OSHKOSH CORPORATION 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 designer and manufacturer of aerial work platforms under the "JLG" brand name. The Company is among the worldwide leaders in the design and manufacturing of telehandlers under the "JLG" and "SkyTrak" brand names. Under the "Jerr-Dan" brand name, the Company is a leading domestic designer and manufacturer and marketer of towing and recovery equipment. The Company manufactures defense trucks under the "Oshkosh" brand name and is a leading designer and manufacturer of severe-duty, tactical wheeled vehicles for theDoD . Under the "Pierce" brand name, the Company is among the leading global designers and manufacturers of fire trucks assembled on both custom and commercial chassis. Under the "Frontline" brand name, the Company is a leading domestic designer, manufacturer and marketer of broadcast vehicles. The Company designs and manufactures aircraft rescue and firefighting and airport snow removal vehicles under the "Oshkosh" brand name. Under the "McNeilus ," "Oshkosh ," "London" and "CON-E-CO" brand names, the Company designs and manufactures rear- and front-discharge concrete mixers and portable and stationary concrete batch plants. Under the "McNeilus" brand name, the Company designs and 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 designer and 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, 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 theU.S. and abroad.
Defense - tactical trucks, trailers and supply parts and services sold to the
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 theU.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 theAmericas and other international markets and field service vehicles and truck-mounted cranes sold to mining, construction and other companies in theU.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
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Executive Overview The Company achieved another year of significantly improved earnings growth in fiscal 2019, reflecting strong execution in an uncertain environment. The Company successfully navigated the impacts of volatile trade policy and tariffs, along with talk of an impending recession to deliver consolidated net sales of$8.38 billion , an increase of$676.5 million , or 8.8%, compared to fiscal 2018, consolidated operating income of$797.0 million , an increase of$141.0 million , or 21.5%, and diluted earnings per share of$8.21 , an increase of$1.92 per share, or 30.5%. This was the third consecutive year that the Company increased operating income by more than 20%. Fiscal 2019 results included$7.0 million , or$0.10 per share, of charges related to adjustments to the repatriation tax on deemed repatriated earnings of foreign subsidiaries required under theU.S. Tax Cuts and Jobs Act enacted inthe United States inDecember 2017 . Fiscal 2018 results included an after-tax charge of$27.5 million , or$0.37 per share, for costs and inefficiencies associated with restructuring actions in the access equipment and commercial segments, an after-tax gain of$15.4 million , or$0.21 per share, related to a litigation settlement in the defense segment, a gain of$10.7 million , or$0.13 per share, related to the implementation of tax reform inthe United States , an after-tax charge of$7.7 million , or$0.10 per share, of debt extinguishment costs incurred in connection with the refinancing of the Company's senior notes and credit agreement, an after-tax gain of$4.9 million , or$0.07 per share, related to the receipt of business interruption insurance proceeds in the commercial segment and an after-tax loss of$1.0 million , or$0.01 per share, on the sale of a small product line in the commercial segment. In the aggregate, these items accounted for a net$5.2 million , or$0.07 per share, charge. Sales increased$676.5 million , or 8.8%, in fiscal 2019 as compared to fiscal 2018. The Company reported double digit percentage sales increases in the defense and fire & emergency segments and record sales of more than$4.0 billion in the access equipment segment. Fiscal 2019 sales without the adoption of Accounting Standards Codification (ASC) 606, the new revenue recognition standard, would have been$8.30 billion , an increase of 7.7% compared to fiscal 2018. Consolidated operating income increased to$797.0 million , or 9.5% of sales, in fiscal 2019 compared to$656.0 million , or 8.5% of sales, in fiscal 2018. The fire & emergency, access equipment and defense segments all reported operating income margins of at least 10%. The commercial segment was on track for solid improvement in fiscal 2019 as well, until production was disrupted by a partial roof collapse at one of its manufacturing facilities in February as a result of heavy snow accumulation. The Company estimates that the disruption to production as a result of the partial roof collapse caused a loss in sales and operating income in fiscal 2019 of approximately$30 million and$12.5 million , respectively. The Company expects insurance will cover much of the costs and lost profits related to the damaged facility. Proceeds related to business interruption insurance are recorded in income only upon settlement with the insurance company. The Company continued to execute its disciplined capital allocation strategy in fiscal 2019. The Company returned$425 million of cash to shareholders through the repurchase of approximately 4.9 million shares of stock and payment of quarterly dividends. Share repurchases completed during the past year also benefited earnings per share by$0.53 compared to fiscal 2018. In addition, the Company recently announced an increase in its quarterly dividend rate of 11.1%, to$0.30 , per share beginning inNovember 2019 . This was the Company's sixth straight year of a double-digit percentage increase in its dividend rate. The Company expects to deliver results in fiscal 2020 that would be the third highest in the Company's history. The benefits of the Company's diverse end markets and operational leverage are reflected in the Company's fiscal 2020 outlook. The Company estimates fiscal 2020 consolidated net sales will be$7.9 billion to$8.2 billion , compared to$8.38 billion in fiscal 2019. The expected decline is sales in fiscal 2020 is attributable to an expected decline in sales in the access equipment segment. The Company believes that uncertainty in the economy is causing access equipment customers inNorth America and theEurope ,Africa andMiddle East region to be more cautious in ordering equipment to grow their fleets. The Company expects fiscal 2020 consolidated operating income will be in the range of$690 million to$765 million , resulting in earnings per share of$7.30 to$8.10 . The Company's expectations for fiscal 2020 assume that the Company will continue to execute its MOVE strategy, including increasing new product development spending and expanding access equipment production capacity inChina , which has been that segment's fastest growing market. 29
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Results of Operations A detailed discussion of the year-over-year changes from the Company's fiscal 2017 to fiscal 2018 can be found in the Management's Discussion and Analysis section in the Company's fiscal 2018 Annual Report on Form 10-K filedNovember 20, 2018 .
Consolidated
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,
2019 2018
Net sales:
Access equipment $ 4,079.7 $ 3,776.8
Defense 2,032.1 1,828.9
Fire & emergency 1,266.1 1,069.7
Commercial 1,022.2 1,054.7
Intersegment eliminations and other (18.1 ) (24.6 )
$ 8,382.0 $ 7,705.5 The following table presents net sales by geographic region based on product shipment destination (in millions):
Fiscal Year Ended September 30,
2019 2018
Net sales:
North America $ 7,216.6 $ 6,489.6
Europe, Africa and the Middle East 664.2 851.8
Rest of the world 501.2 364.1
$ 8,382.0 $ 7,705.5
Consolidated net sales increased $676.5 million , or 8.8%, to $8.38 billion in
fiscal 2019 compared to fiscal 2018. Higher sales volumes in the access
equipment, defense and fire & emergency segments as well as higher pricing in
response to significant material costs escalation drove the improvement in
sales. Fiscal 2019 without the adoption of the new revenue recognition standard
would have been $8.30 billion , an increase of 7.7% compared to fiscal 2018.
Access equipment segment net sales increased $302.9 million , or 8.0%, to $4.08
billion in fiscal 2019 compared to fiscal 2018. The increase in sales was led by
a significant increase in telehandler sales in North America ($285 million ), in
part as a result of improved production rates as the access equipment segment
completed the move of North American telehandler production in fiscal 2018,
offset in part by lower Europe , Africa and the Middle East sales ($82 million ).
Higher pricing to cover significant material costs escalation also contributed
to the increase in sales. A stronger U.S. dollar reduced sales in the access
equipment segment in fiscal 2019 by $33 million compared to fiscal 2018.
Defense segment net sales increased $203.2 million , or 11.1%, to $2.03 billion
in fiscal 2019 compared to fiscal 2018. The increase in sales was primarily due
to the continued ramp up of sales to the U.S. government under the JLTV program
($307 million ) offset in part by the absence of international Mine Resistant
Ambush Protected-All Terrain Vehicle sales ($94 million ). Defense segment sales
for fiscal 2019 without the adoption of the new revenue recognition standard
would have been $2.01 billion , an increase of 10.1% compared to fiscal 2018.
Fire & emergency segment net sales increased $196.4 million , or 18.4%, to $1.27
billion in fiscal 2019 compared to fiscal 2018 as a result of higher fire
apparatus sales volume ($77 million ) as approximately $40 million of sales moved
from the fourth quarter of fiscal 2018 into the first quarter of fiscal 2019,
changes associated with the application of the new revenue recognition standard
($61 million ) and improved pricing to cover significant material costs
escalation. Fire & emergency segment sales for fiscal 2019 without the adoption
of the new revenue recognition standard would have been $1.20 billion , an
increase of 12.6% compared to fiscal 2018.
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--------------------------------------------------------------------------------Commercial segment net sales decreased$32.5 million , or 3.1%, to$1.02 billion in fiscal 2019 compared to fiscal 2018 on lower concrete mixer and refuse collection vehicle volumes as severe winter weather, including the partial roof collapse as a result of extreme snow accumulation, negatively impacted production at one of its manufacturing facilities in the second and third quarters of fiscal 2019. Improved pricing to cover significant material costs escalation helped offset part of the volume decline experienced in fiscal 2019.
Consolidated Cost of Sales - Two Years Ended
The following table presents costs of sales by business segment (in millions):
Fiscal Year Ended September 30,
2019 2018
Cost of sales:
Access equipment $ 3,291.0 $ 3,106.7
Defense 1,727.1 1,527.1
Fire & emergency 998.0 844.0
Commercial 862.4 886.7
Intersegment eliminations and other (13.9 ) (17.6 )
$ 6,864.6 $ 6,346.9
Consolidated cost of sales was $6.86 billion , or 81.9% of sales, in fiscal 2019
compared to $6.35 billion , or 82.4% of sales, in fiscal 2018. The 50 basis point
decrease in cost of sales as a percentage of sales was primarily due to improved
pricing (160 basis points) and lower restructuring-related costs and
inefficiencies in the access equipment and commercial segments (40 basis
points), offset in part by higher material costs (120 basis points).
Access equipment segment cost of sales was $3.29 billion , or 80.7% of sales, in
fiscal 2019 compared to $3.11 billion , or 82.3% of sales, in fiscal 2018. The
160 basis point decrease in cost of sales as a percentage of sales was largely
due to the absence of restructuring-related costs and inefficiencies (80 basis
points), lower freight costs (50 basis points) and improved regional mix
(20 basis points). Improved pricing (220 basis points) was completely offset by
higher material costs (220 basis points).
Defense segment cost of sales was $1.73 billion , or 85.0% of sales, in fiscal
2019 compared to $1.53 billion , or 83.5% of sales, in fiscal 2018. The 150 basis
point increase in cost of sales as a percentage of sales was primarily
attributable to adverse product mix (160 basis points) due largely to the
continued shift to a higher weighting of JLTV sales and lower international
M-ATV sales. JLTV revenue represented approximately 50% of the defense segments
sales in fiscal 2019.
Fire & emergency segment cost of sales was $998.0 million , or 78.8% of sales, in
fiscal 2019 compared to $844.0 million , or 78.9% of sales, in fiscal 2018.
Improved pricing (240 basis points) and lower new product development spending
(100 basis points) were offset by higher material and production costs
(240 basis points) and adverse product mix (120 basis points).
Commercial segment cost of sales was $862.4 million , or 84.4% of sales, in
fiscal 2019 compared to $886.7 million , or 84.1% of sales, in fiscal 2018. The
30 basis point increase in cost of sales as a percentage of sales was largely
due to production disruptions as a result of the roof collapse (160 basis
points), material cost increases (70 basis points) and the receipt of business
interruption insurance proceeds in fiscal 2018 (60 basis points), offset in part
by improved mix (140 basis points) and improved pricing (110 basis points).
Intersegment eliminations and other includes intercompany profit on intersegment sales not yet sold to third party customers.
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Consolidated Operating Income (Loss) - Two Years Ended
The following table presents operating income (loss) by business segment (in
millions):
Fiscal Year Ended September 30,
2019 2018
Operating income (loss):
Access equipment $ 502.6 $ 387.5
Defense 203.3 225.4
Fire & emergency 176.5 137.6
Commercial 66.8 67.5
Corporate (152.2 ) (162.0 )
$ 797.0 $ 656.0
Consolidated operating income increased $141.0 million , or 21.5%, to $797.0
million , or 9.5% of sales, in fiscal 2019 compared to $656.0 million , or 8.5% of
sales, in fiscal 2018. The increase in operating income was primarily a result
of higher gross margin associated with higher sales ($131 million ), improved
price/cost dynamics ($46 million ) and lower restructuring-related costs and
inefficiencies in the access equipment and commercial segments ($35 million ),
offset in part by adverse product mix ($27 million ), a gain on a litigation
settlement in the defense segment in fiscal 2018 ($19 million ) and a gain on the
receipt of business interruption insurance proceeds in the commercial segment in
fiscal 2018 ($7 million ). Fiscal 2018 also included benefits of $8.9 million
related to the collection of receivables that had previously been fully reserved
and $7.7 million related to the recognition of deferred margin upon the receipt
of cash from a customer.
Access equipment segment operating income increased $115.1 million , or 29.7%, to
$502.6 million , or 12.3% of sales, in fiscal 2019 compared to $387.5 million , or
10.3% of sales, in fiscal 2018. The increase in operating income was primarily
the result of higher gross margin associated with higher sales volume
($59 million ), the absence of restructuring-related charges and inefficiencies
($30 million ), improved price/cost dynamics ($22 million ) and lower freight
costs ($20 million ). Fiscal 2018 also included benefits of $8.9 million related
to the collection of receivables that had previously been fully reserved and
$7.7 million related to the recognition of deferred margin upon the receipt of
cash from a customer.
Defense segment operating income decreased $22.1 million , or 9.8%, to $203.3
million , or 10.0% of sales, in fiscal 2019 compared to $225.4 million , or 12.3%
of sales, in fiscal 2018. The decrease in operating income was primarily the
result of a gain on a litigation settlement in fiscal 2018 ($19 million ),
adverse product mix due to the ramp-up of JLTV production and lower
international M-ATV sales ($17 million ) and costs to start up a manufacturing
facility in Tennessee ($10 million ), offset in part by higher gross margin
associated with higher sales volume ($23 million ). Included in mix are changes
in estimates on contracts accounted for under the cost-to-cost method on prior
year revenues, which increased defense segment operating income by $44.7 million
and $2.2 million in fiscal 2019 and 2018, respectively. Defense segment
operating income for fiscal 2019 without the adoption of the new revenue
recognition standard would have been $192.2 million , or 9.5% of sales.
Fire & emergency segment operating income increased $38.9 million , or 28.3%, to
$176.5 million , or 13.9% of sales, in fiscal 2019 compared to $137.6 million , or
12.9% of sales, in fiscal 2018. The increase in operating income was primarily
the result of higher gross margin attributable to higher sales volume
($44 million ) and improved price/cost dynamics ($11 million ), offset in part by
adverse product mix ($16 million ). Fire & emergency segment operating income for
fiscal 2019 without the adoption of the new revenue recognition standard would
have been $167.2 million , or 13.9% of sales.
Commercial segment operating income decreased $0.7 million , or 1.0%, to $66.8
million , or 6.5% of sales, in fiscal 2019 compared to $67.5 million , or 6.4% of
sales, in fiscal 2018. The decrease in operating income was primarily a result
of the impact of the business disruption caused by the weather-related partial
roof collapse at one of its manufacturing facilities in the second quarter of
fiscal 2019 ($12 million ), offset in part by favorable product mix ($14 million )
and improved price/cost dynamics ($8 million ). Fiscal 2018 results included a
$6.6 million gain on the receipt of business interruption insurance proceeds,
$5.9 million of charges associated with restructuring actions and a $1.4 million
loss on the sale of a small product line.
Corporate operating costs decreased $9.8 million to $152.2 million in fiscal
2019 compared to fiscal 2018. The decrease in corporate operating costs was
primarily due to lower management incentive compensation expense ($4 million )
and lower consulting costs ($4 million ).
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--------------------------------------------------------------------------------Consolidated selling, general and administrative expenses increased$19.2 million , or 2.9%, to$683.5 million , or 8.2% of sales, in fiscal 2019 compared to$664.3 million , or 8.6% of sales, in fiscal 2018. The increase in consolidated selling, general and administrative expenses was generally a result of a gain on a litigation settlement in the defense segment in fiscal 2018 ($19 million ).
Non-Operating Income (Expense) - Two Years Ended
Interest expense net of interest income decreased$8.0 million to$47.6 million in fiscal 2019 compared to fiscal 2018 primarily due to$9.9 million of debt extinguishment costs incurred in connection with the refinancing of the Company's senior notes and credit agreement inApril 2018 and lower interest costs as the result of refinancing the Company's debt, offset in part by the receipt of interest in fiscal 2018 from a customer that had been on non-accrual status. Other miscellaneous income, net of$1.3 million in fiscal 2019 and other miscellaneous expense, net of$5.8 million in fiscal 2018 primarily related to net foreign currency transaction gains and losses, investment gains and losses on a rabbi trust and non-service related costs of the Company's pension plans.
Provision for Income Taxes - Two Years Ended
The Company recorded income tax expense of$171.3 million , or 22.8% of pre-tax income, in fiscal 2019 compared to$123.8 million , or 20.8% of pre-tax income, in fiscal 2018. Results for fiscal 2019 were adversely impacted by discrete tax charges of$1.9 million , including$7.0 million of charges for uncertain tax position reserves related to a repatriation tax on deemed repatriated earnings of foreign subsidiaries created by tax reform inthe United States (the "Transition Tax") (90 basis points), offset in part by favorable share-based compensation tax benefits of$1.5 million (20 basis points),$1.5 million of tax benefits related to state tax matters (20 basis points) and a$1.4 million tax benefit related to a foreign provision-to-return adjustment (20 basis points). Results for fiscal 2018 were favorably impacted by discrete tax benefits of$21.7 million , primarily due to a$10.7 million net tax benefit related to tax reform inthe United States (180 basis points), favorable share-based compensation tax benefits of$7.2 million (120 basis points),$5.1 million of tax benefits related to state tax matters (90 basis points) and a$2.5 million tax benefit related to a foreign provision-to-return adjustment (40 basis points). See Note 7 of the Notes to Consolidated Financial Statements for a reconciliation of the effective tax rate compared to theU.S. statutory tax rate. OnDecember 22, 2017 , theU.S. Tax Cuts and Jobs Act (the "Tax Reform Act") was signed into law. The Tax Reform Act significantly revised theU.S. corporate income tax regime by, among other things, lowering theU.S. corporate tax rate from 35% to 21% effectiveJanuary 1, 2018 , repealing the deduction for domestic production activities, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As a result of the Tax Reform Act, the Company recorded a tax benefit of$30.2 million due to a remeasurement of deferred tax assets and liabilities and a tax charge of$19.5 million due to the Transition Tax in fiscal 2018. The Company recorded a$7.0 million charge for changes to uncertain tax position reserves related to the Transition Tax liability in fiscal 2019.
Equity in Earnings of Unconsolidated Affiliates - Two Years Ended
Equity in earnings of unconsolidated affiliates of$1.1 million in fiscal 2018 primarily represented the Company's equity interest in a commercial entity inMexico and a joint venture inEurope .
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 sources of liquidity are availability under the Revolving Credit Facility (as defined in "Liquidity") and available cash and cash equivalents of$448.4 million atSeptember 30, 2019 . The Company had$786.3 million of unused available capacity under the Revolving Credit Facility as ofSeptember 30, 2019 if liquidity needs would arise. 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, dividends and acquisitions that the Company may pursue on an opportunistic basis. The Company expects to meet its fiscal 2020 U.S. funding needs without repatriating undistributed profits that are indefinitely reinvested outsidethe United States . 33
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The Company expects to generate approximately$590 million of cash flow from operations in fiscal 2020, with approximately$150 million of the cash generated from operations planned to be utilized for capital spending needs. The Company expects to return approximately 50% of its free cash flow (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 property, plant and equipment" plus "proceeds from sale of equipment held for rental") to shareholders in the form of dividends and share repurchases in fiscal 2020. The Company expects to have sufficient liquidity to finance its operations over the next twelve months.
Financial Condition at
The Company's capitalization was as follows (in millions):
September 30,
2019 2018
Cash and cash equivalents $ 448.4 $ 454.6
Total debt 819.0 818.0
Total shareholders' equity 2,599.8 2,513.5Total capitalization (debt plus equity) 3,418.8 3,331.5 Debt to total capitalization
24.0 % 24.6 %
The Company's ratio of debt to total capitalization of 24.0% at
During fiscal 2019, the Company repurchased 4,866,532 shares of its Common Stock at a cost of$350.1 million under repurchase authorizations approved by the Company's Board of Directors. AtSeptember 30, 2019 , the Company had approximately 8 million shares of Common Stock remaining under this purchase authorization. InAugust 2015 , the Company's Board of Directors approved a stock repurchase authorization for which there was as ofMay 7, 2019 a remaining authority to repurchase 1,362,821 shares of Common Stock. OnMay 7, 2019 the Board of Directors increased the repurchase authorization by 8,637,719 shares to 10,000,000 shares. Consolidated days sales outstanding (defined as "Trade Receivables" at quarter end divided by "Net Sales" for the most recent quarter multiplied by 90 days) was 63 days at bothSeptember 30, 2018 andSeptember 30, 2019 . Days sales outstanding for segments other than the defense segment were 52 days atSeptember 30, 2019 , down slightly from 53 days atSeptember 30, 2018 . Consolidated inventory turns (defined as "Cost of Sales" on an annualized basis, divided by the average "Inventory" at the past five quarter end periods) increased from 5.1 times atSeptember 30, 2018 to 5.2 times atSeptember 30, 2019 . As a result of the adoption of the new revenue recognition standard, work-in process inventory that related to government programs or was mounted on a customer chassis was recognized as cost of sales and is no longer in the Company's inventory. A detailed discussion of the year-over-year changes in cash flows from the Company's fiscal 2017 and 2018 can be found in the Management Discussion and Analysis section in the Company's fiscal 2018 Annual Report on Form 10-K filedNovember 20, 2018 . Operating Cash Flows The Company generated$568.3 million of cash from operating activities during fiscal 2019 compared to$436.3 million during fiscal 2018. The increase in cash generated from operating activities in fiscal 2019 compared to fiscal 2018 was primarily due to an increase in consolidated net income of$107.5 million and a$50 million increase in income taxes payable.
Investing Cash Flows
Net cash used in investing activities in fiscal 2019 was$153.0 million compared to$90.4 million in fiscal 2018. Additions to property, plant and equipment of$147.6 million in fiscal 2019 reflected an increase in capital spending of$52.3 million compared to fiscal 2018. The higher than typical capital spending for the Company largely reflects the construction of the Company's new global headquarters inOshkosh, Wisconsin . The Company expects that approximately$150 million of cash will be utilized for additions to property, plant and equipment in fiscal 2020. 34 --------------------------------------------------------------------------------
Financing Cash Flows Financing activities used cash of$421.6 million in fiscal 2019 compared to$338.9 million in fiscal 2018. The increase in cash utilized for financing activities was due to an increase in Common Stock repurchases under the authorization approved by the Company's Board of Directors. In fiscal 2019, the Company repurchased approximately 4.9 million shares of its Common Stock at an aggregate cost of$350.1 million . In fiscal 2018, the Company repurchased approximately 3.3 million shares of its Common Stock at an aggregate cost of$249.3 million . In addition, the Company paid dividends of$75.5 million and$71.2 million in fiscal 2019 and 2018, respectively. The Company increased its quarterly dividend rate by approximately 11% inNovember 2019 .
Liquidity
Senior Credit Agreement
OnApril 3, 2018 , the Company entered into a Second Amended and Restated Credit Agreement with various lenders (the "Credit Agreement"). The Credit Agreement provides for (i) an unsecured revolving credit facility (the "Revolving Credit Facility") that matures inApril 2023 with an initial maximum aggregate amount of availability of$850 million and (ii) an unsecured$325 million term loan (the "Term Loan") due in quarterly principal installments of$4.1 million commencingSeptember 30, 2019 with a balloon payment of$264.1 million due at maturity inApril 2023 . AtSeptember 30, 2019 , outstanding letters of credit of$63.7 million reduced available capacity under the Revolving Credit Facility to$786.3 million . See Note 14 of the Notes to Consolidated Financial Statements for additional information regarding the Credit Agreement. Under the Credit Agreement, the Company is obligated to pay (i) an unused commitment fee ranging from 0.125% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement and (ii) a fee ranging from 0.563% to 1.75% 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, and consummate acquisitions.
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 3.75 to 1.00.
• 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 1.00.
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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 afterApril 3, 2018 in an aggregate amount not exceeding the sum of: i.$1.46 billion ;
ii. 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
and ending on the last day of the fiscal quarter immediately preceding the
date of the applicable proposed dividend or distribution; and
iii. 100% of the aggregate net proceeds received by the Company subsequent to
April 3, 2018 either as a contribution to its common equity capital or from the issuance and sale of its Common Stock.
The Company was in compliance with the financial covenants contained in the
Credit Agreement as of
Senior Notes
In
OnMay 17, 2018 the Company issued$300.0 million of 4.600% unsecured senior notes dueMay 15, 2028 (the "2028 Senior Notes") at a$1.0 million discount. The Company used the net proceeds from the sale of the 2028 Senior Notes to repay certain outstanding notes of the Company and to pre-pay$49.2 million of quarterly principal installment payments under the Term Loan. The 2025 Senior Notes and the 2028 Senior Notes were issued pursuant to separate indentures (the "Indentures") between the Company and a trustee. The Indentures contain customary affirmative and negative covenants. The Company has the option to redeem the 2025 Senior Notes for a premium afterMarch 1, 2020 . The Company has the option to redeem the 2028 Senior Notes at any time for a premium.
See Note 14 of the Notes to Consolidated Financial Statements for additional
information regarding the Company's outstanding debt as of
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--------------------------------------------------------------------------------Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Following is a summary of the Company's contractual obligations and payments due
by period following
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) $ 1,043.6 $ 35.8 $ 72.0 $ 330.3 $ 605.5
Operating leases 106.7 34.0 42.6 18.4 11.7
Purchase obligations(2) 1,288.6 1,278.5 9.8 0.3 -
Other long-term liabilities:
Uncertain tax positions(3) - - - - -
Other(4) 666.3 42.4 78.8 51.5 493.6
$ 3,105.2 $ 1,390.7 $ 203.2 $ 400.5 $ 1,110.8 (1) Interest was calculated based upon the interest rate in effect on
(2) The amounts for purchase obligations included above represent all obligations
to purchase goods or services under agreements that are enforceable and
legally binding and that specify all significant terms.
(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,
above. See Note 7 of the Notes to Consolidated Financial Statements for
additional information regarding the Company's unrecognized tax benefits as
of
(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 5 of the Notes to Consolidated
Financial Statements for information regarding these liabilities and the plan
assets available to satisfy them.
The following is a summary of the Company's commitments by period following
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 $ 146.7 $ 102.0 $ 9.7 $ 8.1 $ 26.9
Standby letters of credit 63.7 54.4 9.2 0.1 -
$ 210.4 $ 156.4 $ 18.9 $ 8.2 $ 26.9 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 16 of the Notes to Consolidated Financial Statements.
Fiscal 2020 Outlook
The Company estimates consolidated net sales will be$7.9 billion to$8.2 billion in fiscal 2020, compared to$8.38 billion in fiscal 2019. The Company expects consolidated operating income will be in the range of$690 million to$765 million , resulting in earnings per share of$7.30 to$8.10 . The fiscal 2020 estimates assume an average share count of 69.0 million, which reflects the full year impact of fiscal 2019 share repurchases and an expectation that the Company will return 50% of its free cash flow to shareholders in the form of dividends and share repurchases, consistent with its long-term target. 37
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The Company believes access equipment segment net sales will be between$3.5 billion to$3.8 billion in fiscal 2020, a 7% to 14% decline compared to fiscal 2019 net sales. The Company's estimates reflect expectations that North American sales will be down low 13% to 20% reflecting a pause in fleet growth by rental companies compared to the last two years, a double-digit percentage decline in sales in theEurope ,Middle East andAfrica region and strong double digit percentage increase in demand in thePacific Rim region. The increase in thePacific Rim region reflects expected continued product adoption in that region. The Company expects operating margin in the access equipment segment in fiscal 2020 will be in the range of 11.25% to 12.25%. The Company expects lower amortization expense and the positive impact of operational initiatives to offset the impact of a less favorable regional sales mix compared to fiscal 2019 and higher new product development spending. The Company expects defense segment net sales will be approximately$2.2 billion in fiscal 2020, an increase of 8.25% compared to fiscal 2019. The fiscal 2020 estimate reflects additional JLTV production and modestly lower FHTV and FMTV sales. The Company expects defense segment operating income margin will be approximately 9.0% in fiscal 2020, reflecting the continued mix shift to a higher percentage of JLTVs and increased new product development spending. The Company expects fire & emergency segment net sales will be approximately$1.2 billion in fiscal 2020, approximately$65 million lower than fiscal 2019. The lower expected fire & emergency segment sales are mostly a reflection of activity in fiscal 2019, where approximately$40 million of sales moved from the fourth quarter of fiscal 2018 into the first quarter of fiscal 2019. The Company expects operating margin in the fire & emergency segment to increase to a range of 14.5% to 15.0% in fiscal 2020 as a result of the continued execution of the Company's simplification strategy. The Company estimates commercial segment net sales will be approximately$1.05 billion in fiscal 2020, up slightly from fiscal 2019 sales. The Company expects operating income margin in this segment to be in the range of 7.0% to 7.25% after fiscal 2019 margins were negatively impacted by the partial roof collapse at one of its manufacturing facilities.
The Company estimates corporate expenses in fiscal 2020 will be between
The Company expects consolidated sales in the first quarter of fiscal 2020 to be down by a mid-single digit percent compared to the first quarter of fiscal 2019, with lower access equipment and fire & emergency segment sales more than offsetting higher defense segment sales. The Company expects operating income and earnings per share in the first quarter of fiscal 2020 to be down meaningfully more than the expected decline in sales on a percentage basis due to the impact in the prior year quarter of receipt of a large JLTV order in the defense segment, which increased operating income in the first quarter of fiscal 2019 by$30.3 million . The defense segment is also expecting higher new product development spending in the first quarter of fiscal 2020 as compared to the first quarter of fiscal 2019. The Company also expects commercial segment operating income margin will be down due to several favorable adjustments in the first quarter of fiscal 2019 that the Company does not expect to repeat in the first quarter of fiscal 2020. 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 in accordance with ASC 606, Revenue from Contracts with Customers. Accordingly, revenue is recognized when control of the goods or services promised under a contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as the Company performs under the contract) in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. The Company accounts for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. If collectability is not probable, the sale is deferred until collection becomes probable or payment is received. Approximately 31%, of the Company's revenues were recognized under the percentage-of-completion accounting method in fiscal 2019. 38 --------------------------------------------------------------------------------
Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration (e.g., the transaction price) is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation, which is determinable based on observable standalone selling prices or is estimated using an expected cost plus a margin approach. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. When the amount of consideration allocated to a performance obligation through this process differs from the invoiced amount, it results in a contract asset or liability. The identification of performance obligations within a contract requires significant judgment.
The following is a description of the primary activities from which the Company generates revenue.
Access equipment, Fire & emergency and Commercial segments revenue
The Company derives revenue in the access equipment, fire & emergency and commercial segments (non-defense segments) through the sale of machinery, vehicles and related aftermarket parts and services. Customers include distributors and end-users. Contracts with customers generally exist upon the approval of a quote and/or purchase order by the Company and customer. Each contract is also assessed at inception to determine whether it is necessary to combine the contract with other contracts. The Company's non-defense segments offer various customer incentives within contracts, such as sales and marketing rebates, volume discounts and interest subsidies, some of which are variable and therefore must be estimated by the Company. Transaction prices may also be impacted by rights of return, primarily within the aftermarket parts business, which requires the Company to record a liability and asset representing its rights and obligations in the event a return occurs. The estimated return liability is based on historical experience rates. Revenue for performance obligations consisting of machinery, vehicle and after-market parts (together, "product") is recognized when the customer obtains control of the product, which typically occurs at a point in time, based on the shipping terms within the contract. In the commercial segment, concrete mixer and refuse collection products are sold on both Company owned chassis and customer owned chassis. When performing work on a customer owned chassis, revenue is recognized over time based on the cost-to-cost method, as the Company is enhancing a customer owned asset. All non-defense segments offer aftermarket services related to their respective products such as repair, refurbishment and maintenance (together, "services"). The Company generally recognizes revenue on service performance obligations over time using the method that results in the most faithful depiction of transfer of control to the customer. Non-defense segments also offer extended warranty coverage as an option on most products. The Company considers extended warranties to be service-type warranties and therefore a performance obligation. Service-type warranties differ from the Company's standard, or assurance-type warranties, as they are generally separately priced and negotiated as part of the contract and/or provide additional coverage beyond what the customer or customer group that purchases the product would receive under an assurance-type warranty. The Company has concluded that its extended warranties are stand-ready obligations to perform and therefore recognizes revenue ratably over the coverage period. The Company also provides a standard warranty on its products and services at no additional cost to its customers in most instances.
Defense segment revenue
The majority of the Company's defense segment net sales are derived through long-term contracts with theU.S. government to design, develop, manufacture or modify defense products. These contracts, which also include those under theU.S. Government -sponsored Foreign Military Sales (FMS) program, accounted for approximately 95% of defense segment revenue in fiscal 2019. Contracts with defense segment customers are generally fixed-price or cost-reimbursement type contracts. Under fixed-price contracts, the price paid to the Company is generally not adjusted to reflect the Company's actual costs except for costs incurred as a result of contract modifications. Certain fixed-price contracts include an incentive component under which the price paid to the Company is subject to adjustment based on the actual costs incurred. Under cost-reimbursement contracts, the price paid to the Company is determined based on the allowable costs incurred to perform plus a fee. The fee component of cost-reimbursement contracts can be fixed based on negotiations at contract inception or can vary based on performance against target costs established at the time of contract inception. The Company also designs, develops, manufactures or modifies defense products for international customers through Direct Commercial Sale contracts. The defense 39 --------------------------------------------------------------------------------
segment supports its products through the sale of aftermarket parts and services. Aftermarket contracts can range from long-term supply agreements to ad hoc purchase orders for replacement parts.
The Company evaluates the promised goods and services within defense segment contracts at inception to identify performance obligations. The goods and services in defense segment contracts are typically not distinct from one another as they are generally customized and have complex inter-relationships and the Company is responsible for overall management of the contract. As a result, defense segment contracts are typically accounted for as a single performance obligation. The defense segment provides standard warranties for its products for periods that typically range from one to two years. These assurance-type warranties typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. The Company determines the transaction price for each contract at inception based on the consideration that it expects to receive for the goods and services promised under the contract. This determination is made based on the Company's current rights, excluding the impact of any subsequent contract modifications (including unexercised options) until they become legally enforceable. Contract modifications frequently occur within the defense segment. The Company evaluates each modification to identify changes that impact price or scope of its contracts, which are then assessed to determine if the modification should be accounted for as an adjustment to an existing contract or as a separate contract. Contract modifications within the defense segment are generally accounted for as a cumulative effect adjustment to existing contracts as they are not distinct from the goods and services within the existing contract. For defense segment contracts that include a variable component of the sale price, the Company estimates variable consideration. Variable consideration is included within the contract's transaction price to the extent it is probable that a significant reversal of revenue will not occur. The Company evaluates its estimates of variable consideration on an ongoing basis and any adjustments are accounted for as changes in estimates in the period identified. Common forms of variable consideration within defense segment contracts include cost reimbursement contracts that contain incentives, customer reimbursement rights and regulatory or customer negotiated penalties tied to contract performance. The Company recognizes revenue on defense segment contracts as performance obligations are satisfied and control of the underlying goods and services is transferred to the customer. In making this evaluation, the defense segment considers contract terms, payment terms and whether there is an alternative future use for the good or service. Through this process the Company has concluded that substantially all of the defense segment's performance obligations, including a majority of performance obligations for aftermarket goods and services, transfer to the customer continuously during the contract term and therefore revenue is recognized over time. ForU.S. government and FMS program contracts, this determination is supported by the inclusion of clauses within contracts that allow the customer to terminate a contract at its convenience. When the clause is present, the Company is entitled to compensation for the work performed through the date of notification at a price that reflects actual costs plus a reasonable margin in exchange for transferring its work in process to the customer. For contracts that do not contain termination for convenience provisions, the Company is generally able to support the continuous transfer of control determination as a result of the customized nature of its goods and services and contractual rights.
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 inthe United States of America (U.S. GAAP). The preparation of financial statements in accordance withU.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.
40
--------------------------------------------------------------------------------Estimate-at-Completion (EAC). The Company has concluded that control of substantially all of the defense segment's performance obligations transfers to the customer continuously during the contract term and therefore revenue is recognized over time. The defense segment recognizes revenue on its performance obligations that are satisfied over time by measuring progress using the cost-to-cost method of percentage-of-completion because it best depicts the transfer of control to the customer. Under the cost-to-cost method of percentage-of-completion, the defense segment measures progress based on the ratio of costs incurred to date to total estimated costs for the performance obligations. Due to the size and nature of these contracts, the estimation of total revenues and costs is highly complicated and judgmental. The Company must make assumptions regarding expected increases in wages and employee benefits, productivity and availability of labor, material costs and allocated fixed costs. Each contract is evaluated at contract inception to identify risks and estimate revenue and costs. In performing this evaluation, the defense segment considers risks of contract performance such as technical requirements, schedule, duration and key contract dependencies. These considerations are then factored into the Company's estimated revenue and costs. If a loss is expected on a performance obligation, the complete estimated loss is recorded in the period in which the loss is identified. Preliminary contract estimates are subject to change throughout the duration of the contract as additional information becomes available that impacts risks and estimated revenue and costs. Changes to production costs, overhead rates, learning curve and/or supplier performance can also impact these estimates. These estimates are highly judgmental, particularly the non-production costs currently being incurred on the JLTV and FMTV A2 contracts. The Company recognizes changes in estimated sales or costs and the resulting profit or loss on a cumulative basis. In addition, as contract modifications (e.g., new orders) are received, they are evaluated to determine if they represent a separate contract or the impact on the existing contract. As ofSeptember 30, 2019 , the estimated remaining costs on the JLTV and FMTV A2 contracts represent the majority of the total estimated costs to complete in the defense segment. Changes in estimates on contracts accounted for under the cost-to-cost method on prior year revenues increased defense segment operating income by$44.7 million in fiscal 2019. Changes in estimates on contracts accounted for under the cost-to-cost method on prior year revenues increased defense segment operating income by$2.2 million in fiscal 2018. Impairment ofGoodwill 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. 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. 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 Company believes the income approach more accurately considers long-term fluctuations in theU.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 41
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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 ofJuly 1, 2019 . The Company identified no indicators of goodwill impairment in the test performed as ofJuly 1, 2019 . 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 ofJuly 1, 2019 . 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. AtJuly 1, 2019 , the Company had approximately$1.38 billion of goodwill and indefinite-lived purchased intangibles, of which 90% 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.
New Accounting Standards
See 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 theU.S. government comprised approximately 24% of the Company's net sales in fiscal 2019. 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 ofSeptember 30, 2019 decreased 0.7% to$4.14 billion compared to$4.17 billion atSeptember 30, 2018 . Access equipment segment backlog decreased 59.5% to$390.1 million atSeptember 30, 2019 compared to$962.4 million atSeptember 30, 2018 due to a moderation of customer demand inNorth America andEurope and the timing of orders as customers have become more cautious in their ordering resulting in a shift in order patterns away from placing large annual orders in advance to placing more frequent orders closer to when the equipment is needed. Defense segment backlog increased 34.0% to$2.49 billion atSeptember 30, 2019 compared to$1.86 billion atSeptember 30, 2018 primarily due to a$1.7 billion order for approximately 6,100 JLTVs and kits received from theU.S. Army during the first quarter of fiscal 2019, offset in part by shipments on all contracts during fiscal 2019. Fire & emergency segment backlog decreased 0.8% to$970.1 million atSeptember 30, 2019 compared to$978.1 million atSeptember 30, 2018 . Commercial segment backlog decreased 21.1% to$296.7 million atSeptember 30, 2019 compared to$376.0 million atSeptember 30, 2018 . Unit backlog for concrete mixers as ofSeptember 30, 2019 was down 36.4% due to lower market demand and timing of fleet orders. Unit backlog for refuse collection vehicles as ofSeptember 30, 2019 was down 18.2% compared toSeptember 30, 2018 due to a large customer order that occurred late in fiscal 2018 that did not reoccur in fiscal 2019. 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 theDoD versus its sales to other customers. Approximately 11% of the Company'sSeptember 30, 2019 backlog is not expected to be filled in fiscal 2020. 42 --------------------------------------------------------------------------------
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 inU.S. and off-shore interest rates affect interest payable on the Company's borrowings under its Credit Agreement. Based on debt outstanding atSeptember 30, 2019 , 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$2.8 million .
The table below provides information about the Company's debt obligations, which are sensitive to changes in interest rates (dollars in millions):
Expected Maturity Date
2020 2021 2022 2023 2024 Thereafter Total Fair Value
Liabilities
Long-term debt:
Variable rate ($US) $ - $ - $ 2.8 $ 272.2 $ - $ - $ 275.0 $ 275.0
Average interest rate 3.0469 % 2.6660 % 2.6118 % 2.6313 % 2.6713 % - % 2.6311 %
Fixed rate ($US) $ - $ - $ - $ - $ - $ 550.0 $ 550.0 $ 581.0
Average interest rate 4.9523 % 4.9523 % 4.9523 % 4.9523 % 4.9523 % 4.7578 % 4.8664 %
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 significant components'
suppliers for 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. , 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 18% of overall net sales in fiscal
2019, of which approximately 82% involved exports from the U.S. The majority of
export sales in fiscal 2019 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.
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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