. Accordingly, conditions could arise that could limit our ability to generate sufficient cash flows or access borrowings to enable us to fund our liquidity needs, further limit our financial flexibility or impair our ability to obtain alternative financing sufficient to repay our debt at maturity.
The covenants in our credit agreement and the indentures governing our senior notes, our credit rating, our current debt levels and the current credit market conditions could have important consequences for our operations, including:
• | Render us more vulnerable to general adverse economic and industry conditions in our highly cyclical markets or economies generally; |
• | Require us to dedicate a portion of our cash flow from operations to interest costs or required payments on debt, thereby reducing the availability of such cash flow to fund working capital, capital expenditures, research and development, share repurchases, dividends and other general corporate activities; |
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• | Limit our ability to obtain additional financing in the future to fund growth working capital, capital expenditures, new product development expenses and other general corporate requirements; |
• | Make us vulnerable to increases in interest rates as our debt under our credit agreement is at variable rates; |
• | Limit our flexibility in planning for, or reacting to, changes in our business and the markets we serve; and |
• | Limit our ability to pursue strategic acquisitions that may become available in our markets or otherwise capitalize on business opportunities if we had additional borrowing capacity. |
Security breaches and other disruptions could compromise our information and expose us to liability, which could cause our business and reputation to suffer.
We use our information systems to collect and store confidential and sensitive data, including information about our business, our customers and our employees. As technology continues to evolve, we anticipate that we will collect and store even more data in the future and that our systems will increasingly use remote communication features that are sensitive to both willful and unintentional security breaches. Much of our value relative to our competitors is derived from our confidential business information, including vehicle designs, proprietary technology and trade secrets, and to the extent the confidentiality of such information is compromised, we may lose our competitive advantage and our vehicle sales may suffer.
We also collect, retain and use personal information, including data we gather from customers for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this personal information, we are subject to a variety of ever-changing laws on a global basis that require us to provide notification to the data owners, and that subject us to lawsuits, fines and other means of regulatory enforcement. Depending on the function involved, a breach in security may lead to customers purchasing vehicles from our competitors, subject us to lawsuits, fines and other means of regulatory enforcement or harm employee morale.
Our objective is to expand international operations and sales, the conduct of which subjects us to risks that may have a material adverse effect on our business.
Expanding international operations and sales is a significant part of our growth strategy. International operations and sales are subject to various risks, including political, religious and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers, the impact of foreign government regulations and the effects of income and withholding taxes, sporadic order patterns, governmental expropriation, uncertainties or delays in collection of accounts receivable and differences in business practices. We may incur increased costs, including increased supply chain costs, and experience delays or disruptions in production schedules, product deliveries or payments in connection with international manufacturing and sales that could cause loss of revenues and earnings. Among other things, there are additional logistical requirements associated with international sales, which increase the amount of time between the completion of vehicle production and our ability to recognize related revenue. In addition, expansion into foreign markets requires the establishment of distribution networks and may require modification of products to meet local requirements or preferences. Establishment of distribution networks or modification to the design of our products to meet local requirements and preferences may take longer or be more costly than we anticipate and could have a material adverse effect on our ability to achieve international sales growth. Some of these international sales require financing to enable potential customers to make purchases. Availability of financing to non-U.S. customers depends in part on the U.S. Export-Import Bank. If U.S. Export-Import Bank authorization financing is not secured for certain transactions, we may not be able to effectively compete for international sales against foreign competitors who are able to benefit from direct or indirect financial support from governments where they have operations. In addition, our entry into certain markets that we wish to enter may require us to establish a joint venture. Identifying an appropriate joint venture partner and creating a joint venture could be more time consuming, more costly and more difficult than we anticipate.
As a result of our international operations and sales, we are subject to the FCPA and other laws that prohibit improper payments or offers of payments to foreign governments and their officials for the purpose of obtaining or retaining business. Our international activities create the risk of unauthorized payments or offers of payments in violation of the FCPA by one of our employees, consultants, sales agents or distributors, because these parties are not always subject to our control. Any violations of the FCPA could result in significant fines, criminal sanctions against us or our employees, and prohibitions on the conduct of our business, including our business with the U.S. government. We are also increasingly subject to export control regulations, including, without limitation, the United States Export Administration Regulations and the International Traffic in Arms Regulations. Unfavorable changes in the political, regulatory or business climate could have a material adverse effect on our net sales, financial condition, profitability and/or cash flows.
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Our results could be adversely affected by severe weather, natural disasters, and other events in the locations in which we or our customers or suppliers operate.
We have manufacturing and other operations in locations prone to severe weather and natural disasters, including earthquakes, hurricanes or tsunamis that could disrupt our operations. Our suppliers and customers also have operations in such locations. Severe weather or a natural disaster that results in a prolonged disruption to our operations, or the operations of our customers or suppliers could delay delivery of parts, materials or components to us or sales to our customers and could have a material adverse effect on our net sales, financial condition, profitability and/or cash flows.
Concrete mixer and access equipment sales also are seasonal with the majority of such sales occurring in the spring and summer months, which constitute the traditional construction season in the Northern hemisphere. The timing of orders for the traditional construction season in the Northern hemisphere can be impacted by weather conditions.
Changes in regulations could adversely affect our business.
Both our products and the operation of our manufacturing facilities are subject to statutory and regulatory requirements. These include environmental requirements applicable to manufacturing and vehicle emissions, government contracting regulations and domestic and international trade regulations. A significant change to these regulatory requirements could substantially increase manufacturing costs or impact the size or timing of demand for our products, all of which could make our business results more variable.
In particular, many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. Congress has previously considered and may in the future implement restrictions on greenhouse gas emissions through a cap-and-trade system under which emitters would be required to buy allowances to offset emissions of greenhouse gas. In addition, several states, including states where we have manufacturing plants, are considering various greenhouse gas registration and reduction programs. Our manufacturing plants use energy, including electricity and natural gas, and certain of our plants emit amounts of greenhouse gas that may be affected by these legislative and regulatory efforts. Greenhouse gas regulation could increase the price of the electricity we purchase, increase costs for our use of natural gas, potentially restrict access to or the use of natural gas, require us to purchase allowances to offset our own emissions or result in an overall increase in our costs of raw materials, any one of which could increase our costs, reduce our competitiveness in a global economy or otherwise negatively affect our business, operations or financial results.
SEC disclosure requirements impose inquiry, diligence and disclosure obligations with respect to “conflict minerals,” defined as tin, tantalum, tungsten and gold, that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by an SEC reporting company. Certain of these minerals are used extensively in components manufactured by our suppliers (or in components incorporated by our suppliers into components supplied to us) for use in our vehicles or other products. Under the rules, an SEC reporting company must conduct a country of origin inquiry that is reasonably designed to determine whether any of the “conflict minerals” that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by the company originated in the Democratic Republic of the Congo or an adjoining country. If any such “conflict minerals” originated in the Democratic Republic of Congo or an adjoining country, the rules require the issuer to exercise due diligence on the source of such “conflict minerals” and their chain of custody with the ultimate objective of determining whether the “conflict minerals” directly or indirectly financed or benefited armed groups in the Democratic Republic of the Congo or an adjoining country. The issuer must then prepare and file with the SEC a report regarding its diligence efforts. Our supply chain is very complex and multifaceted. While we have no intention to use minerals sourced from the Democratic Republic of Congo or adjoining countries that finance or benefit armed groups, we have incurred and expect to incur costs to conduct our country of origin inquiry and, if necessary, to exercise such due diligence. As mandated by DoD regulations, a significant number of our suppliers are small businesses, and those small businesses have limited or no resources to track their sources of minerals. As a result, we expect significant difficulty in determining the country of origin or the source and chain of custody for all “conflict minerals” used in our products and disclosing that our products are “conflict free” (meaning that they do not contain “conflict minerals” that directly or indirectly finance or benefit armed groups in the Democratic Republic of the Congo or an adjoining country). We may face reputational challenges if we are unable to verify the country of origin or the source and chain of custody for all “conflict minerals” used in our products or if we are unable to disclose that our products are “conflict free.” Implementation of these rules may also affect the sourcing and availability of some minerals necessary to the manufacture of our products and may affect the availability and price of “conflict minerals” capable of certification as “conflict free.” Accordingly, we may incur significant costs as a consequence of these rules, which may adversely affect our business,
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financial condition or results of operations. Other laws or regulations impacting our supply chain, such as the UK Modern Slavery Act, may have similar consequences.
Disruptions within our dealer network could adversely affect our business.
Although we sell the majority of our products directly to the end user, we market, sell and service products through a network of independent dealers in the fire & emergency segment and in a limited number of markets for the access equipment and commercial segments. As a result, our business with respect to these products is influenced by our ability to establish and manage new and existing relationships with dealers. While we have relatively low turnover of dealers, from time to time, we or a dealer may choose to terminate the relationship as a result of difficulties that our independent dealers experience in operating their businesses due to economic conditions or other factors, or as a result of an alleged failure by us or an independent dealer to comply with the terms of our dealer agreement. We do not believe our business is dependent on any single dealer, the loss of which would have a sustained material adverse effect upon our business. However, disruption of dealer coverage within a specific state or other geographic market could cause difficulties in marketing, selling or servicing our products and have an adverse effect on our business, operating results or financial condition.
In addition, our ability to terminate our relationship with a dealer is limited due to state dealer laws, which generally provide that a manufacturer may not terminate or refuse to renew a dealer agreement unless it has first provided the dealer with required notices. Under many state laws, dealers may protest termination notices or petition for relief from termination actions. Responding to these protests and petitions may cause us to incur costs and, in some instances, could lead to litigation resulting in lost opportunities with other dealers or lost sales opportunities, which may have an adverse effect on our business, operating results or financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
The Company has no unresolved staff comments regarding its periodic or current reports from the staff of the SEC that were issued 180 days or more preceding September 30, 2016.
ITEM 2. PROPERTIES
The Company believes its equipment and buildings are well maintained and adequate for its present and anticipated needs. As of September 30, 2016, the Company operated in 31 manufacturing facilities consisting of over six million square feet of manufacturing space. The locations of the Company’s manufacturing facilities are provided in the table below:
Segment | Location (# of facilities) | Segment | Location (# of facilities) | |||
Access Equipment | McConnellsburg, Pennsylvania (3) | Fire & Emergency | Appleton, Wisconsin (3) | |||
Orrville, Ohio (1) | Bradenton, Florida (1) | |||||
Shippensburg, Pennsylvania (1) | Kewaunee, Wisconsin (1) | |||||
Greencastle, Pennsylvania (1) | Clearwater, Florida (1) (a) | |||||
Riverside, California (1) (a) | ||||||
Medias, Romania (1) (a) | Commercial | Dodge Center, Minnesota (1) | ||||
Tianjin, China (1) | Garner, Iowa (1) | |||||
Maasmechelen, Belgium (1) (a) | Blair, Nebraska (1) | |||||
Tonneins, France (1) (a) | Riceville, Iowa (1) | |||||
Port Macquarie, Australia (1) | Audubon, Iowa (1) | |||||
Wigston, United Kingdom (1) | London, Canada (1) (a) | |||||
Leicester, United Kingdom (1) (a) | ||||||
Defense | Oshkosh, Wisconsin (4) | Corporate | Leon, Mexico (1) | |||
_________________________
(a) These facilities are leased.
23
The Company’s manufacturing facilities generally operate five days per week on one or two shifts, except for seasonal shutdowns for one- to three-week periods. The Company believes its manufacturing capacity could be significantly increased with limited capital spending by operating an additional shift at each facility.
The Company also performs contract maintenance services out of multiple warehousing and service facilities owned and/or operated by the U.S. government and third parties, including locations in the U.S., Japan and multiple other countries in Europe and the Middle East.
In addition to sales and service activities at the Company’s manufacturing facilities, the Company maintains 25 sales and service centers in the U.S. The Company uses these facilities primarily for sales and service of concrete mixers and refuse collection vehicles. The access equipment segment also leases a number of small distribution, engineering, administration or service facilities throughout the world.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to environmental matters and legal proceedings and claims, including patent, antitrust, product liability, warranty and state dealership regulation compliance proceedings that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, the Company believes that the ultimate resolution of all such matters and claims will not have a material effect on the Company’s financial condition, results of operations or cash flows.
Personal injury actions and other. At September 30, 2016, the estimated net liabilities for product and general liability claims totaled $38.3 million. Although the final results of all such matters and claims cannot be predicted with certainty, the Company believes that the ultimate resolution of all such matters and claims, after taking into account the liabilities accrued with respect to all such matters and claims, will not have a material effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of November 22, 2016 concerning the Company’s executive officers. All of the Company’s executive officers serve terms of one year and until their successors are elected and qualified.
Name | Age | Title | ||
Wilson R. Jones | 55 | President and Chief Executive Officer | ||
Ignacio A. Cortina | 45 | Executive Vice President, General Counsel and Secretary | ||
James W. Johnson | 51 | Executive Vice President and President, Fire & Emergency Segment | ||
Joseph H. Kimmitt | 66 | Executive Vice President, Government Operations and Industry Relations | ||
Frank R. Nerenhausen | 52 | Executive Vice President and President, Access Equipment Segment | ||
Mark M. Radue | 52 | Executive Vice President and Chief Strategy Officer | ||
David M. Sagehorn | 53 | Executive Vice President and Chief Financial Officer | ||
Robert H. Sims | 54 | Executive Vice President and Chief Human Resources Officer | ||
John J. Bryant | 58 | Senior Vice President and President, Defense Segment | ||
Marek W. May | 47 | Senior Vice President, Operations | ||
Robert S. Messina | 46 | Senior Vice President, Engineering and Technology | ||
Colleen R. Moynihan | 56 | Senior Vice President, Quality & Continuous Improvement | ||
Bradley M. Nelson | 47 | Senior Vice President and President, Commercial Segment | ||
_________________________
Wilson R. Jones. Mr. Jones joined the Company in 2005 as Vice President and General Manager of the Company's airport products business. He served as President, Pierce; Executive Vice President and President, Fire & Emergency Segment from 2008 to 2010, Executive Vice President and President, Access Equipment Segment from 2010 to 2012 and most recently President and Chief Operating Officer of the Company from 2012 to 2016. Effective January 1, 2016, Mr. Jones assumed the position of President and Chief Executive Officer. Mr. Jones was elected a director of the Company effective January 1, 2016. Mr. Jones is also a director of Thor Industries, Inc.
Ignacio A. Cortina. Mr. Cortina joined the Company in 2006 with the acquisition of JLG. He has held various roles of increasing responsibility, most recently serving as the Company's Vice President and Deputy General Counsel from 2011 to 2015 and Senior Vice President, General Counsel and Secretary from 2015 to 2016. Prior to joining the Company, he spent seven years in private practice in the Washington, D.C. area. He was appointed to his current position of Executive Vice President, General Counsel and Secretary in November 2016.
James W. Johnson. Mr. Johnson joined the Company in 2007 as Director of Dealer Development for Pierce. He was appointed to Senior Vice President of Sales and Marketing for Pierce in 2009 and was appointed to his current position of Executive Vice President and President, Fire & Emergency Segment in 2010.
Joseph H. Kimmitt. Mr. Kimmitt joined the Company in 2001 as Vice President, Government Operations and was appointed to his current position of Executive Vice President, Government Operations and Industry Relations in 2006.
Frank R. Nerenhausen. Mr. Nerenhausen joined the Company in 1986 and has served in various assignments, including Vice President of Concrete & Refuse Sales & Marketing for McNeilus from 2008 to 2010 and Executive Vice President and President, Commercial Segment from 2010 to 2012. He was appointed to his current position of Executive Vice President and President, Access Equipment Segment in 2012.
Mark M. Radue. Mr. Radue joined the Company in 2005 as Senior Director of Financial Analysis and Controls. He served as Senior Vice President, Business Development from 2011 to 2016 prior to being appointed to his current position of Executive Vice President and Chief Strategy Officer in November 2016.
David M. Sagehorn. Mr. Sagehorn joined the Company in 2000 as Senior Manager - Mergers & Acquisitions and has served in various assignments, including Director - Business Development, Vice President - Defense Finance, Vice President - McNeilus Finance, Vice President - Business Development and Vice President and Treasurer. He was appointed to his current position of Executive Vice President and Chief Financial Officer in 2007.
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Robert H. Sims. Mr. Sims joined the Company in August 2016 as Executive Vice President and Chief Human Resources Officer. He previously served as a Senior Vice President Human Resources Officer at Eaton Corporation, a global power management company, from 2009 to August 2016. Prior to Eaton Corporation, Mr. Sims served in a variety of executive human resources roles with a number of major consumer brand companies.
John J. Bryant. Mr. Bryant joined the Company in 2010 as Vice President and General Manager of Marine Corps Programs - Defense segment. He served as Vice President of Programs - Defense segment from 2013 until his appointment to his current position of Senior Vice President and President, Defense Segment in June 2016. Prior to joining Oshkosh Defense, he served as a Professor of Program Management at the Defense Acquisition University. Mr. Bryant retired from the U.S. Marine Corps with the rank of Colonel in 2008.
Marek W. May. Mr. May joined the Company in 2009 as Director of Operations - Defense Segment and served as Senior Director of Operations - Defense Segment from June 2010 to September 2010 and Vice President of Manufacturing Operations - Defense Segment from September 2010 to 2013. He was appointed to his current position of Senior Vice President, Operations in 2013. He previously served as Business Leader (Plant Manager) for Ingersoll Rand from 2007 to 2009.
Robert S. Messina. Mr. Messina joined the Company in 2009 as Chief Engineer, Advanced Products and served in various assignments, including Vice President Engineering - Defense Segment and most recently as the Vice President Engineering - Access Equipment Segment until he was appointed to his current position of Senior Vice President, Engineering and Technology in 2015.
Colleen R. Moynihan. Ms. Moynihan joined the Company in 2011 as Senior Vice President, Quality & Continuous Improvement. She previously served as Director of Global Quality & Manufacturing Engineering at Caterpillar Inc. from 2007 to 2011.
Bradley M. Nelson. Mr. Nelson joined the Company in 2011 as Global Vice President of Marketing for JLG and was appointed to his current position of Senior Vice President and President, Commercial Segment in 2013. He previously served as Vice President of Global Marketing and Communications from 2007 to 2011 at Eaton Corporation.
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PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The information relating to dividends included in Note 24 of the Notes to Consolidated Financial Statements contained herein under Item 8 and the information relating to dividends per share contained herein under Item 6 are hereby incorporated by reference in answer to this item.
Common Stock Repurchases
On August 31, 2015, the Company's Board of Directors increased the Company's authorization to repurchase shares of the Company's Common Stock by 10,000,000 shares, taking the authorized number of shares of Common Stock available for repurchase to 10,299,198 as of that date. As of September 30, 2016, the Company had repurchased 2,786,624 shares of Common Stock under this authorization. As a result, 7,512,574 shares of Common Stock remained available for repurchase under the repurchase authorization at September 30, 2016. The Company can use this authorization at any time as there is no expiration date associated with the authorization. From time to time, the Company may enter into a Rule 10b5-1 trading plan for the purpose of repurchasing shares under this authorization. The Company did not repurchase any Common Stock under the authorization during the fourth quarter of fiscal 2016.
Dividends and Common Stock Price
On October 31, 2014, the Company's Board of Directors increased the Company's quarterly dividend from $0.15 per share of Common Stock to $0.17 per share. On October 29, 2015, the Company's Board of Directors increased the Company's quarterly dividend from $0.17 per share of Common Stock to $0.19 per share. On November 1, 2016, the Company's Board of Directors increased the Company's quarterly dividend from $0.19 per share of Common Stock to $0.21 per share.
The Company intends to declare and pay dividends on a regular basis. However, the payment of future dividends is at the discretion of the Company’s Board of Directors and will depend upon, among other things, future earnings and cash flows, capital requirements, the Company’s general financial condition, general business conditions and other factors. In addition, the Company's credit agreement limits the amount of dividends and other distributions, including repurchases of shares of Common Stock, the Company may pay on or after March 3, 2010 to (i) 50% of the consolidated net income of the Company and its subsidiaries (or if such consolidated net income is a deficit, minus 100% of such deficit), accrued on a cumulative basis during the period beginning on January 1, 2010 and ending on the last day of the fiscal quarter immediately preceding the date of the applicable proposed dividend or distribution; plus (ii) 100% of the aggregate net proceeds received by the Company subsequent to March 3, 2010 either as a contribution to its common equity capital or from the issuance and sale of its Common Stock. The Company's indentures for its senior notes due 2022 and senior notes due 2025 also contain restrictive covenants that may limit the Company's ability to repurchase shares of its Common Stock or make dividends and other types of distributions to shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for further discussion about the Company’s financial covenants under its credit agreement and indenture.
The Company’s Common Stock is listed on the New York Stock Exchange (NYSE) under the symbol OSK. As of November 15, 2016, there were 1,066 holders of record of the Common Stock. The following table sets forth prices reflecting actual sales of the Common Stock as reported on the NYSE for the periods indicated.
Fiscal 2016 | Fiscal 2015 | ||||||||||||||
Quarter Ended | High | Low | High | Low | |||||||||||
September 30 | $ | 57.75 | $ | 45.19 | $ | 43.34 | $ | 32.56 | |||||||
June 30 | 49.71 | 38.47 | 55.69 | 42.36 | |||||||||||
March 31 | 41.54 | 29.59 | 49.40 | 38.64 | |||||||||||
December 31 | 44.13 | 35.08 | 49.50 | 39.72 | |||||||||||
Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans.
27
The following information in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (Exchange Act) or to the liabilities of Section 18 of the Exchange Act, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent the Company specifically incorporates it by reference into such a filing. The SEC requires the Company to include a line graph presentation comparing cumulative five year Common Stock returns with a broad-based stock index and either a nationally recognized industry index or an index of peer companies selected by the Company. The Company has chosen to use the Standard & Poor’s MidCap 400 market index as the broad-based index and the companies currently in the Standard Industry Classification Code 371 Index (motor vehicles and equipment) (the SIC Code 371 Index) as a more specific comparison.
The comparisons assume that $100 was invested on September 30, 2011 in each of: the Company’s Common Stock, the Standard & Poor’s MidCap 400 market index and the SIC Code 371 Index. The total return assumes reinvestment of dividends and is adjusted for stock splits. The fiscal 2016 return listed in the charts below is based on closing prices per share on September 30, 2016. On that date, the closing price for the Company’s Common Stock was $56.00.
________________________
* $100 invested on September 30, 2011 in stock or index, including reinvestment of dividends.
September 30, | ||||||||||||||||||||
2012 | 2013 | 2014 | 2015 | 2016 | ||||||||||||||||
Oshkosh Corporation | $ | 174.27 | $ | 311.18 | $ | 283.81 | $ | 237.06 | $ | 372.24 | ||||||||||
S&P MidCap 400 market index | 128.54 | 164.12 | 183.51 | 186.07 | 214.59 | |||||||||||||||
SIC Code 371 Index | 119.16 | 182.57 | 184.88 | 182.07 | 205.51 | |||||||||||||||
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ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended September 30, | ||||||||||||||||||||
(In millions, except per share amounts) | 2016 | 2015 | 2014 | 2013 | 2012 | |||||||||||||||
Income Statement Data: | ||||||||||||||||||||
Net sales | $ | 6,279.2 | $ | 6,098.1 | $ | 6,808.2 | $ | 7,665.1 | $ | 8,141.1 | ||||||||||
Gross income | 1,055.8 | 1,039.2 | 1,182.7 | 1,191.8 | 1,006.9 | |||||||||||||||
Asset impairment charges | 26.9 | — | — | 9.0 | — | |||||||||||||||
Depreciation | 73.3 | 64.9 | 65.3 | 65.3 | 65.5 | |||||||||||||||
Amortization of purchased intangibles, deferred financing costs and stock-based compensation (1) | 74.2 | 81.0 | 86.5 | 85.9 | 83.2 | |||||||||||||||
Operating income (2) | 364.0 | 398.6 | 503.3 | 505.7 | 387.7 | |||||||||||||||
Income (loss) attributable to Oshkosh Corporation common shareholders: | ||||||||||||||||||||
From continuing operations | 216.4 | 229.0 | 308.1 | 314.3 | 244.6 | |||||||||||||||
From discontinued operations (3) | — | — | — | 1.7 | (14.4 | ) | ||||||||||||||
Net income | 216.4 | 229.0 | 308.1 | 316.0 | 230.2 | |||||||||||||||
Income (loss) attributable to Oshkosh Corporation common shareholders per share assuming dilution: | ||||||||||||||||||||
From continuing operations | $ | 2.91 | $ | 2.90 | $ | 3.61 | $ | 3.53 | $ | 2.67 | ||||||||||
From discontinued operations (3) | — | — | — | 0.02 | (0.16 | ) | ||||||||||||||
Net income | 2.91 | 2.90 | 3.61 | 3.55 | 2.51 | |||||||||||||||
Dividends per share | $ | 0.76 | $ | 0.68 | $ | 0.60 | $ | — | $ | — | ||||||||||
Balance Sheet Data (4): | ||||||||||||||||||||
Cash and cash equivalents | $ | 321.9 | $ | 42.9 | $ | 313.8 | $ | 733.5 | $ | 540.7 | ||||||||||
Total assets | 4,513.8 | 4,552.7 | 4,503.2 | 4,688.9 | 4,866.0 | |||||||||||||||
Net working capital | 1,049.9 | 919.0 | 1,006.4 | 1,105.1 | 920.1 | |||||||||||||||
Long-term debt (including current maturities) | 846.2 | 927.8 | 882.7 | 945.6 | 942.6 | |||||||||||||||
Shareholders’ equity | 1,976.5 | 1,911.1 | 1,985.0 | 2,107.8 | 1,853.5 | |||||||||||||||
Other Financial Data: | ||||||||||||||||||||
Expenditures for property, plant and equipment | $ | 92.5 | $ | 131.7 | $ | 92.2 | $ | 46.0 | $ | 55.9 | ||||||||||
Backlog | 3,537.9 | 2,607.4 | 1,891.0 | 2,838.0 | 4,046.2 | |||||||||||||||
Book value per share | $ | 26.74 | $ | 25.33 | $ | 24.86 | $ | 24.36 | $ | 20.24 | ||||||||||
_________________________
(1) | Includes amortization of deferred financing costs of $3.0 million in fiscal 2016, $6.4 million in fiscal 2015, $6.2 million in fiscal 2014, $4.9 million in fiscal 2013 and $7.0 million in fiscal 2012. |
(2) | Includes costs incurred by the Company in connection with an unsolicited tender offer for the Company's Common Stock and a threatened proxy contest of $16.3 million in fiscal 2013 and costs incurred by the Company in connection with a proxy contest of $6.6 million in fiscal 2012. |
(3) | In fiscal 2013, the Company discontinued production of ambulances, which the Company sold under the Medtec brand name. In fiscal 2012, the Company completed the sale of its European mobile medical business, Oshkosh Specialty Vehicles (UK), Limited and AK Specialty Vehicles and its wholly-owned subsidiary, and discontinued production of U.S. mobile medical units. |
(4) | Historical balances have been recast to reflect the impact of Accounting Standards Updates 2015-03 and 2015-17, which were adopted by the Company in fiscal 2016, and which did not have a significant effect on the Company's financial position and results of operations. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The Company is a leading designer, manufacturer and marketer of a wide range of specialty vehicles and vehicle bodies, including access equipment, defense trucks and trailers, fire & emergency vehicles, concrete mixers and refuse collection vehicles. The Company is a leading global manufacturer of aerial work platforms under the “JLG” brand name. The Company is among the worldwide leaders in the manufacturing of telehandlers under the “JLG” and “SkyTrak” brand names. Under the “Jerr-Dan” brand name, the Company is a leading domestic manufacturer and marketer of towing and recovery equipment. The Company manufactures defense trucks under the “Oshkosh” brand name and is a leading manufacturer of severe-duty, tactical wheeled vehicles for the DoD. Under the “Pierce” brand name, the Company is among the leading global manufacturers of fire trucks assembled on both custom and commercial chassis. Under the “Frontline” brand name, the Company is a leading domestic manufacturer and marketer of broadcast vehicles. The Company manufactures ARFF and airport snow removal vehicles under the “Oshkosh” brand name. Under the “McNeilus,” “Oshkosh,” “London” and “CON-E-CO” brand names, the Company manufactures rear- and front-discharge concrete mixers and portable and stationary concrete batch plants. Under the “McNeilus” brand name, the Company manufactures a wide range of automated, rear, front, side and top loading refuse collection vehicles. Under the “IMT” brand name, the Company is a leading domestic manufacturer of field service vehicles and truck-mounted cranes.
Major products manufactured and marketed by each of the Company’s business segments are as follows:
Access equipment — aerial work platforms and telehandlers used in a wide variety of construction, agricultural, industrial, institutional and general maintenance applications to position workers and materials at elevated heights, as well as carriers and wreckers. Access equipment customers include equipment rental companies, construction contractors, manufacturing companies, home improvement centers and towing companies in the U.S. and abroad.
Defense — tactical trucks, trailers and supply parts and services sold to the U.S. military and to other militaries around the world.
Fire & emergency — custom and commercial firefighting vehicles and equipment, ARFF vehicles, snow removal vehicles, simulators and other emergency vehicles primarily sold to fire departments, airports and other governmental units, and broadcast vehicles sold to broadcasters and TV stations in the U.S. and abroad.
Commercial — concrete mixers, refuse collection vehicles, portable and stationary concrete batch plants and vehicle components sold to ready-mix companies and commercial and municipal waste haulers in the Americas and other international markets and field service vehicles and truck-mounted cranes sold to mining, construction and other companies in the U.S. and abroad.
All estimates referred to in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refer to the Company’s estimates as of November 22, 2016.
Executive Overview
Consolidated net sales increased $181.1 million, or 3.0%, to $6.28 billion in fiscal 2016 compared to fiscal 2015. The sales increase was driven by strong percentage increases in sales in both the defense and fire & emergency segments, offset in part by lower access equipment segment sales. As the Company had expected, defense segment sales rebounded from a trough year in fiscal 2015, driven by international sales of almost 600 M-ATVs and a full year of FHTV production. The fire & emergency segment continued to experience strong demand for fire trucks as new product launches and the improved municipal spending environment in the U.S. continued to benefit the Company's traditional fire truck business as cities and towns looked to replace aged equipment. Access equipment segment sales were lower than the prior year due primarily to a continued slowdown in North American replacement demand as a result of low purchases of access equipment in the 2009 and 2010 time-period.
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Consolidated operating income decreased 8.7% to $364.0 million, or 5.8% of sales, in fiscal 2016 compared to $398.6 million, or 6.5% of sales, in fiscal 2015. Consolidated operating income in fiscal 2016 was adversely impacted by an asset impairment charge of $26.9 million, or 0.4% of sales. The Company's defense, fire & emergency and commercial segments' operating income and operating income margins all improved in fiscal 2016 as compared to fiscal 2015, reflecting continued improved market outlooks and execution on the Company's goal to improve operational performance. This improved performance was offset by lower access equipment segment operating income driven by lower sales and more competitive pricing as well as higher corporate expenses due to increased costs to support the start-up of a shared manufacturing facility in Mexico and higher incentive compensation expense.
The Company reported earnings per share of $2.91 in fiscal 2016 as compared to $2.90 in fiscal 2015. Fiscal 2016 results were negatively impacted by $0.23 per share related to asset impairment and workforce reduction charges in the access equipment segment. Earnings in fiscal 2015 included $0.12 of net costs related to workforce reductions, debt extinguishment costs related to the refinancing of the Company's senior notes due 2020 and a postretirement benefit curtailment gain. Share repurchases completed during the 24 month period ended September 30, 2016 benefited earnings per share in fiscal 2016 by $0.17 compared to fiscal 2015.
The Company continued to return cash to shareholders in fiscal 2016 as it repurchased approximately 2.5 million shares of its stock as part of its capital allocation strategy. The Company also announced an increase in the quarterly dividend of approximately 11% beginning in November 2016. This was the Company's third straight year of double digit percentage increases in its dividend rate.
Access equipment segment net sales decreased $388.2 million, or 11.4%, to $3.01 billion in fiscal 2016 compared to fiscal 2015. The Company believes that access equipment customers in North America remain cautious and that they are closely watching their fleet utilization rates and local market rental rates, leading them to continue to be selective with their capital expenditures for rental equipment. Additionally, the impact of extremely low levels of access equipment purchases by rental companies during 2009 and 2010 continues to negatively impact replacement-driven demand in North America.
On September 21, 2016, the Company committed to transition its access equipment segment aftermarket parts distribution network to a third party logistics company. Concurrent with this decision, the Company’s access equipment segment committed to cease operations at its Orrville, Ohio parts distribution center by August 1, 2017. This initiative is intended to increase operational efficiency and allow the Company to reallocate resources to invest in future growth. With the Company’s announced intent to outsource its aftermarket parts distribution to a third party, the Company abandoned an information system developed to support aftermarket parts distribution. As a result the Company recognized a pre-tax, non-cash impairment charge associated with accumulated costs of $26.9 million, or $0.22 per share, in the fourth quarter of fiscal 2016. The Company expects that utilizing a third party to manage its parts distribution centers in the access equipment segment will save approximately $6 million per year starting in fiscal 2018.
In the defense segment, the Company began building JLTVs on its production line in Oshkosh during fiscal 2016, shipping the first of these units to the U.S. Army in September 2016 to support government testing activities during the Low Rate Initial Production (LRIP) phase of the JLTV program. The Company expects approximately three years of LRIP, including extensive government testing, will occur prior to the planned attainment of Full Rate Production in fiscal 2019. The Company expects production to ramp up over this three-year period with deliveries under the JLTV contract of nearly 750 vehicles in fiscal 2017, 2,000 vehicles in fiscal 2018 and 3,000 vehicles in fiscal 2019. The Company also continues to be pleased with the level of interest it is receiving for the JLTV from international militaries. The Company believes that international JLTV sales are a few years away, but expects that international JLTV sales represent a significant opportunity for its defense segment.
In the fire & emergency segment, higher demand as a result of the continued recovery of the North American fire truck market contributed to margin improvement. Higher margins were also driven by the implementation of numerous operational improvements over the last several years in its Pierce factories in Wisconsin and Florida, as well as in its front-end order processing.
The commercial segment's domestic refuse collection vehicle market remains attractive and grew again in fiscal 2016, in large part due to fleet replenishment by larger private waste haulers. During fiscal 2016, the Company believes it outperformed its competitors and gained share in the domestic refuse collection vehicle market. The Company expects the domestic refuse collection vehicle market growth rate to moderate in fiscal 2017, following several years of solid growth. The Company continued to experience modest and choppy order flow from customers in the commercial segment's concrete mixer market in fiscal 2016, with customers placing orders for new equipment at a measured pace as they remained cautious due to short-term economic uncertainties.
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The Company believes consolidated net sales will increase approximately 3.5% to 6.7% in fiscal 2017 compared to fiscal 2016, resulting in consolidated sales of between $6.5 billion and $6.7 billion. The defense segment is expected to be the biggest driver of the increase in sales, overcoming an expected decline in access equipment segment sales. Sales in the fire & emergency and commercial segments are also expected to be higher in fiscal 2017 as compared to fiscal 2016. The Company expects consolidated operating income will be in the range of $390 million to $430 million, with earnings per share of approximately $3.00 to $3.40 assuming a full year average share count of approximately 74.5 million shares. The Company expects weakness in the access equipment segment to be overcome by collective stronger performance in the defense, fire & emergency and commercial segments.
Results of Operations
Consolidated Net Sales — Three Years Ended September 30, 2016
The following table presents net sales (see definition of net sales contained in Note 2 of the Notes to Consolidated Financial Statements) by business segment (in millions):
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales: | |||||||||||
Access equipment | $ | 3,012.4 | $ | 3,400.6 | $ | 3,506.5 | |||||
Defense | 1,351.1 | 939.8 | 1,724.5 | ||||||||
Fire & emergency | 953.3 | 815.1 | 756.5 | ||||||||
Commercial | 979.2 | 978.0 | 865.9 | ||||||||
Intersegment eliminations and other | (16.8 | ) | (35.4 | ) | (45.2 | ) | |||||
$ | 6,279.2 | $ | 6,098.1 | $ | 6,808.2 | ||||||
The following table presents net sales by geographic region based on product shipment destination (in millions):
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales: | |||||||||||
United States | $ | 4,756.6 | $ | 4,789.3 | $ | 5,247.7 | |||||
Other North America | 219.5 | 302.8 | 351.2 | ||||||||
Europe, Africa and the Middle East | 905.5 | 564.4 | 672.3 | ||||||||
Rest of the world | 397.6 | 441.6 | 537.0 | ||||||||
$ | 6,279.2 | $ | 6,098.1 | $ | 6,808.2 | ||||||
Fiscal 2016 Compared to Fiscal 2015
Consolidated net sales increased $181.1 million, or 3.0%, to $6.28 billion in fiscal 2016 compared to fiscal 2015. Higher sales in the defense and fire & emergency segments were partially offset by a decline in sales in the access equipment segment. The strengthening U.S. dollar negatively impacted net sales in fiscal 2016 by $25 million, or 40 basis points, compared to fiscal 2015.
Access equipment segment net sales decreased $388.2 million, or 11.4%, to $3.01 billion in fiscal 2016 compared to fiscal 2015. The decline in sales was primarily due to the slowdown in North American replacement demand that began in the third quarter of fiscal 2015 and a challenging pricing environment (down $75 million). A stronger U.S. dollar also negatively impacted sales by $20 million, or 60 basis points, compared to the fiscal 2015.
Defense segment net sales increased $411.3 million, or 43.8%, to $1.35 billion in fiscal 2016 compared to fiscal 2015. The increase in sales was primarily due to international sales of M-ATVs to the Middle East and increased sales to the DoD, as higher FHTV sales were offset in part by lower FMTV sales. The Company experienced a break in production under the FHTV program in the second and third quarters of fiscal 2015.
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Fire & emergency segment net sales increased $138.2 million, or 16.9%, to $953.3 million in fiscal 2016 compared to fiscal 2015. Sales in fiscal 2016 benefited from higher domestic fire truck deliveries and favorable pricing. Improved operational efficiencies have allowed the fire & emergency segment to increase fire apparatus production rates to meet increased demand.
Commercial segment net sales increased $1.2 million, or 0.1%, to $979.2 million in fiscal 2016 compared to fiscal 2015. Higher refuse collection vehicle sales were almost completely offset by lower sales of field service vehicles and truck-mounted cranes.
Fiscal 2015 Compared to Fiscal 2014
Consolidated net sales decreased $710.1 million, or 10.4%, to $6.10 billion in fiscal 2015 compared to fiscal 2014 largely as a result of an expected significant decline in defense segment sales. Foreign currency exchange rates also adversely impacted sales by $103 million compared to the prior year.
Access equipment segment net sales decreased $105.9 million, or 3.0%, to $3.40 billion in fiscal 2015 compared to fiscal 2014, due largely to an unfavorable currency impact of $94 million as a result of the weakening of most major currencies against the U.S. dollar during the year. Access equipment segment sales were also negatively impacted in the second half of the fiscal year as a result of the beginning of a mid-cycle dip in North American demand due to lower oil & gas related demand and lower replacement demand as a result of lower access equipment purchases in 2009 and 2010.
Defense segment net sales decreased $784.7 million, or 45.5%, to $939.8 million in fiscal 2015 compared to fiscal 2014. The decrease in defense segment sales was primarily due to an expected decline in sales to the DoD (down $706 million) and lower international sales of M-ATVs. The Company experienced a break in production under the FHTV program in the second and third quarters of fiscal 2015.
Fire & emergency segment net sales increased $58.6 million, or 7.8%, to $815.1 million in fiscal 2015 compared to fiscal 2014. The increase in sales primarily reflected higher fire truck deliveries (up $46 million) as a result of improved production rates and improved pricing (up $14 million).
Commercial segment net sales increased $112.1 million, or 12.9%, to $978.0 million in fiscal 2015 compared to fiscal 2014. The increase in commercial segment sales was primarily attributable to higher refuse collection vehicle unit volume (up $46 million), higher package sales, consisting of a purchased chassis and manufactured body (up $42 million) and improved aftermarket parts and service sales (up $20 million).
Consolidated Cost of Sales — Three Years Ended September 30, 2016
The following table presents costs of sales by business segment (in millions):
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cost of sales: | |||||||||||
Access equipment | $ | 2,435.4 | $ | 2,697.7 | $ | 2,706.5 | |||||
Defense | 1,147.7 | 862.7 | 1,566.4 | ||||||||
Fire & emergency | 816.0 | 703.9 | 666.3 | ||||||||
Commercial | 817.5 | 820.6 | 727.6 | ||||||||
Intersegment eliminations and other | 6.8 | (26.0 | ) | (41.3 | ) | ||||||
$ | 5,223.4 | $ | 5,058.9 | $ | 5,625.5 | ||||||
Fiscal 2016 Compared to Fiscal 2015
Consolidated cost of sales was $5.22 billion, or 83.2% of sales, in fiscal 2016 compared to $5.06 billion, or 83.0% of sales, in fiscal 2015. The 20 basis point increase in cost of sales as a percentage of sales in fiscal 2016 compared to fiscal 2015 was primarily due to higher access equipment costs as a percentage of sales and start-up costs for a shared manufacturing facility in Mexico, offset in part by improved defense, fire & emergency and commercial segment performance.
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Access equipment segment cost of sales was $2.44 billion, or 80.8% of sales, in fiscal 2016 compared to $2.70 billion, or 79.3% of sales, in fiscal 2015. The 150 basis point increase in cost of sales as a percentage of sales in fiscal 2016 compared to fiscal 2015 was primarily due to a more competitive pricing environment (230 basis points) and adverse manufacturing absorption (80 basis points) associated with lower production, offset in part by lower spending on engine emissions standards changes (100 basis points).
Defense segment cost of sales was $1.15 billion, or 84.9% of sales, in fiscal 2016 compared to $862.7 million, or 91.8% of sales, in fiscal 2015. The 690 basis point decrease in cost of sales as a percentage of sales in fiscal 2016 compared to fiscal 2015 was primarily attributable to favorable product mix (260 basis points), lower Company funded research & development related to the JLTV program (250 basis points) and contractual price increases, offset in part by the absence of a pension and other postretirement curtailment benefit recorded in fiscal 2015 (30 basis points).
Fire & emergency segment cost of sales was $816.0 million, or 85.6% of sales, in fiscal 2016 compared to $703.9 million, or 86.4% of sales, in fiscal 2015. The 80 basis point decline in cost of sales as a percentage of sales in fiscal 2016 compared to fiscal 2015 was largely attributable to favorable pricing (140 basis points), offset in part by adverse product mix (50 basis points).
Commercial segment cost of sales was $817.5 million, or 83.5% of sales, in fiscal 2016 compared to $820.6 million, or 83.9% of sales, in fiscal 2015. The 40 basis point decrease in cost of sales as a percentage of sales in fiscal 2016 compared to fiscal 2015 was largely due to favorable product mix (90 basis points) as a result of lower package sales, offset in part by production inefficiencies associated with the start-up of new products (50 basis points).
Intersegment eliminations and other includes intercompany profit on inter-segment sales not yet sold to third party customers, net of start-up costs of a shared manufacturing facility in Mexico not allocated to segments.
Fiscal 2015 Compared to Fiscal 2014
Consolidated cost of sales was $5.06 billion, or 83.0% of sales, in fiscal 2015 compared to $5.63 billion, or 82.6% of sales, in fiscal 2014. The 40 basis point increase in cost of sales as a percentage of sales in fiscal 2015 was primarily due to adverse absorption of fixed costs due to the lower production rates in the defense segment and a higher concentration of less profitable telehandler sales in the access equipment segment.
Access equipment segment cost of sales was $2.70 billion, or 79.3% of sales, in fiscal 2015 compared to $2.71 billion, or 77.2% of sales, in fiscal 2014. The 210 basis point increase in cost of sales as a percentage of sales in fiscal 2015 was primarily due to a higher concentration of less profitable telehandler sales (160 basis points) and adverse production variances (80 basis points).
Defense segment cost of sales was $862.7 million, or 91.8% of sales, in fiscal 2015 compared to $1.57 billion, or 90.8% of sales, in fiscal 2014. The 100 basis point increase in cost of sales as a percentage of sales was primarily attributable to adverse production absorption (310 basis points) on significantly lower sales, offset in part by the combined impact of pension and other postretirement benefit curtailments in fiscal 2015 and fiscal 2014 (100 basis points) and favorable product mix (60 basis points).
Fire & emergency segment cost of sales was $703.9 million, or 86.4% of sales, in fiscal 2015 compared to $666.3 million, or 88.1% of sales, in fiscal 2014. The 170 basis point decline in cost of sales as a percentage of sales in fiscal 2015 compared to fiscal 2014 was largely attributable to improved product mix (50 basis points), favorable overhead absorption (50 basis points) and improved pricing (50 basis points).
Commercial segment cost of sales of $820.6 million, or 83.9% of sales, in fiscal 2015 was largely unchanged as a percentage of sales compared to $727.6 million, or 84.0% of sales, in fiscal 2014 as adverse sales mix (30 basis points) and higher material costs (30 basis points) were offset by lower warranty expenses (60 basis points).
Intersegment eliminations and other includes intercompany profit on inter-segment sales not yet sold to third party customers as well as start-up costs of a shared manufacturing facility in Mexico not allocated to segments.
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Consolidated Operating Income (Loss) — Three Years Ended September 30, 2016
The following table presents operating income (loss) by business segment (in millions):
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Operating income (loss): | |||||||||||
Access equipment | $ | 263.4 | $ | 407.0 | $ | 501.1 | |||||
Defense | 122.5 | 9.2 | 76.4 | ||||||||
Fire & emergency | 67.0 | 43.8 | 26.6 | ||||||||
Commercial | 67.6 | 64.5 | 53.9 | ||||||||
Corporate | (156.5 | ) | (126.0 | ) | (154.7 | ) | |||||
Intersegment eliminations | — | 0.1 | — | ||||||||
$ | 364.0 | $ | 398.6 | $ | 503.3 | ||||||
Fiscal 2016 Compared to Fiscal 2015
Consolidated operating income decreased 8.7% to $364.0 million, or 5.8% of sales, in fiscal 2016 compared to $398.6 million, or 6.5% of sales, in fiscal 2015. Consolidated operating income in fiscal 2016 was adversely impacted by an asset impairment charge of $26.9 million, or 0.4% of sales.
Access equipment segment operating income decreased 35.3% to $263.4 million, or 8.7% of sales, in fiscal 2016 compared to $407.0 million, or 12.0% of sales, in fiscal 2015. The decrease in operating income was primarily the result of the lower gross income associated with lower sales volume (down $95 million), a challenging pricing environment (down $75 million), an asset impairment charge related to a decision to outsource aftermarket parts distribution ($27 million) and adverse manufacturing absorption (down $12 million) associated with lower production, offset in part by lower spending (down $43 million) on engine emissions standards changes and selling, general and administrative cost reductions ($7 million). Fiscal 2015 results also benefited from a $8 million vendor recovery settlement.
Defense segment operating income increased 1,226.0% to $122.5 million, or 9.1% of sales, in fiscal 2016 compared to $9.2 million, or 1.0% of sales, in fiscal 2015. The increase in operating income was largely due to higher gross income associated with higher sales (up $51 million), favorable product mix (up $33 million), contractual price increases and lower Company funded research & development related to the JLTV program (down $12 million), offset in part by higher selling, general and administrative costs (up $13 million) to ramp up for the JLTV contract.
Fire & emergency segment operating income increased 53.1% to $67.0 million, or 7.0% of sales, in fiscal 2016, compared to $43.8 million, or 5.4% of sales, in fiscal 2015. Higher gross income on increased sales volume was the largest contributor to the increase in operating income.
Commercial segment operating income increased 4.8% to $67.6 million, or 6.9% of sales, in fiscal 2016 compared to $64.5 million, or 6.6% of sales, in fiscal 2015. The increase in operating income was primarily a result of favorable product mix (up $11 million), offset in part by production inefficiencies associated with the start-up of new products.
Corporate operating costs increased $30.5 million to $156.5 million in fiscal 2016 compared to fiscal 2015. The increase in corporate operating costs in fiscal 2016 was primarily due to increased costs to support the start-up of a shared manufacturing facility in Mexico (up $13 million) and higher incentive compensation expense.
Consolidated selling, general and administrative expenses increased 4.3% to $612.4 million, or 9.7% of sales, in fiscal 2016 compared to $587.4 million, or 9.6% of sales, in fiscal 2015. The increase in consolidated selling, general and administrative expenses in fiscal 2016 compared to fiscal 2015 was generally a result of higher incentive compensation, offset in part by reductions in outside services and travel spending.
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Fiscal 2015 Compared to Fiscal 2014
Consolidated operating income decreased 20.8% to $398.6 million, or 6.5% of sales, in fiscal 2015 compared to $503.3 million, or 7.4% of sales, in fiscal 2014. Reductions in corporate expenses and improved performance in the fire & emergency and commercial segments were not sufficient to offset the adverse product mix in the access equipment segment as well as the impact of significantly lower sales volumes in the defense segment.
Access equipment segment operating income decreased 18.8% to $407.0 million, or 12.0% of sales, in fiscal 2015 compared to $501.1 million, or 14.3% of sales, in fiscal 2014. The decrease in operating income was primarily the result of an adverse product mix (down $56 million) and unfavorable production variances (up $25 million).
Defense segment operating income decreased 87.9% to $9.2 million, or 1.0% of sales, in fiscal 2015 compared to $76.4 million, or 4.4% of sales, in fiscal 2014. The decrease in operating income was largely due to lower gross income associated with lower sales (down $111 million), partially offset by lower operating expenses (down $14 million) and lower engineering costs (down $10 million). Operating income in fiscal 2014 was adversely impacted by an $8.9 million reduction to net sales as a result of the reversal of billings to the DoD for other post-employment benefit costs determined to be unallowable under cost-plus government contracts.
Fire & emergency segment operating income increased 64.5% to $43.8 million, or 5.4% of sales, in fiscal 2015, compared to $26.6 million, or 3.5% of sales, in fiscal 2014. The increase in operating income was largely due to higher gross income on increased sales (up $8 million), improved pricing, net of higher input costs (up a combined $7 million) and improved absorption (up $4 million), partially offset by increased operating expenses (up $4 million).
Commercial segment operating income increased 19.7% to $64.5 million, or 6.6% of sales, in fiscal 2015 compared to $53.9 million, or 6.2% of sales, in fiscal 2014. The increase in operating income was primarily a result of gross income associated with higher sales volume (up $28 million) and favorable warranty performance (down $4 million), partially offset by increased operating expenses (up $9 million), including investments in MOVE initiatives.
Corporate operating expenses decreased $28.7 million to $126.0 million in fiscal 2015 compared to fiscal 2014. The decrease in corporate operating expenses in fiscal 2015 was primarily due to lower incentive compensation expense (down $12 million), lower information technology expense (down $9 million) and lower stock-based compensation expense (down $7 million), partially offset by costs to support the start-up of a corporate-led manufacturing facility to support multiple business segments. Stock-based compensation expense declined because the Company granted few equity-based long-term incentive awards in fiscal 2015 because it moved the annual employee stock-based compensation grants from September to November.
Consolidated selling, general and administrative expenses decreased 5.9% to $587.4 million, or 9.6% of sales, in fiscal 2015 compared to $624.1 million, or 9.2% of sales, in fiscal 2014. The decrease in selling, general and administrative expenses was largely the result of lower incentive compensation expense for fiscal 2015 compared to fiscal 2014. The increase in consolidated selling, general and administrative expenses as a percentage of sales was largely due to a shift in the percentage of consolidated sales to segments (non-defense) that have a higher percentage of selling, general and administrative expenses. The Company’s defense segment generally has lower selling, general and administrative costs as a percentage of sales compared to its other segments, in large part due to concentration of business with the DoD. For example, the defense segment has limited sales and marketing expenses and has operations/locations primarily in the United States, as compared to the Company’s access equipment segment, which has a diverse customer base with a significant number of customers, significant sales and marketing costs, and operations/locations in various regions of the world. As the Company’s defense segment sales decreased and the Company’s non-defense segment sales increased as a percentage of consolidated sales, consolidated selling, general and administrative expenses as a percentage of sales increased.
Non-Operating Income (Expense) — Three Years Ended September 30, 2016
Fiscal 2016 Compared to Fiscal 2015
Interest expense net of interest income decreased $9.3 million to $58.3 million in fiscal 2016 compared to fiscal 2015. Fiscal 2015 interest expense included $14.7 million of debt extinguishment costs in connection with the refinancing of portions of the Company’s long-term debt during fiscal 2015. The full year benefit in fiscal 2016 of lower interest rates on the senior notes refinanced in the second quarter of fiscal 2015 was offset by increased borrowings to support increased working capital requirements throughout fiscal 2016.
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Other miscellaneous income of $1.3 million in fiscal 2016 and expense of $4.9 million in fiscal 2015 primarily related to net foreign currency transaction gains and losses.
Fiscal 2015 Compared to Fiscal 2014
Interest expense net of interest income decreased $1.8 million to $67.6 million in fiscal 2015 compared to fiscal 2014 primarily as a result of lower interest rates on the Company's senior notes refinanced in the second quarters of fiscal 2015 and fiscal 2014. Included in interest expense are $14.7 million and $10.9 million of debt extinguishment costs in connection with the refinancing of portions of the Company’s long-term debt during fiscal 2015 and 2014, respectively.
Other miscellaneous expense of $4.9 million in fiscal 2015 and $2.0 million in fiscal 2014 primarily related to net foreign currency transaction losses.
Provision for Income Taxes — Three Years Ended September 30, 2016
Fiscal 2016 Compared to Fiscal 2015
The Company recorded income tax expense of $92.4 million in fiscal 2016, or 30.1% of pre-tax income, compared to $99.2 million, or 30.4% of pre-tax income in fiscal 2015. See Note 18 of the Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate compared to the U.S. statutory tax rate.
Fiscal 2015 Compared to Fiscal 2014
The Company recorded income tax expense of $99.2 million in fiscal 2015, or 30.4% of pre-tax income, compared to $125.0 million, or 29.0% of pre-tax income in fiscal 2014. See Note 18 of the Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate compared to the U.S. statutory tax rate.
Equity in Earnings of Unconsolidated Affiliates — Three Years Ended September 30, 2016
Fiscal 2016 Compared to Fiscal 2015
Equity in earnings of unconsolidated affiliates of $1.8 million in fiscal 2016 and $2.6 million in fiscal 2015 primarily represented the Company's equity interest in a commercial entity in Mexico and a joint venture in Europe.
Fiscal 2015 Compared to Fiscal 2014
Equity in earnings of unconsolidated affiliates of $2.6 million in fiscal 2015 and $2.4 million in fiscal 2014 primarily represented the Company's equity interest in a commercial entity in Mexico and a joint venture in Europe.
Liquidity and Capital Resources
The Company generates significant capital resources from operating activities, which is the expected primary source of funding for its operations. Other resources of liquidity are availability under the Revolving Credit Facility and available cash and cash equivalents. At September 30, 2016, the Company had cash and cash equivalents of $321.9 million. The Company expects to meet its fiscal 2017 U.S. funding needs without repatriating undistributed profits that are indefinitely reinvested outside the United States. In addition to cash and cash equivalents, the Company had $739.2 million of unused available capacity under the Revolving Credit Facility (as defined in “Liquidity”) as of September 30, 2016. Borrowings under the Revolving Credit Facility could, as discussed below, be limited by the financial covenants contained within the Credit Agreement (as defined in “Liquidity”). These sources of liquidity are needed to fund the Company's working capital requirements, debt service requirements, capital expenditures, share repurchases and dividends. At September 30, 2016, the Company had approximately 7.5 million shares of Common Stock remaining under a repurchase authorization approved by the Company's Board of Directors in August 2015.
Due to expected working capital requirements in the defense segment to support international M-ATV sales in fiscal 2017, the Company expects to generate $100 million to $150 million of cash flow from operations in fiscal 2017, significantly less than in fiscal 2016. The Company expects that working capital utilized to support the international M-ATV contract will be
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converted to cash in fiscal 2018. The Company expects fiscal 2017 capital spending to be approximately $100 million. The Company expects to have sufficient liquidity to finance its operations over the next twelve months.
Financial Condition at September 30, 2016
The Company’s cash and cash equivalents and capitalization were as follows (in millions):
September 30, | |||||||
2016 | 2015 | ||||||
Cash and cash equivalents | $ | 321.9 | $ | 42.9 | |||
Total debt | 846.2 | 927.8 | |||||
Total shareholders’ equity | 1,976.5 | 1,911.1 | |||||
Total capitalization (debt plus equity) | 2,822.7 | 2,838.9 | |||||
Debt to total capitalization | 30.0 | % | 32.7 | % | |||
The Company's ratio of debt to total capitalization of 30.0% at September 30, 2016 remained within its targeted range.
Consolidated days sales outstanding (defined as “Trade Receivables” at quarter end divided by “Net Sales” for the most recent quarter multiplied by 90 days) were 49 days at September 30, 2016, down slightly from 50 days at September 30, 2015. Days sales outstanding for segments other than the defense segment were 51 days at September 30, 2016, down from 53 days at September 30, 2015. This decrease in days sales outstanding was primarily due to improved collections at Pierce. Consolidated inventory turns (defined as “Cost of Sales” on an annualized basis, divided by the average “Inventory” at the past five quarter end periods) was 4.1 times at September 30, 2016, down from 4.3 times at September 30, 2015. The decrease in inventory turns was largely due to higher inventory levels in the access equipment segment during fiscal 2016.
Operating Cash Flows
Fiscal 2016 Compared to Fiscal 2015
The Company generated $577.7 million of cash from operating activities during fiscal 2016 compared to $82.5 million during fiscal 2015. The increase in cash generated from operating activities in fiscal 2016 compared to fiscal 2015 was primarily due to a significant reduction in inventory levels in the access equipment segment in fiscal 2016 and a significant build of inventories in the access equipment and defense segments in the prior year. The access equipment segment reduced inventories (down $305.8 million) in fiscal 2016 to better align inventory levels with lower market demand. In fiscal 2015, the access equipment segment experienced an increase in inventory (up $182.8 million) as a result of the combination of a plan to level-load production during the year to address seasonal fluctuations in demand and a subsequent reduction in access equipment third and fourth quarter sales compared to previous estimates as a result of the start of a mid-cycle dip in North American demand for access equipment related to lower oil & gas related demand and lower replacement demand as a result of lower purchases of access equipment by rental companies in 2009 and 2010. In fiscal 2015, defense inventory levels grew (up $134.0 million) to support new contracts, both domestic and international. The magnitude and duration of these contracts has resulted in continued increased working capital requirements in the defense segment during fiscal 2016. Defense segment inventory is expected to remain at current levels as a result of increased demand.
Fiscal 2015 Compared to Fiscal 2014
The Company generated $82.5 million of cash from operating activities during fiscal 2015 compared to $170.4 million during fiscal 2014. The decrease in cash generated from operating activities in fiscal 2015 compared to fiscal 2014 was primarily due to lower operating income and higher inventory levels in the access equipment and defense segments at September 30, 2015, partially offset by increased customer advances on higher order backlog in the fire & emergency segment. Increased inventory in the access equipment segment (up $182.8 million) resulted from the combination of a plan to level-load production during the year to address seasonal fluctuations in demand and a subsequent reduction in access equipment third and fourth quarter sales compared to previous estimates as a result of the start of a mid-cycle dip in North American demand for access equipment related to lower oil & gas related demand and lower replacement demand as a result of lower purchases of access equipment by rental companies in 2009 and 2010. Defense inventory levels grew (up $134.0 million) to support new contracts, both domestic and international. The magnitude and duration of these contracts has resulted in heightened working capital requirements in the defense segment.
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Investing Cash Flows
Fiscal 2016 Compared to Fiscal 2015
Net cash used in investing activities in fiscal 2016 was $89.2 million compared to $140.1 million in fiscal 2015. Additions to property, plant and equipment of $92.5 million in fiscal 2016 reflected a decrease in capital spending of $39.2 million compared to fiscal 2015. In fiscal 2015, the Company increased investments in property, plant and equipment to fund the Company's vertical integration strategy and global information systems replacement initiative.
Fiscal 2015 Compared to Fiscal 2014
Net cash used in investing activities in fiscal 2015 was $140.1 million compared to $114.8 million in fiscal 2014. Additions to property, plant and equipment of $131.7 million in fiscal 2015 reflected an increase in capital spending of $39.5 million compared to fiscal 2014 as a result of investments in the Company's vertical integration strategy and global information systems replacement initiative.
Financing Cash Flows
Fiscal 2016 Compared to Fiscal 2015
Financing activities resulted in a net use of cash of $215.8 million in fiscal 2016 compared to $212.9 million in fiscal 2015. The Company utilized cash flow from operations to repay $63.5 million on its Revolving Credit Facility in fiscal 2016 as compared to borrowing $63.5 million on its Revolving Credit Facility in fiscal 2015 to fund operations. In fiscal 2016 and 2015, the Company repurchased approximately 2.5 million and 4.9 million shares of its Common Stock, respectively, under its share repurchase authorization at an aggregate cost of $100.1 million and $200.4 million, respectively. At September 30, 2016, the Company had approximately 7.5 million shares of Common Stock remaining under a repurchase authorization approved by the Company's Board of Directors in August 2015. The Company targets returning half of its free cash flows (defined as “cash flows from operations” less “additions to property, plant and equipment” less “additions to equipment held for rental” plus “proceeds from sale of equipment held for rental”) to shareholders over the course of the operating cycle. The Company plans to be opportunistic with share repurchases. It may take a number of years to repurchase the remaining 7.5 million shares currently authorized for repurchase or the Company could accelerate the repurchase pace depending on the Company's share price performance. In addition, the Company paid dividends of $55.9 million and $53.1 million in fiscal 2016 and 2015, respectively. The Company subsequently increased its dividend rate by approximately 11% in November 2016.
Fiscal 2015 Compared to Fiscal 2014
Financing activities resulted in a net use of cash of $212.9 million in fiscal 2015 compared to $476.0 million in fiscal 2014. The Company made required quarterly debt payments during fiscal 2015 totaling $20.0 million compared to $37.5 million in fiscal 2014. The Company also prepaid $22.5 million of term debt in fiscal 2014 as part of refinancing the Credit Agreement. In fiscal 2015 and 2014, the Company repurchased approximately 4.9 million and 8.3 million shares of its Common Stock, respectively, under its share repurchase authorization at an aggregate cost of $200.4 million and $403.3 million, respectively. In addition, the Company paid dividends of $53.1 million and $50.7 million in fiscal 2015 and 2014, respectively.
Liquidity
Senior Secured Credit Agreement
In March 2014, the Company entered into an Amended and Restated Credit Agreement with various lenders (the “Credit Agreement”). The Credit Agreement provides for (i) a revolving credit facility (Revolving Credit Facility) that matures in March 2019 with an initial maximum aggregate amount of availability of $600 million and (ii) a $400 million term loan due in quarterly principal installments of $5.0 million with a balloon payment of $310.0 million due at maturity in March 2019. In January 2015, the Company entered into an agreement with lenders under the Credit Agreement that increased the Revolving Credit Facility by $250.0 million to an aggregate maximum amount of $850.0 million. Refer to Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the Credit Agreement.
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The Company’s obligations under the Credit Agreement are guaranteed by certain of its domestic subsidiaries, and the Company will guarantee the obligations of certain of its subsidiaries under the Credit Agreement. Subject to certain exceptions, the Credit Agreement is collateralized by (i) a first-priority perfected lien and security interests in substantially all of the personal property of the Company, each material subsidiary of the Company and each subsidiary guarantor, (ii) mortgages upon certain real property of the Company and certain of its domestic subsidiaries and (iii) a pledge of the equity of each material subsidiary of the Company.
Under the Credit Agreement, the Company must pay (i) an unused commitment fee ranging from 0.225% to 0.35% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement and (ii) a fee ranging from 0.625% to 2.00% per annum of the maximum amount available to be drawn for each letter of credit issued and outstanding under the Credit Agreement.
Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied, or (ii) for dollar-denominated loans only, the base rate (which is the highest of (a) the administrative agent's prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied.
Covenant Compliance
The Credit Agreement contains various restrictions and covenants, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions, subject to certain exceptions, on the ability of the Company and certain of its subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions and make investments in joint ventures and foreign subsidiaries.
The Credit Agreement contains the following financial covenants:
• | Leverage Ratio: A maximum leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (EBITDA)) as of the last day of any fiscal quarter of 4.50 to 1.0. |
• | Interest Coverage Ratio: A minimum interest coverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated EBITDA to the Company’s consolidated cash interest expense) as of the last day of any fiscal quarter of 2.50 to 1.0. |
• | Senior Secured Leverage Ratio: A maximum senior secured leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated secured indebtedness to the Company’s consolidated EBITDA) of 3.00 to 1.0. |
With certain exceptions, the Company may elect to have the collateral pledged in connection with the Credit Agreement released during any period that the Company maintains an investment grade corporate family rating from either Standard & Poor’s Ratings Group or Moody’s Investor Service Inc. During any such period when the collateral has been released, the Company’s leverage ratio as of the last day of any fiscal quarter must not be greater than 3.75 to 1.0, and the Company would not be subject to any additional requirement to limit its senior secured leverage ratio.
The Company was in compliance with the financial covenants contained in the Credit Agreement as of September 30, 2016 and expects to be able to meet the financial covenants contained in the Credit Agreement over the next twelve months.
Additionally, with certain exceptions, the Credit Agreement limits the ability of the Company to pay dividends and other distributions, including repurchases of shares of its Common Stock. However, so long as no event of default exists under the Credit Agreement or would result from such payment, the Company may pay dividends and other distributions after March 3, 2010 in an aggregate amount not exceeding the sum of:
i. | 50% of the consolidated net income of the Company and its subsidiaries (or if such consolidated net income is a deficit, minus 100% of such deficit), accrued on a cumulative basis during the period beginning on January 1, 2010 and ending on the last day of the fiscal quarter immediately preceding the date of the applicable proposed dividend or distribution; and |
ii. | 100% of the aggregate net proceeds received by the Company subsequent to March 3, 2010 either as a contribution to its common equity capital or from the issuance and sale of its Common Stock. |
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Senior Notes
On February 2014, the Company issued $250.0 million of 5.375% unsecured senior notes due March 1, 2022 (the “2022 Senior Notes”). In March 2015, the Company issued $250.0 million of 5.375% unsecured senior notes due March 1, 2025 (the “2025 Senior Notes”). The proceeds of both note issuances were used to repay existing outstanding notes of the Company. The Company has the option to redeem the 2022 Senior Notes and the 2025 Senior Notes for a premium after March 1, 2017 and March 1, 2020, respectively.
The 2022 Senior Notes and the 2025 Senior Notes were issued pursuant to separate indentures (the “Indentures”) among the Company, the subsidiary guarantors named therein and a trustee. The Indentures contain customary affirmative and negative covenants. Certain of the Company’s subsidiaries jointly, severally, fully and unconditionally guarantee the Company’s obligations under the 2022 Senior Notes and 2025 Senior Notes. See Note 23 of the Notes to Consolidated Financial Statements for separate financial information of the subsidiary guarantors.
Refer to Note 9 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s outstanding debt as of September 30, 2016.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Following is a summary of the Company’s contractual obligations and payments due by period following September 30, 2016 (in millions):
Payments Due by Period | |||||||||||||||||||
Less Than | More Than | ||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Long-term debt (including interest)(1) | $ | 1,056.7 | $ | 54.0 | $ | 398.5 | $ | 53.8 | $ | 550.4 | |||||||||
Operating leases | 78.9 | 26.6 | 32.2 | 15.8 | 4.3 | ||||||||||||||
Purchase obligations(2) | 786.3 | 785.8 | 0.5 | — | — | ||||||||||||||
Other long-term liabilities: | |||||||||||||||||||
Uncertain tax positions(3) | — | — | — | — | — | ||||||||||||||
Other(4) | 599.8 | 30.5 | 74.5 | 50.8 | 444.0 | ||||||||||||||
$ | 2,521.7 | $ | 896.9 | $ | 505.7 | $ | 120.4 | $ | 998.7 | ||||||||||
_________________________
(1) | Interest was calculated based upon the interest rate in effect on September 30, 2016. |
(2) | The Company utilizes blanket purchase orders to communicate expected annual requirements to many of its suppliers or contractors. Requirements under blanket purchase orders generally do not become “firm” until four weeks prior to the Company’s scheduled unit production. The purchase obligations amounts included above represent the values of commitments considered firm, plus the value of all outstanding subcontracts. |
(3) | Due to the uncertainty of the timing of settlement with taxing authorities, the Company is unable to make reasonably reliable estimates of the period of cash settlement of unrecognized tax benefits for the remaining uncertain tax liabilities. Therefore, $37.4 million of unrecognized tax benefits as of September 30, 2016 have been excluded from the Contractual Obligations table above. See Note 18 of the Notes to Consolidated Financial Statements for additional information regarding the Company’s unrecognized tax benefits as of September 30, 2016. |
(4) | Represents other long-term liabilities on the Company's Consolidated Balance Sheet, including the current portion of these liabilities. The projected timing of cash flows associated with these obligations is based on management's estimates, which are based largely on historical experience. This amount also includes all liabilities under the Company's pension and other postretirement benefit plans. See Note 17 of the Notes to Consolidated Financial Statements for information regarding these liabilities and the plan assets available to satisfy them. |
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The following is a summary of the Company’s commitments by period following September 30, 2016 (in millions):
Amount of Commitment Expiration Per Period | |||||||||||||||||||
Less Than | More Than | ||||||||||||||||||
Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||
Customer financing guarantees to third parties | $ | 116.3 | $ | 26.0 | $ | 37.4 | $ | 30.8 | $ | 22.1 | |||||||||
Standby letters of credit | 110.8 | 63.4 | 47.2 | 0.2 | — | ||||||||||||||
$ | 227.1 | $ | 89.4 | $ | 84.6 | $ | 31.0 | $ | 22.1 | ||||||||||
The Company incurs contingent limited recourse liabilities with respect to customer financing activities primarily in the access equipment segment. For additional information relative to guarantees, see Note 11 of the Notes to Consolidated Financial Statements.
Fiscal 2017 Outlook
The Company believes consolidated net sales will increase 3.5% to 6.7% in fiscal 2017 compared to fiscal 2016, resulting in consolidated sales of between $6.5 billion and $6.7 billion. The defense segment is expected to be the largest driver of the increase in sales, overcoming an expected decline in access equipment segment sales. Sales in the fire & emergency and commercial segments are also expected to be higher in fiscal 2017 as compared to fiscal 2016. The Company expects consolidated operating income will be in the range of $390 million to $430 million, with earnings per share of approximately $3.00 to $3.40 assuming a full year average share count of approximately 74.5 million shares. The Company expects weakness in the access equipment segment to be overcome by stronger collective performance in the defense, fire & emergency and commercial segments.
The Company believes access equipment segment sales will be between $2.7 billion and $2.8 billion in fiscal 2017, representing a decrease of 7% to 10% compared to fiscal 2016. The Company expects the sales decrease will be driven by continued lower replacement demand in North America. The Company expects operating income margins in the access equipment segment will be in the range of 7.75% to 8.5%, reflecting the continued challenging pricing environment, foreign exchange headwinds and higher overall material costs, partially offset by modestly higher absorption and the impact of cost reduction initiatives.
The Company expects that defense segment sales will be approximately $1.85 billion in fiscal 2017, an increase of approximately 37% from fiscal 2016 sales. The increase in defense segment sales is expected to be driven by higher international M-ATV deliveries. The Company expects the defense segment to sell approximately 1,000 international M-ATVs in fiscal 2017. The ramp up of JLTV deliveries in fiscal 2017 is also expected to contribute to the higher year-over-year sales. The Company expects the defense segment will sell approximately 750 JLTVs in fiscal 2017. The Company believes operating income margins in this segment will increase slightly to approximately 9.5%, driven by a higher mix of M-ATVs versus fiscal 2016, partially offset by bid and proposal and vehicle testing costs for the FMTV contract re-competition and higher international marketing costs for JLTVs.
The Company expects fire & emergency segment sales will be approximately $1.0 billion in fiscal 2017, reflecting the continued recovery in the municipal fire apparatus market and the full year benefit from higher production rates implemented in fiscal 2016. The Company expects operating income margins in this segment to increase to approximately 8.5% in fiscal 2017 driven by further operational efficiency gains and improved absorption on modestly higher sales.
The Company believes commercial segment sales will be approximately $1.0 billion in fiscal 2017, a 2% improvement over fiscal 2016. The Company expects the cautious approach to concrete mixer purchases shown by concrete producers in fiscal 2016 to continue into fiscal 2017. The Company also expects refuse collection vehicle market growth to moderate after several years of solid growth. The Company expects operating income margins in this segment to be approximately 6.75% in fiscal 2017.
The Company expects corporate expenses in fiscal 2017 will be between $140 million and $145 million. The Company estimates its effective tax rate for fiscal 2017 will be up approximately 300 basis points to 33%. The Company does not expect fiscal 2016 benefits of a change in filing position (90 basis points) and discrete tax optimization benefits (110 basis points) to benefit the fiscal 2017 effective tax rate.
The Company expects the first quarter of fiscal 2017 to be the weakest quarter of fiscal 2017 due to seasonal factors. The Company also expects earnings per share in the first quarter of fiscal 2017 to be lower than the prior-year quarter as the first quarter
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of fiscal 2016 included the sale of more than 200 M-ATVs in the defense segment. The Company does not expect to sell any M-ATVs in the first quarter of fiscal 2017.
Critical Accounting Policies
The Company’s significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements. The Company considers the following policy to be the most critical in understanding the judgments that are involved in the preparation of the Company’s consolidated financial statements and the uncertainties that could impact the Company’s financial condition, results of operations and cash flows.
Revenue Recognition. The Company recognizes revenue on equipment and parts sales when contract terms are met, collectability is reasonably assured and a product is shipped or risk of ownership has been transferred to and accepted by the customer. Revenue from service agreements is recognized as earned, when services have been rendered. Appropriate provisions are made for discounts, returns and sales allowances. Sales are recorded net of amounts invoiced for taxes imposed on the customer such as excise or value-added taxes.
Sales to the U.S. government of non-commercial products manufactured to the government’s specifications are recognized under percentage-of-completion accounting using either the units-of-delivery method or cost-to-cost method to measure contract performance. Under the units-of-delivery method, the Company records sales as units are accepted by the DoD generally based on unit sales values stated in the respective contracts. Costs of sales are based on actual costs incurred to produce the units delivered under the contract. Under the cost-to-cost method, sales, including estimated margins, are recognized as contract costs are incurred. The measurement method selected is generally determined based on the nature of the contract. The Company includes amounts representing contract change orders, claims or other items in sales only when they can be reliably estimated and realization is probable. The Company has significant experience in contracting and producing vehicles for the defense industry, which has resulted in a history of making reasonable estimates of revenues and costs when measuring progress toward contract completion. The Company charges anticipated losses on contracts or programs in progress to earnings when identified. Approximately 19% of the Company’s revenues for fiscal 2016 were recognized under the percentage-of-completion accounting method.
Critical Accounting Estimates
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on the Company's Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP). The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and judgments that affect reported amounts and related disclosures. On an ongoing basis, management evaluates and updates its estimates. Management employs judgment in making its estimates but they are based on historical experience and currently available information and various other assumptions that the Company believes to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Actual results could differ from those estimates. Management believes that its judgment is applied consistently and produces financial information that fairly depicts the results of operations for all periods presented.
Percentage-of-Completion Accounting. The percentage-of-completion accounting method is used to account for long-term contracts that involve the design, development, manufacture, or modification of complex equipment to a buyers specification. Contracts accounted for under this method generally are long-term in nature and may involve related services. Revenue is recognized on these types of contracts based on the extent of progress toward completion of the overall contract. The determination of the method to measure progress toward completion of a contract requires judgment, which is generally dependent on the nature of the Company's obligations under the contract. Under the units-of-delivery measure of progress, the extent of progress on a contract is measured as units are accepted by the DoD generally based on unit sales values stated in the respective contracts. Costs of sales are based on actual costs incurred to produce the units delivered under the contract. Under the cost-to-cost measure of progress, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at the completion of the contract. Revenues, including margins, are recorded as costs are incurred. The revenue and cost estimates used under the cost-to-cost measurement method are complex and involve significant judgment. The Company has implemented a rigorous Estimate at Completion (EAC) process that requires management to perform a detailed evaluation of contract progress and performance on at least a quarterly basis. During this process all key inputs and variables that may impact contract performance are analyzed and the EAC is updated for any changes. Adjustments to revenue, costs and operating income resulting from this process are recorded in the period they become known.
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Allowance for Doubtful Accounts. The allowance for doubtful accounts requires management to estimate a customer’s ability to satisfy its obligations. The estimate of the allowance for doubtful accounts is particularly critical in the Company’s access equipment segment. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific reserve is recorded against amounts due to reduce the net recognized receivable to the amount reasonably expected to be collected. Additional reserves are established based upon the Company’s perception of the quality of the current receivables, including the length of time the receivables are past due, past experience of collectability and underlying economic conditions. At September 30, 2016, reserves for potentially uncollectible receivables totaled $21.2 million. If the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional reserves would be required.
Inventories. Inventories are stated at the lower of cost or market (LCM) value. In valuing inventory, the Company is required to make assumptions regarding the level of reserves required to value potentially obsolete or over-valued items. These assumptions require the Company to analyze the aging of and forecasted demand for its inventory, forecast future product sales prices, pricing trends and margins, and to make judgments and estimates regarding obsolete or excess inventory. Future product sales prices, pricing trends and margins are based on the best available information at that time including actual orders received, negotiations with customers for future orders, including their plans for expenditures, and market trends for similar products. The Company's judgments and estimates for excess or obsolete inventory are based on analysis of actual and forecasted usage. The valuation of used equipment taken in trade from customers requires the Company to use the best information available to determine the value of the equipment to potential customers. This value is subject to change based on numerous conditions. Inventory reserves are established taking into account age, frequency of use, or sale, and in the case of repair parts, the installed base of machines. While calculations are made involving these factors, significant management judgment regarding expectations for future events is involved. Future events that could significantly influence the Company's judgment and related estimates include general economic conditions in markets where the Company's products are sold, new equipment price fluctuations, actions of the Company's competitors, including the introduction of new products and technological advances. The Company makes adjustments to its inventory reserves based on the identification of specific situations and increases its inventory reserves accordingly. At September 30, 2016, inventory had been reduced by $80.1 million as a result of LCM valuation and reserves for excess and obsolescence.
Impairment of Goodwill and Indefinite-Lived Intangible Assets. Goodwill and indefinite-lived intangible assets are tested for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Such circumstances include a significant adverse change in the business climate for one of the Company's reporting units, a material negative change in relationships with significant customers, or strategic decisions made in response to economic and competitive conditions. The Company performs its annual review at the beginning of the fourth quarter of each fiscal year.
The Company evaluates the recoverability of goodwill by estimating the fair value of the businesses to which the goodwill relates. A reporting unit is an operating segment or, under certain circumstances, a component of an operating segment that constitutes a business. When the fair value of the reporting unit is less than the carrying value of the reporting unit, a further analysis is performed to measure and recognize the amount of the impairment loss, if any. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of a reporting unit’s goodwill over the implied fair value of that goodwill.
The Company evaluates the recoverability of indefinite-lived trade names based upon a “relief from royalty” method. This methodology determines the fair value of each trade name through use of a discounted cash flow model that incorporates an estimated “royalty rate” the Company would be able to charge a third party for the use of the particular trade name. In determining the estimated future cash flows, the Company considers projected future sales, a fair market royalty rate for each applicable trade name and an appropriate discount rate to measure the present value of the anticipated cash flows.
In evaluating the recoverability of goodwill, it is necessary to estimate the fair value of the reporting units. The estimate of the fair value of the reporting units is generally determined on the basis of discounted future cash flows and a market approach. In estimating the fair value, management must make assumptions and projections regarding such items as the Company performance and profitability under existing contracts, its success in securing future business, the appropriate risk-adjusted interest rate used to discount the projected cash flows, and terminal value growth and earnings rates. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions.
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The rate used to discount estimated cash flows is a rate corresponding to the Company’s cost of capital, adjusted for risk where appropriate, and is dependent upon interest rates at a point in time. To assess the reasonableness of the discounted projected cash flows, the Company compares the sum of its reporting units' fair value to the Company's market capitalization and calculates an implied control premium (the excess of the sum of the reporting units' fair values over the market capitalization). The reasonableness of this control premium is evaluated by comparing it to control premiums for recent comparable market transactions. Consistent with prior years, the Company weighted the income approach more heavily (75%) as the income approach uses long-term estimates that consider the expected operating profit of each reporting unit during periods where residential and non-residential construction and other macroeconomic indicators are nearer historical averages. The Company believes the income approach more accurately considers the expected recovery in the U.S. and European construction markets than the market approach. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of goodwill impairment. It is possible that assumptions underlying the impairment analysis will change in such a manner to cause further impairment of goodwill, which could have a material impact on the Company’s results of operations. The Company completed the required goodwill impairment test as of July 1, 2016. The Company identified no indicators of goodwill impairment in the test performed as of July 1, 2016. In order to evaluate the sensitivity of any quantitative fair value calculations on the goodwill impairment test, a hypothetical 10% decrease to the fair values of any reporting unit was calculated. This hypothetical 10% decrease would still result in excess fair value over carrying value for the reporting units as of July 1, 2016.
At July 1, 2016, approximately 90% of the Company’s recorded goodwill and indefinite-lived purchased intangibles were concentrated within the JLG reporting unit in the access equipment segment. Assumptions utilized in the impairment analysis are highly judgmental. While the Company currently believes that an impairment of intangible assets at JLG is unlikely, events and conditions that could result in the impairment of intangibles at JLG include a sharp decline in economic conditions, significantly increased pricing pressure on JLG's margins or other factors leading to reductions in expected long-term sales or profitability at JLG.
Guarantees of the Indebtedness of Others. The Company enters into agreements with finance companies whereby the Company will guarantee the indebtedness of third-party end-users to whom the finance company lends to purchase the Company’s equipment. In some instances, the Company retains an obligation to the finance companies in the event the customer defaults on the financing. In accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 460, Guarantees, the Company recognizes the greater of the fair value of the guarantee or the contingent liability required by FASB ASC Topic 450, Contingencies. The Company is party to multiple agreements whereby at September 30, 2016 it guaranteed an aggregate of $563.2 million in indebtedness of customers. The Company estimated that its maximum loss exposure under these contracts at September 30, 2016 was $116.3 million.
Reserves are initially established related to these guarantees at the fair value of the guarantee based upon the Company’s understanding of the current financial position of the underlying customers and based on estimates and judgments made from information available at that time in accordance with FASB ASC Topic 460, Guarantees. If the Company becomes aware of deterioration in the financial condition of the customer/borrower or of any impairment of the customer/borrower’s ability to make payments, additional allowances are considered as required by FASB ASC Topic 450, Contingencies. Although the Company may be liable for the entire amount of a customer/borrower’s financial obligation under guarantees, its losses would generally be mitigated by the value of any underlying collateral including financed equipment, the finance company’s inability to provide clear title of foreclosed equipment to the Company, loss pools established in accordance with the agreements and other conditions. During periods of economic downturn, the value of the underlying collateral supporting these guarantees can decline sharply to further increase losses in the event of a customer/borrower’s default. Reserves for guarantees of the indebtedness of others under these contracts was $8.4 million at September 30, 2016. If the financial condition of the Company’s customers were to deteriorate resulting in an impairment of their ability to make payments, additional reserves would be required.
Product Liability. Due to the nature of the Company’s products, the Company is subject to product liability claims in the normal course of business. A substantial portion of these claims and lawsuits involve the Company’s access equipment, concrete placement and refuse collection vehicle businesses, while such lawsuits in the Company’s defense and fire & emergency businesses have historically been limited. To the extent permitted under applicable law, the Company maintains insurance to reduce or eliminate risk to the Company. Most insurance coverage includes self-insured retentions that vary by business segment and by year. As of September 30, 2016, the Company was generally self-insured for future claims up to $5.0 million per claim.
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The Company establishes product liability reserves for its self-insured retention portion of any known outstanding matters based on the likelihood of loss and the Company’s ability to reasonably estimate such loss. There is inherent uncertainty as to the eventual resolution of unsettled matters due to the unpredictable nature of litigation. The Company makes estimates based on available information and the Company’s best judgment after consultation with appropriate experts. The Company periodically revises estimates based upon changes to facts or circumstances. The Company also utilizes actuarial methodologies to calculate reserves required for estimated incurred but not reported claims as well as to estimate the effect of the adverse development of claims over time. At September 30, 2016, the estimated net liabilities for product and general liability claims totaled $38.3 million.
New Accounting Standards
Refer to Note 2 of the Notes to Consolidated Financial Statements for a discussion of the impact of new accounting standards on the Company’s consolidated financial statements.
Customers and Backlog
Sales to the U.S. government comprised approximately 19% of the Company’s net sales in fiscal 2016. No other single customer accounted for more than 10% of the Company’s net sales for this period. A substantial majority of the Company’s net sales are derived from the fulfillment of customer orders that are received prior to commencing production.
The Company’s backlog as of September 30, 2016 increased 35.7% to $3.54 billion compared to $2.61 billion at September 30, 2015 due largely to an increase in the defense segment backlog as a result of new contracts in fiscal 2016. Access equipment segment backlog decreased 14.5% to $179.3 million at September 30, 2016 compared to $209.7 million at September 30, 2015 primarily due to the slowdown in North American replacement demand. Defense segment backlog increased 65.0% to $2.33 billion at September 30, 2016 compared to $1.41 billion at September 30, 2015 primarily due to the receipt of a large international contract for the delivery of M-ATVs, higher order levels on the FHTV and FMTV programs and increased funding for the JLTV program. Defense segment backlog at September 30, 2016 includes orders under the recently extended FMTV contract. A third party protest of the FMTV contract extension was subsequently withdrawn. Fire & emergency segment backlog increased 7.9% to $852.9 million at September 30, 2016 compared to $790.7 million at September 30, 2015 due largely to increased orders for domestic fire trucks as a result of continued market recovery and share gains. Commercial segment backlog decreased 10.2% to $173.3 million at September 30, 2016 compared to $193.0 million at September 30, 2015. Unit backlog for concrete mixers and refuse collection vehicles as of September 30, 2016 was down 18.8% and 29.7%, respectively, compared to September 30, 2015 due to continued softness in the concrete mixer market and the timing of fleet replacement demand for refuse collection vehicles.
Reported backlog excludes purchase options and announced orders for which definitive contracts have not been executed. Backlog information and comparisons thereof as of different dates may not be accurate indicators of future sales or the ratio of the Company’s future sales to the DoD versus its sales to other customers. Approximately 18% of the Company’s September 30, 2016 backlog is not expected to be filled in fiscal 2017.
Financial Market Risk
The Company is exposed to market risk from changes in interest rates, certain commodity prices and foreign currency exchange rates. To reduce the risk from changes in foreign currency exchange and interest rates, the Company selectively uses financial instruments. All hedging transactions are authorized and executed pursuant to clearly defined policies and procedures, which strictly prohibit the use of financial instruments for speculative purposes.
Interest Rate Risk. The Company’s earnings exposure related to adverse movements in interest rates is primarily derived from outstanding floating rate debt instruments that are indexed to short-term market interest rates. In this regard, changes in U.S. and off-shore interest rates affect interest payable on the Company’s borrowings under its Credit Agreement. Based on debt outstanding at September 30, 2016, a 100 basis point increase or decrease in the average cost of the Company’s variable rate debt would increase or decrease annual pre-tax interest expense by approximately $3.5 million.
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The table below provides information about the Company’s debt obligations, which are sensitive to changes in interest rates (dollars in millions):
Expected Maturity Date | |||||||||||||||||||||||||||||||
2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | Total | Fair Value | ||||||||||||||||||||||||
Liabilities | |||||||||||||||||||||||||||||||
Long-term debt: | |||||||||||||||||||||||||||||||
Variable rate ($US) | $ | 20.0 | $ | 20.0 | $ | 315.0 | $ | — | $ | — | $ | — | $ | 355.0 | $ | 355.0 | |||||||||||||||
Average interest rate | 2.4248 | % | 2.5648 | % | 2.6345 | % | — | % | — | % | — | % | 2.6187 | % | |||||||||||||||||
Fixed rate ($US) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 500.0 | $ | 500.0 | $ | 525.0 | |||||||||||||||
Average interest rate | 5.3750 | % | 5.3750 | % | 5.3750 | % | 5.3750 | % | 5.3750 | % | 5.3750 | % | 5.3750 | % | |||||||||||||||||
The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based on implied forward rates in the yield curve at the reporting date.
Commodity Price Risk. The Company is a purchaser of certain commodities, including steel, aluminum and composites. In addition, the Company is a purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others which are integrated into the Company’s end products. The Company generally buys these commodities and components based upon market prices that are established with the vendor as part of the purchase process. The Company does not use commodity financial instruments to hedge commodity prices.
The Company generally obtains firm quotations from its suppliers for a significant portion of its orders under firm, fixed-price contracts in its defense segment. In the Company’s access equipment, fire & emergency and commercial segments, the Company generally attempts to obtain firm pricing from most of its suppliers, consistent with backlog requirements and/or forecasted annual sales. To the extent that commodity prices increase and the Company does not have firm pricing from its suppliers, or its suppliers are not able to honor such prices, then the Company may experience margin declines to the extent it is not able to increase selling prices of its products.
Foreign Currency Risk. The Company’s operations consist of manufacturing in the U.S., Belgium, Mexico, Canada, France, Australia, Romania, the United Kingdom and China and sales and limited vehicle body mounting activities on five continents. International sales comprised approximately 24% of overall net sales in fiscal 2016, of which approximately 70% involved exports from the U.S. The majority of export sales in fiscal 2016 were denominated in U.S. dollars. As a result of the manufacture and sale of the Company’s products in foreign markets, the Company’s earnings are affected by fluctuations in the value of foreign currencies in which certain of the Company’s transactions are denominated as compared to the value of the U.S. dollar. The Company’s operating results are principally exposed to changes in exchange rates between the U.S. dollar and the European currencies, primarily the Euro and the U.K. pound sterling, changes between the U.S. dollar and the Australian dollar, changes between the U.S. dollar and the Brazilian real, changes between the U.S. dollar and the Mexican peso and changes between the U.S. dollar and the Chinese renminbi.
The Company enters into certain forward foreign currency exchange contracts to mitigate the Company’s foreign currency exchange risk on monetary assets or liabilities. These contracts qualify as derivative instruments under FASB ASC Topic 815, Derivatives and Hedging; however, the Company has not designated all of these instruments as hedge transactions under ASC Topic 815. Accordingly, the mark-to-market impact of these derivatives is recorded each period to current earnings along with the offsetting foreign currency transaction gain/loss recognized on the related balance sheet exposure. At September 30, 2016, the Company was managing $111.6 million (notional) of foreign currency contracts, including $110.5 million (notional) which were not designated as accounting hedges. All outstanding foreign currency contracts as of September 30, 2016 will settle within 365 days.
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The following table quantifies outstanding forward foreign exchange contracts intended to hedge non-U.S. dollar denominated cash, receivables and payables and the corresponding U.S. dollar impact on the value of these instruments assuming a 10% appreciation/depreciation of the sell currency at September 30, 2016 (dollars in millions):
Foreign Exchange Gain/(Loss) From: | ||||||||||||||||||
Notional Amount | Average Contractual Exchange Rate | Fair Value | 10% Appreciation of Sell Currency | 10% Depreciation of Sell Currency | ||||||||||||||
Sell AUD / Buy USD | $ | 42.6 | 0.7662 | $ | — | $ | 4.3 | $ | (4.3 | ) | ||||||||
Sell EUR / Buy SEK | 20.4 | 9.5144 | (0.3 | ) | 2.3 | (1.9 | ) | |||||||||||
Sell USD / Buy EUR | 14.2 | 1.1264 | — | (1.4 | ) | 1.4 | ||||||||||||
Sell CAD / Buy EUR | 12.8 | 1.4700 | — | (0.7 | ) | 0.7 | ||||||||||||
Sell EUR / Buy USD | 10.7 | 1.1263 | — | 1.1 | (1.1 | ) | ||||||||||||
Sell EUR / Buy CAD | 6.6 | 1.4726 | — | 0.1 | (0.1 | ) | ||||||||||||
Sell USD / Buy GBP | 3.2 | 1.3299 | (0.1 | ) | (0.3 | ) | 0.3 | |||||||||||
Sell CAN / Buy USD | 1.1 | 1.2545 | — | (0.1 | ) | 0.1 | ||||||||||||
As previously noted, the Company’s policy prohibits the trading of financial instruments for speculative purposes or the use of leveraged instruments. It is important to note that gains and losses indicated in the sensitivity analysis would be offset by gains and losses on the underlying receivables and payables.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Market Risk” contained in Item 7 of this Form 10-K is hereby incorporated by reference in answer to this item.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Oshkosh Corporation
Oshkosh, Wisconsin
We have audited the accompanying consolidated balance sheets of Oshkosh Corporation and subsidiaries (the “Company”) as of September 30, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2016. Our audits also included the consolidated financial statement schedule listed in the Table of Contents at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Oshkosh Corporation and subsidiaries at September 30, 2016 and 2015 and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of September 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 22, 2016, expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
November 22, 2016
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Oshkosh Corporation
Oshkosh, Wisconsin
We have audited the internal control over financial reporting of Oshkosh Corporation and subsidiaries (the “Company”) as of September 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the consolidated financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended September 30, 2016 of the Company and our report dated November 22, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Milwaukee, Wisconsin
November 22, 2016
50
OSHKOSH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net sales | $ | 6,279.2 | $ | 6,098.1 | $ | 6,808.2 | |||||
Cost of sales | 5,223.4 | 5,058.9 | 5,625.5 | ||||||||
Gross income | 1,055.8 | 1,039.2 | 1,182.7 | ||||||||
Operating expenses: | |||||||||||
Selling, general and administrative | 612.4 | 587.4 | 624.1 | ||||||||
Amortization of purchased intangibles | 52.5 | 53.2 | 55.3 | ||||||||
Asset impairment charge | 26.9 | — | — | ||||||||
Total operating expenses | 691.8 | 640.6 | 679.4 | ||||||||
Operating income | 364.0 | 398.6 | 503.3 | ||||||||
Other income (expense): | |||||||||||
Interest expense | (60.4 | ) | (70.1 | ) | (71.4 | ) | |||||
Interest income | 2.1 | 2.5 | 2.0 | ||||||||
Miscellaneous, net | 1.3 | (4.9 | ) | (2.0 | ) | ||||||
Income before income taxes and equity in earnings of unconsolidated affiliates | 307.0 | 326.1 | 431.9 | ||||||||
Provision for income taxes | 92.4 | 99.2 | 125.0 | ||||||||
Income before equity in earnings of unconsolidated affiliates | 214.6 | 226.9 | 306.9 | ||||||||
Equity in earnings of unconsolidated affiliates | 1.8 | 2.6 | 2.4 | ||||||||
Net income | $ | 216.4 | $ | 229.5 | $ | 309.3 | |||||
Earnings per share attributable to common shareholders: | |||||||||||
Basic | $ | 2.94 | $ | 2.94 | $ | 3.66 | |||||
Diluted | 2.91 | 2.90 | 3.61 | ||||||||
The accompanying notes are an integral part of these financial statements
51
OSHKOSH CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Fiscal Year Ended September 30, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Net income | $ | 216.4 | $ | 229.5 | $ | 309.3 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||
Employee pension and postretirement benefits | (27.5 | ) | (2.2 | ) | (21.2 | ) | |||||
Currency translation adjustments | (3.0 | ) | (73.1 | ) | (33.4 | ) | |||||
Change in fair value of derivative instruments | (0.1 | ) | 0.1 | — | |||||||
Total other comprehensive income (loss), net of tax | (30.6 | ) | (75.2 | ) | (54.6 | ) | |||||
Comprehensive income | $ | 185.8 | $ | 154.3 | $ | 254.7 | |||||
The accompanying notes are an integral part of these financial statements
52
OSHKOSH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts)
September 30, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 321.9 | $ | 42.9 | |||
Receivables, net | 1,021.9 | 964.6 | |||||
Inventories, net | 979.8 | 1,301.7 | |||||
Other current assets | 93.9 | 67.9 | |||||
Total current assets | 2,417.5 | 2,377.1 | |||||
Property, plant and equipment, net | 452.1 | 475.8 | |||||
Goodwill | 1,003.5 | 1,001.1 | |||||
Purchased intangible assets, net | 553.5 | 606.7 | |||||
Other long-term assets | 87.2 | 92.0 | |||||
Total assets | $ | 4,513.8 | $ | 4,552.7 | |||
Liabilities and Shareholders' Equity | |||||||
Current liabilities: | |||||||
Revolving credit facility and current maturities of long-term debt | $ | 20.0 | $ | 83.5 | |||
Accounts payable | 466.1 | 552.8 | |||||
Customer advances | 471.8 | 440.2 | |||||
Payroll-related obligations | 147.9 | 116.6 | |||||
Other current liabilities | 261.8 | 265.0 | |||||
Total current liabilities | 1,367.6 | 1,458.1 | |||||
Long-term debt, less current maturities | 826.2 | 844.3 | |||||
Deferred income taxes, net | 11.3 | 42.1 | |||||
Other long-term liabilities | 332.2 | 297.1 | |||||
Commitments and contingencies | |||||||
Shareholders' equity: | |||||||
Preferred Stock ($.01 par value; 2,000,000 shares authorized; none issued and outstanding) | — | — | |||||
Common Stock ($.01 par value; 300,000,000 shares authorized; 92,101,465 shares issued) | 0.9 | 0.9 | |||||
Additional paid-in capital | 782.3 | 771.5 | |||||
Retained earnings | 2,177.0 | 2,016.5 | |||||
Accumulated other comprehensive loss | (175.0 | ) | (144.4 | ) | |||
Common Stock in treasury, at cost (18,175,669 and 16,647,031 shares, respectively) | (808.7 | ) | (733.4 | ) | |||
Total shareholders’ equity | 1,976.5 | 1,911.1 | |||||
Total liabilities and shareholders' equity | $ | 4,513.8 | $ | 4,552.7 | |||
The accompanying notes are an integral part of these financial statements
53
OSHKOSH CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions, except per share amounts)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Common Stock in Treasury at Cost | Total | ||||||||||||||||||
Balance at September 30, 2013 | $ | 0.9 | $ | 725.6 | $ | 1,581.5 | $ | (14.6 | ) | $ | (185.6 | ) | $ | 2,107.8 | |||||||||
Net income | — | — | 309.3 | — | — | 309.3 | |||||||||||||||||
Employee pension and postretirement benefits, net of tax of ($12.4) | — | — | — | (21.2 | ) | — | (21.2 | ) | |||||||||||||||
Currency translation adjustments | — | — | — | (33.4 | ) | — | (33.4 | ) | |||||||||||||||
Cash dividends ($0.60 per share) | — | — | (50.7 | ) | — | — | (50.7 | ) | |||||||||||||||
Repurchases of Common Stock | — | — | — | — | (403.3 | ) | (403.3 | ) | |||||||||||||||
Exercise of stock options | — | 6.2 | — | — | 44.7 | 50.9 | |||||||||||||||||
Stock-based compensation expense | — | 25.0 | — | — | — | 25.0 | |||||||||||||||||
Excess tax benefit from stock-based compensation | — | 6.4 | — | — | — | 6.4 | |||||||||||||||||
Payment of earned performance shares | — | (5.1 | ) | — | — | 5.1 | — | ||||||||||||||||
Shares tendered for taxes on stock-based compensation | — | — | — | — | (6.2 | ) | (6.2 | ) | |||||||||||||||
Other | — | (0.1 | ) | — | — | 0.5 | 0.4 | ||||||||||||||||
Balance at September 30, 2014 | 0.9 | 758.0 | |||||||||||||||||||||