October 23, 2019 Oshkosh Jeffrey
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Financial Summary:
Market Cap 4.34B
Total Debt 818M
Cash 152M
Enterprise-Value = 4.92B + 818M – 152M = 5.59B
EBIT = 650M
Oper.Cashflow - CapEx = 321M – 132M = 189M
FCF = 165M
Owner’s Earnings = 260M
Multiple = 16-25x
Revenue by Geography
USA 6.48B
Europe, Africa, Middle-East 851M
Asia 364M
Total Revenue 7.6B
Operating profit 653M, Operating margin 8.5%
Capitalization
Cash and equivalents 454M
Total-debt 818M
Shareholders’ equity 2.51B
Total capitalization (debt plus equity) 3.3B
Debt to total capitalization 24.6%.
Backlog for 2018 –4.2B
Access-Equipment – 1.6B
Defense—1.5B
Fire & Emergency—1B
Commercial—420M
Adjusted Net Property
Plant & Equipment = 290M
27 manufacturing facilities in 7 countries, with 6 new facilities.
Service Centers in 23 countries, customer reach –130
countries
Machinery and Equipment – 650M
Buildings – 300M
Software – 100M
Others – 80M
Adjusted Total – 980M
Depreciation – 780M
Adjusted Total with
depreciation – 290M
Tangible Book-Value 2013 – 303M,
2018 – 1.15B, 30% per-annum
Working Capital = Current Assets – Current Liabilities =
3.0B–1.72B = 1.28B
Working Capital – Cash = 1.28B – 152M = 1.128B
Capital Employed = Fixed Assets + Working Capital = 290M + 1.52B
= 1.81B
Capital Returned = 260M
ROE = 12-14%
Capital Employed + Debt = 1.81B + 818M = 2.6B
Capital Returned = 260M
ROIC = 1-3%
Domestic business 65-75%
Business from US government contracts 20%
Segments
50% of Oshkosh’s business are in telehandlers, aerial lifts
25% JLTV defense contracts
13% fire & emergency
12% concrete and garbage/refuse vehicles
Access-Equipment
Sales of aerial-lifts and telehandlers depend on construction
activity and third-party financing for rental companies. Previously contractors
bought their access-equipment; now industry dynamics are shifting towards
rental companies.
Ashtead, which owns Sunbelt rentals, and their competitor United
Rentals, have a fleet of access-equipment and bargaining power. United and
Sunbelt prolong equipment 5-10 years by repairing and replacing parts to
Oshkosh’s detriment. Cost-savings are not retained by Oshkosh, but flow to
rental-equipment customers.
Rental companies utilize equipment better—platforms
purchased specifically for a construction site remain idle until the project is
finished, while rental companies immediately transfer equipment for another
site. 2019 had a higher than normal mix of independent rental companies vs
nationals.
Access-equipment comprises 49% of Oshkosh’s revenues at 3.7B
in 2018, backlog was 1.78B. Distribution is handled by sales agents and a partnership
with Caterpillar.
Access-Equipment brands include—
JLG – aerial platforms
Jerr-Dan – towing/recovery
SkyTrak— telehandlers
In 2018, sales increased to 2B for aerial platforms.
Telehandlers – 948M, other components— 810M. In 2019, first quarter orders exceeded
1.5B, the second highest quarter ever.
Operating profit for access-equipment was 387M in 2018. Strong sales and
backlog suggests a strong construction and rental market. As of September 30,
2018, for identifiable assets, access equipment comprises of 54% of total
assets at 2.89B out of 5.3B. U.S comprised of 2.2B, Europe 400M, and Asia 215M.
Spare-parts and maintenance generates 500-700M a year, but has lower margins.
Previously Tier-4 engine emission stipulated standards for oil
and gas operating access-equipment, effective December 2019. While Tier-4 had
significant impact on the bottom line, ANSI won’t be as important. Oshkosh’s
updated products are already compliant with the new ANSI standards.
Aerial-platforms comprise the bulk of sales for access-equipment.
Oshkosh acquired aerial-platform producer JLG for 3B in 2006. Genie, JLG’s
competitor, was acquired by Terex in 2002.
Competitor Genie’s sales in 2018 was 2.56B (1.6B for JLG) for
aerial platforms, but had a smaller backlog of 870M (1.6B for JLG). 63% of
sales for Genie was from North America, 21% from Europe, and 16% from the rest
of the world. In contrast, JLG isn’t as strong internationally.
70-75% of Oshkosh Access-Equipment sales are domestic, with
the rest in Western-Europe, Middle-East, Brazil, and Asia. JLG manufactures
close to customers—Tianjin for China, and UK, France, for Europe. With China’s
growth, its size will eventually rival established markets. Through a long-term
license with Caterpillar until 2025, JLG produces Caterpillar branded
telehandlers for distribution through their dealer-network. JLG’s products are also
marketed internationally through independent rental companies and distributors.
Progress was made in outsourcing aftermarket-parts
distribution and consolidating manufacturing in U.S and Europe. In an earnings
call, CEO Wilson Jones noted restructuring of telehandler and access-equipment in
2018 incurred higher charges than expected.
Oshkosh consolidated 2 facilities into 1 with 2-3 shifts and employed 600
people. Wilson claims that Oshkosh is “still experiencing periodic disruptions
from some suppliers, and we'll continue to combat those challenges.”
Competitive-advantage for aerial platforms is determined by
brand premium— the variance in price for brands when resold in the secondary market.
5 companies make up 98% of the US aerial lift market –Genie, JLG, Skyjack,
Hauloutte, and Snorkel. A survey by EquipmentWatch, concluded only premium
brands like JLG and Genie retain most of their original value when resold.
In terms of market-share, JLG has 50.1% market share, while
Genie is second with 43.5%. Other brands, descending order are— Snorkel,
Haulotte, and Skyjack. For average prices, Genie had the highest price, while
Haulotte had the lowest price.
Genie and JLG command a higher price and market share. Deterioration
in product durability and after sales-service can erode this advantage. Some
customers claim JLG has a slightly better support network, but Genie edges JLG
on ease of maintenance, fewer failed hydraulic components, and an outstanding
training program. Customers are loyal to brand names— Terex unsuccessfully used
its name instead of Genie’s after acquisition, and promptly rectified this
mistake.
The highest telescopic-boom-lift is 185ft, whereas the
lowest is 40ft. Genie and JLG have
dominated by supplying various lengths in a consolidating industry.
Manufacturers Aichi-Toyota and Grove-Manlift left due to fierce competition, while
Up-Right purchased Snorkel in 2007 to expand their boom operation.
Average-lifespan fluctuates among common brands, whereas
Genie and JLG remain consistent. The average platform lasts 6-13 years. Skyjack has an average-age of 5-10 years,
whereas snorkel is 9-12 years. For lead times, large telehandler order take 5-6
months to deliver. For booms & scissors, 30-45 days is the industry
standard.
Access-equipment also includes Jerr-Dan tow trucks
(wreckers) and roll-back-vehicle carriers sold to towing and recovery companies.
In addition, Jerr-Dan provides customers with one-stop service for carriers and
wreckers; generating biggest revenue growth among access-equipment from installation,
chassis, and service-parts. Recent floods and hail bring stronger demand, but Jerr-Dan
comprise less than 10% of access equipment revenue.
Defense Contracts
Defense-contracts depend on federal defense-budget— 25B
proposed for military-modernization over five years. The Budget Control Act (cuts
through 2023), and less foreign conflicts both dampen sales. Trump’s 2-year
federal budget agreement removed 2018-2019 cuts, but could return in 2020.
Most defense contracts are 5-6 year, fixed-price contracts contain
annual price increases. Defense comprised of a quarter or 22-25% of Oshkosh’s revenue
at 1.82B. Defense operating income increased 7.2% to 222M in 2018, or 12.2% of
sales, compared to 208M in 2017, or 11.4% of sales.
Perhaps Oshkosh was wise to purchase JLG in 2006 to make
access-equipment their largest segment. Defense contracts were the bulk of
Oshkosh’s sales in 1998-2008, afterwards, contracts shrunk to a size similar to
a decade ago. In 2010, defense had peak sales of 7.16B and a backlog of 5B. In 2019, sales and backlogs were as small as
2006—less than 2 billion.
Mine-resistant-ambush-protected-all-terrain vehicles
(M-ATV), Family-of-medium-tactical-vehicles (FMTV) are legacy products which
have a minimal contribution to Oshkosh’s bottom-line. Previously, Oshkosh
produced M-ATVs for Afghanistan. The latest contract for joint-light-tactical-vehicles
(JLTV) was a milestone for Oshkosh containing most of current defense revenue.
Oshkosh bid against other defense contractors for JLTV production.
Eventually, Pentagon filtered to 3 contractors submitting their proposals. Oshkosh
designed a vehicle lasting 6-times longer than the second best Lockheed Martin
prototype. Oshkosh achieved 7,051 Mean-Miles-Between-Operational-Mission-Failure
(MMBOMF), Lockheed Martin achieved 1,271 MMBOMF. AM General achieved 526
MMBOMF. The Army and Marine were impressed at JLTV capabilities compared to older
tactical vehicles.
Oshkosh was awarded the JLTV contract in 2015— 6.7B for
16,901 JLTVs. The Army would be equipped with a 1.7B order for 6,100 JLTVs in
2018, taking backlog to early 2021. JLTV will have 4 defense manufacturing
facilities in Wisconsin with a new facility in Tennessee which shares
manufacturing with access-equipment and employs 300 staff.
Oshkosh produced about 2,000 vehicles during the 2017-2019, 3-year
low-rate-production-phase valued at 114M. In June 2019, with full-rate-production
confirmed, Oshkosh will produce 2,200-3,000 vehicles per year for 5-years from
2020-2024. Should the program be renewed, 2,200 JLTVs will be delivered each
year from 2024-2036 with 5500-9000 units for the Marines—30,000-40,000 or so
vehicles for another decade.
If each JLTV priced approximately 250-400k (depending on
armor and accessories), and is multiplied by 17,000 vehicles, we get the
contract sum, 6.8B. As CFO Sagehorn mentioned, 11,000 on hand would be 4.4B. JLTVs
will have high single digit margins (8-10%), instead of the 14-19% for M-ATVs.
JLTV production involves more than 300 suppliers in 31
states. While Oshkosh attempts to limit cost fluctuations with fixed pricing—if
suppliers fail to honor contracts, actual costs will exceed estimates and Oshkosh
would face margin pressure and may suffer losses.
Beginning in 2019, CFO Sagehorn announced Oshkosh will
account for long-term defense contracts utilizing the
cost-to-cost-method-of-percentage-of-completion accounting. In simple terms—under
the new accounting— Oshkosh can only include units in estimates of overall
contract profitability after they receive a confirmed order. New orders can
change the profitability of cumulative orders, particularly in early contracts
with fewer units.
Over the last decade, federal budgets have taken additional
processing time. Even if there is no finalized budget in 2019, Oshkosh is in a
solid position for 2020 due to the extensive backlogs. Backlogs have grown to 5.85B,
but listed as 1.69B due to new accounting rules for confirmed orders.
Fire & Emergency
The two brands for Oshkosh Fire and Emergency are Pierce–
which makes fire-engines and custom apparatus, and Frontline— which makes
ambulances, snow-removal, and airport vehicles abroad. Fire and Emergency
comprises of 14% of Oshkosh’s total revenue at 1.07B, operating profit was 137M,
and operating margin 12%. For fire and emergency, Oshkosh has 4 facilities in
Wisconsin, and 2 in Florida.
Pierce is the leading domestic manufacturer of custom and
standard chassis for firetrucks— primarily serving domestic municipal customers
while meeting stringent industry and government regulations. CEO Jones stresses
the importance of repeat customers by focusing on a total-cost-of-ownership
model and relationships with 36 domestic dealers. In the past months, a dozen
dealers added new service-facilities, reflecting their confidence in the
Pierce-brand.
Pierce claims to have the largest American
fire-apparatus-distribution-network with exclusive non-competing contracts as
an intangible asset—a 40-year life (historical-turnover-analysis) is assigned
to the distribution network (net book-value of 23.8M at September 30, 2018).
Frontline targets international business and is a smaller,
more stable business than Pierce. Frontline includes Airport-fire-fighting-vehicles
(ARFF vehicles), snow removal vehicles, primarily sold to fire departments,
airports and governments abroad. ARFF has maintained 10-11% margins despite no
growth. Previous administrative bottlenecks with international sales are gone.
International sales include Pierce fire-trucks to China and
airport-rescue-firefighting-vehicles to Egypt.
Upgrades and customization for emergency-vehicles are
vulnerable to municipal budget-cuts. Municipal budgets mainly come from local
property taxes, with a large untouchable portion related to pensions. During
the housing boom of 2003-2008, increased building activity and housing prices boosted
local budgets— a splurge on heavily customized fire-trucks and ambulances led
to higher margins.
After the housing market crash, budgets were squeezed for fire-trucks
and ambulances. Local municipalities approved the most basic version of
vehicles for aging fleets— causing prices to fall, crushing Oshkosh’s margins from
double digits to a loss. Standardized trucks had a lower production cost than customized—Oshkosh
had to adjust its cost structure accordingly.
The fire-emergency market recovered once municipal tax
receipts grew and aging fire-fleets were addressed. Firefighting vehicle
recovered to single digit margins. There continues to be costs consuming a
large portion of municipal budgets, but the industry grew at a reasonable pace
in 2018.
Commercial
Oshkosh’s commercial segment consists of concrete-placement
and refuse-collection-vehicles. Oshkosh’s team is recovering from a partial factory
roof collapse due to extreme weather during the second quarter of 2019. Equipment
has been replaced, but production is yet to be on track. The regional and
national concrete market is cyclical—impacted by construction, housing, and
factors.
Brands include:
IMT— a designer and manufacturer of field service vehicles
and truck mounted cranes for niche construction markets such as building
supply, utility, tire service, railroad and mining industries.
McNeilus and London– lead the waste services industry with
refuse collection vehicles, municipal waste haulers and field services. Refuse-collection-vehicles
are impacted by municipal tax receipts and replacement demand of large waste
haulers.
Con-e-co – produces front and rear discharge concrete
mixers, and portable and stationary concrete batch backs.
Sales for refuse collection vehicles operate on a constant
replacement cycle, therefore margins are steadier than concrete vehicles.
Commercial vehicles comprise 14% of total revenue. Sales for
the commercial segment was 1.05B in 2017, shrinking slightly to 1.04B in 2018.
Operating profit was 67M, operating margin – 6%. In 2018, sales for concrete
placement was 491M, sales for refuse collection was 438M, other components 116M.
In 2017, concrete-placement generated 474M of sales, refuse 391M and others 99M.
New vehicles include a redesigned McNeilus-S-Series-Front-Discharge-Concrete-Mixer.
The new mixer delivers upgrades in critical areas—including enhancing flex-controls
which give operators additional data on quality of loads which was previously
only available in rear discharge mixers. With positive feedback, orders are
scheduled to begin later in 2019.
Despite continued modest residential construction growth, housing
remains below 30-year averages with rising interest rates. Customers maintain a
cautious approach to fleet replacement and expansion, waiting to confirm
construction activity will support utilization. Orders in the commercial
concrete segment were lower than last year, but remain within long-term
averages. Lack of construction spending with fixed costs yields poor results.
Patents and Licenses
& Competitive Advantages
Oshkosh also manufactures their own proprietary components—front-drive-steer-axles,
transfer-cases, transaxles, the TAK-4 independent-suspension system, Hercules
and Husky compressed-air-foam-systems, and the Command-Zone vehicle-control-system.
Oshkosh believes patents such as TAK-4 independent
suspension which expires in 2040, Pro-Pulse hybrid-electric-drive, and Command-Zone
electronics provides a performance and cost advantage in bidding contracts in the
defense and fire & emergency vehicles. In the fire & emergency, TAK-4
independent suspension are on Pierce custom fire-trucks, as well as
Striker-ARFF-vehicles.
Oshkosh acquired a non-exclusive license to use certain
Caterpillar intellectual property and patent applications through 2025 in
connection with manufacturing their telehandler products.
Risks- Raw materials,
Purchasing of Components, suppliers, and Labor
Oshkosh operates in a cyclical market. During a downturn, highly-leveraged
customers default and receivables may not be collected. Oshkosh faces credit
risk as the access equipment segment’s ten largest debtors represented 25% of
consolidated gross receivables.
48% of sales coming from access equipment, which is tied to
the construction industry. If this segment were to see a 50% drop in demand,
revenue for Oshkosh could shrink by a quarter or 1.5 billion. The need for a
new fire-truck, tow-truck, or garbage-truck is dependent upon municipal budgets
and client capital expenditures.
Oshkosh outsources certain manufacturing to small companies
near its facilities. While providing low-cost services, such companies require
performance inspection. Third-party suppliers makes Oshkosh vulnerable to
shortages, price increases, and may disrupt delivery-time for assembly. Chassis
suppliers failing to deliver on time will affect vehicle-frames, engine-transmissions,
radiators, motors, bearings and hydraulic-components. For body options suppliers—
cranes, cargo bodies and trailers. Capacity constraints, labor shortages or
disputes, are magnified in a downturn. The critical issue with suppliers is a
lack of skilled labor— diligent workers with technical expertise—leaving
Oshkosh with few options.
Oshkosh’s massive backlog makes vulnerable to rising costs
such as steel, aluminum, and petroleum-based products. In 2018, Access-equipment
backlog went up 143% to 1.8B, while fire & emergency increased by 23M.
Commercial backlog increased 20%. Section 232 tariffs for imported steel and
aluminum, executive orders requiring 95% U.S. steel on federal-infrastructure,
and a weakening U.S. dollar bring additional costs.
In 2019, prices for sheet-steel and hot-rolled-coil may
temporarily decline in 2019, but steel-mills may soon increases prices. Plate-steel
has remained high priced— 55% higher than sheet steel entering 2018. There will
probably be a 6-month lag before events hit Oshkosh’s financials. In 2018, raw
materials comprise the bulk of inventories at 639 million, with partially
finished products at 355 million, and finished products at 330 million.
Inventories at FIFO cost as listed in the annual report totaled 1.32B.
For trucks, electrification is not a threat yet. As of 2019,
gasoline has an energy density 30 times of the best battery. The weight alone
placed in a large vehicle would make it cumbersome for freight or
transportation.
Catalyst
Pros
- Buybacks were
initiated in 2018 and will continue
- Management aligned
compensation with ROIC instead of ROE
- New facility in
Tennessee, with 600 members running on 2-3 shifts
- 4-5B
contracts/backlogs
- CEO Wilson Jones also
recently mentioned— “our balance-sheet is in probably the best shape in my 14
years with the company.”
- Debt to capitalization is lower than peers
Cons
-
50% access equipment and 25% defense contracts.
Down-cycle could make 500M-1.5B evaporate
-
Utilization rate– operational inefficiencies due
to inconsistent production volumes
-
ANSI regulations, labor and supplier challenges.
-
Overstocking inventory. Raw material
fluctuations with huge backlog.
-
Uncertain
trade policies and tariffs
Oshkosh is trading at 8-13x earnings. Navistar 8.6-11.6x,
Terex 12-13x, wait for Oshkosh to drop 25-45% with a greater margin of safety
before purchasing—a multiple closer to 3-8x owner’s earnings.
Sources:
Oshkosh Annual Reports, Oshkosh Earning’s calls
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