Oshkosh's (OSK) CEO Wilson Jones on Q3 2016 Results - Earnings Call Transcript

| About: Oshkosh Corporation (OSK)

Oshkosh Corp (NYSE:OSK)

Q3 2016 Earnings Conference Call

July 28, 2016, 09:00 ET

Executives

Analysts

Wilson Jones - President & CEO

David Sagehorn - EVP & CFO

Pat Davidson - VP, IR

Tim Thein - Citigroup

Eli Lustgarten - Longbow Securities

Jamie Cook - Credit Suisse

Peter Skibitski - Drexel Hamilton

Ann Duignan - JPMorgan

Stephen Volkmann - Jefferies

Seth Weber - RBC Capital Markets

Jerry Revich - Goldman Sachs

Mircea Dobre - Robert W. Baird

Mike Shlisky - Seaport Global Securities

Charlie Brady - SunTrust

David Raso - Evercore ISI

Ross Gilardi - Bank America Merrill Lynch

Stanley Elliott - Stifel

Operator

Welcome to the Oshkosh Corporation Fiscal 2016 Third Quarter Results. [Operator Instructions]. I would now like to turn the conference over to your host, Mr. Pat Davidson. Thank you, you may begin.

Pat Davidson

Good morning and thanks for joining us. Earlier today, we published our third quarter fiscal 2016 results. A copy of the release is available on our website at oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation which includes a reconciliation of non-GAAP to GAAP financial measures that we will use during this call and it's also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide 2 of that presentation.

Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different from those expressed or implied by such forward-looking statements. These risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC.

We disclaim any obligation to update these forward-looking statements which may not be updated until our next quarterly earnings conference call, if at all. All references on this call to a quarter or a year are to our fiscal quarter or fiscal year unless stated otherwise.

Our presenters today include Wilson Jones, President and Chief Executive Officer and Dave Sagehorn, Executive Vice President and Chief Financial Officer. Please turn to slide 3 and I'll turn it over to you, Wilson.

Wilson Jones

Thanks Pat. Good morning everyone. Today, we announced third quarter earnings per share of $1.13 and raised our outlook for the remainder of 2016. I'm proud of our team and their continued focus to deliver another quarter of solid results in a challenging environment. You've heard us all talk about Oshkosh being a different integrated global industrial. I think you're seeing that in our results and will see more in our performance in the coming years.

Our MOVE strategy and evolving People First culture, along with our industry-leading brands and unique blend of businesses with diverse end markets provide us with an opportunity to deliver solid performance for shareholders. In particular, our defense, fire trucks and refuse collection vehicle businesses benefit from drivers that support improving end market demand at a time when our access equipment in concrete mixer businesses are seeing lower market demand. Highlights for the third quarter include continued strong sales growth in the defense and fire & emergency segments. Our march toward margin enhancement continued with higher operating income margins in the defense, fire & emergency and commercial segments. And progress on the funding and delivery schedules for the large international M-ATV order that we received in the second quarter.

As I mentioned earlier, we increased our full-year earnings per share outlook. We also tightened the range, our new earnings per share estimate range is $2.60 to $2.80. And later on this call, Dave will walk you through the details of our new range. Overall, it was a good quarter and we're excited about our outlook. Please turn to slide 4 for a discussion of our segments, starting with access equipment. Access equipment segment third quarter results largely reflect the dynamics we're seeing in this industry. The North American market remains cautious. To remind you, the North American market is experiencing low replacement driven demand as a result of lower purchases during the 2009-2010 timeframe. In addition, our own customers are closely watching their fleet utilization rates and local market rental rates, leading them to be more selective with our capital expenditures.

We continue to see solid activity in Europe this quarter, as this market continues its recovery. It is too early to provide an accurate assessment of what the long term impact of Brexit will be on our business. There has been little change in our markets in the near term. The long term impact is unknown and will evolve over time. I would like to remind you that the UK represents only 1% to 2% of our consolidated sales, so the direct impact on us is limited. Elsewhere, the Brazil market remains extremely depressed, while we continue to see growth in the Asia-Pacific region. And the market in Australia continues to feel the impact of the ongoing slowdown in mining.

Rounding out our thoughts by region, we continue to experience generally challenging pricing environment, driven primarily by the strong U.S. dollar and lack of market growth. As the market leader in access equipment, we will always strive to maintain pricing discipline. Operationally, the access equipment team made good progress, responsibly lowering inventory levels this quarter. The reduction that started in the second quarter accelerated during the third quarter and we remain confident that we will achieve targeted inventory reductions by the end of this year. We aren't providing forecast today for 2017, but we believe these challenging conditions in the access equipment market will continue, likely leading to lower sales in this segment in 2017. For the rental industry, it's performing well.

We believe customers in North America particularly, will maintain their cautious approach to fleet purchases in our 2017. In contrast to current access equipment market conditions, our longer term outlook for the business is positive, solid domestic construction forecasts over the next several years, as well as product adoption and market penetration in newer less developed markets, along with the overall trends toward improved safety and productivity contribute to our positive outlook for the access equipment segment.

Please turn to slide 5 for a discussion of defense. Our defense segment is a big differentiator for Oshkosh Corporation. Our backlog for this segment is now $2.3 billion, nearly double what it was last year at this time. With $1.6 billion of the backlog slotted for 2017 sales. The defense team was very active in the third quarter, one of the highlights was the promotion of John Bryant as segment President in June. John served in the U.S. Marine Corp for 28 years, retiring as a colonel before coming to Oshkosh where he ran all of our domestic vehicle programs for the past five years. John has been instrumental in the return to growth of our defense business, including managing a portfolio of heavy, medium and mine resistant tactical wheeled vehicles for the U.S. Department of Defense.

As well as leading our campaign to enter the light tactical wheeled vehicle market by winning the JLTV program. JLTV continues to move forward as a model program for the U.S. Army and Marine Corp, we're working side-by-side with our U.S. government customer every day, to build, test and feel the world's most capable light protected tactical wheeled military vehicles. In early June we held a JLTV supplier kick-off event in Oshkosh, it was attended by more than 200 suppliers. The positive tone and productive discussions at the event reinforce my confidence in our ability to deliver a great vehicle that fills many mission roles for our country service men and women.

In the third quarter, we continued our international JLTV marketing campaign, displaying the vehicle at the Eurosatory Trade Show in Paris. I'm not going to go into details on this call, but we received a high level of interest in the JLTV from international militaries. It's unlikely that we will receive or realize any international JLTV revenues in the near term, but we're highly confident that there will be customers for these vehicles outside of the U.S. As I mentioned earlier, we made progress with the large international M-ATV order during the quarter.

Our investment in procuring a limited amount of longer lead time materials earlier this year has paid off, as we begin shipping a limited number of M-ATVs to our customer this month, contributing to our full fourth quarter outlook. We continue to engage in discussions with four militaries regarding the requirements for Oshkosh defense vehicles and are confident that we will secure additional orders. But as we've previously said, the timing of securing additional contracts is uncertain. Our outlook for defense segment has not been this strong for some time. We're very excited about the potential for this business in the coming years.

Please turn to slide 6 to discuss the fire & emergency segment. The fire & emergency team delivered another quarter of improved year-over-year results. This is the testament to the efforts of our team members, not only in this quarter, but over the past couple of years. The fire & emergency team has implemented numerous process improvements and structural changes and we're really starting to see the benefits flow through in this segment's performance. Third quarter results benefits from these operational improvements along with strong demands in cities and towns that are replacing aged fire trucks and demand for recently introduced innovative new products.

The operational improvements allowed us to increase our fire truck production rates earlier this year and we're increasing our build rates again during the fourth quarter. We're pleased with the improved performance at fire & emergency and are confident that Jim Johnson and his team will build on this momentum going forward. The fire truck market in the U.S. has continued to slowly recover from the downturn experienced from 2009 to 2013, benefiting from improved municipal tax receipts and the demand to replace aging fleets. A good example of this is Kansas City and Missouri.

About a year ago, we received a significant order for Pierce fire trucks from the Kansas City Fire Department. This order was to replace a large portion of Kansas City's fire truck fleet. I'm pleased to announce that we've been shipping these units, including a substantial block within this quarter. Kansas City is representative of a number of large cities that have been placing orders to replace and upgrade their fleets. We expect a slow recovery of the U.S. fire market will continue into 2017.

Please turn to slide 7 and we'll talk about our commercial segment. The commercial team delivered a good quarter with higher operating income compared to the prior year quarter on modestly lower sales. Fleet replenishment by larger private waste haulers has continued to lead a nice recovery in the domestic refuse collection vehicle market. Solid levels of construction activity and improved municipal tax receipts are additional catalyst to the RCV market and to the improvement that we've seen in this past year in this business. We've also continued to gain share in this market, driven by our innovative line-up of RCV models. We did have a tough comparison in the third quarter due to a large international RCV sale in the prior quarter, but we still delivered solid RCV sales this quarter.

Turning to concrete mixers. We continue to experience solid orders and backlog for front discharge mixers in the third quarter, while most rear discharge mixture customers continued their more cautious approach to ordering. We did see the typical seasonal pickup in demand for this product, however, rear discharge customers continued to place orders for new equipment at a measured pace.

Rested up for our four business segments, I'm going to turn it over to Dave to discuss our financials and our changes in outlook in greater detail.

David Sagehorn

Thanks, Wilson and good morning everyone. Consolidated net sales for the quarter were $1.75 billion, up 8.4% from third quarter 2015 sales of $1.61 billion. The sales increase was driven by strong percentage increases in both defense, fire & emergency segments. Along with a slight increase in access equipment segment sales. Commercial segment sales were slightly lower than the prior year quarter, due mainly to the large international RCV sale in the prior year quarter, as well as seasonality. The increase in defense segment sales was driven by higher FHTV sales.

As you may recall, last year we had a breaking FHTV production as we negotiated a new contract with our U.S. government customer. The increase in fire & emergency segment sales was due to improved operational efficiencies which allowed this segment to increase its production rate to meet the higher demand they've experienced over the past year. A slight increase in access equipment segment sales represents a significant improvement in year-over-year sales change when compared to the year-over-year sales change in the first half of the year. This is more the result of the comparisons getting easier in the third quarter than a change in overall market conditions, however, from the first half of this year.

Consolidating operating income for the third quarter was $146.8 million or 8.4% of sales compared to $136.6 million or 8.5% of sales in the prior year quarter. We're pleased and encouraged by the higher operating income and operating income margins reported in the defense, fire & emergency and commercial segments. Higher operating income compared to the prior year in the defense segment was driven by a positive mix, along with contractual price increases and the higher level of sales. Defense operating income margins of 7.2% in the quarter were significantly higher than our expectations. Better operational efficiencies and lower SG&A expenses contributed to the higher than expected margins.

Further, our previous defense outlook had not factored in JLTV contract revenue associated with engineering and test support costs incurred during the quarter for this program. Higher fire & emergency operating income was driven largely by the higher sales volume and improved pricing and higher commercial segment operating income was a result of improved product mix. The lower operating income and operating income margin in the access equipment segment and relatively flat sales was attributable to a more challenging pricing environment and the reversal of accrued incentive compensation expense in the prior year quarter, when the segment lowered its full-year outlook, partially offset by lower spending on engine emission standards changes and the benefit of slightly higher sales volume.

We commented in our second quarter call that pricing had become a headwind on margin performance in this segment, as we expected, that environment continued into the third quarter and we believe it will continue through the fourth quarter as well. Corporate expenses were higher this quarter compared to the prior year due to higher incentive compensation cost. Similar to the access equipment segment, in the third quarter of 2015, we reversed previously accrued incentive compensation costs as a result of lowering our expected full-year outlook for 2015. This year we accrued incentive compensation expense in the third quarter commensurate with our expected increased full year result.

Earnings per share for the quarter was $1.13, same as the prior year quarter. Prior year third quarter results included $0.09 per share of benefit related to the settlement of tax audits and expiration of statutes of limitations. Current quarter results benefited $0.07 per share compared to the prior year quarter as a result of our share repurchase activity over the past year. We did not repurchase any shares of our common stock in the third quarter.

Please turn to slide 9 for a review of our updated expectations for 2016. We're increasing and narrowing our 2016 EPS estimate range from $2.30 to $2.70 to a range of $2.60 to $2.80 and sales of $6 billion to $6.1 billion and operating income of $340 million to $360 million. There's a number of pieces to the change in EPS estimate range, so let me walk through those with you. We're narrowing the sales range for access equipment to $2.9 billion to $2.95 billion or effectively the high-end of our previous sales range. We're also lowering the estimated full year operating income margin for this segment from approximately 10% to a range of 9.5% to 9.75%.

Reduction largely reflects an expected less favorable mix compared to our prior expectation. In the defense segment, we increased our estimated sales to $1.25 billion, largely to reflect the expected sale of approximately 175 M-ATVs in the fourth quarter under the large international contract that we received earlier this year. We also increased this segment's estimated operating income margin 5.25% to approximately 7.75%. Drivers of this increase includes the higher expected sales volume, improved operational efficiencies realized in the third quarter and expected to be realized in the fourth quarter and the update to the JLTV Engineering and test support revenue that I discussed earlier.

We increased the fire & emergency segment sales outlook from $900 million to approximately $950 million to reflect the expected timing of vehicle deliveries. We increased the margin expectation in this segment from 6% to approximately 6.75%, largely to reflect the increase in sales volume. We also increased our estimate range of corporate expenses to $150 million to $155 million to reflect higher incentive compensation expense related to the expected higher results for the year.

We're increasing the estimated tax rate for the year from 30% to 32% to reflect the higher proportion of earnings and higher tax rate regions. Finally, we're increasing our estimated free cash flow for the year from $275 million to approximately $400 million, largely to reflect the progress made on collecting payments on international defense contracts early in the fourth quarter. A lot of moving pieces, but overall a positive outlook for 2016.

Let me turn it back over to Wilson now for some closing comments before we open it up for Q&A.

Wilson Jones

Thanks, Dave. On our last earnings call, I described our second quarter is one in which we were making progress that's the case again this quarter, as we delivered solid performance and have a strong outlook. Before we take questions, I'd like to summarize why we're a different integrated global industrial and why we believe we can deliver solid performance for shareholders in the coming years.

Our defense and fire & emergency segments are delivering strong results with extensive backlogs and solid tailwinds behind them. These businesses are both gaining momentum and will drive our performance until we see a recovery in the access equipment market. Our commercial segment is growing and posting higher margins. We have a team delivering solid results, despite uneven market factors.

Our access equipment segment is currently operating in a period of lower demand, but we're the market leader and we will manage our production levels and cost structure to drive operating efficiencies across the cycle. Collectively, we're a technology leader with market-leading products that drive sustainable long term competitive advantages across our segments.

As we finish our prepared remarks, I'll remind you of our upcoming Analyst Day. We're playing a fun, high-energy, informative event on September 22 and 23. We're asking analysts to come out early to experience the thrill of riding in a JLTV on our famous test track. And I'm confident that every one of you who takes a ride in our revolutionary new vehicle will step out of the unit with those big smile on your face. So I invite you to come on out and give it a try. If you haven't been in contact with Pat or Jeff about securing your spot at our Analyst day, please reach out to either of them to get information on our event.

I'll turn it back over to Pat now to get the Q&A started.

Pat Davidson

Thanks, Wilson. I'd like to remind everybody, please limit your questions to one plus a follow-up, after your follow-up we ask that you get back in queue if you'd like to ask additional questions.

Operator, please begin the question-and-answer period of this call.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Tim Thein, Citigroup. Please state your question.

Tim Thein

The first maybe for Dave obviously on -- coming back on access and just kind of thinking about some high level thoughts you had mentioned in the initial outlook for lower sales in 2017 and just help us think about some of the drivers to decrementals. On the one side you did mention the challenging pricing environment and if sustained, it looks as though steel cost could be a headwind and at the same time you had presumed that some of this under-absorption penalty would be behind us. So maybe just help us kind of frame some of the -- how you're thinking about decremental potentials, decremental margins in 2017?

David Sagehorn

Sure. As you touched on there, Tim, a number of pieces to that, I would say in terms of the volume, we're still working our assessment of the volume outlook for 2017 and we'll provide more color on that on the Analyst Day, but at this time, we were thinking more in a may be modestly lower, so not significantly lower from that standpoint. We know we've been through this before. We know we need to manage our ways through it from a -- and in terms of dealing with any of the headwinds from a pricing standpoint and we talked about that impact in the third quarter here, heading to the fourth quarter. Our view right now is, we expect to see that kind of flatten out similar impact in the fourth quarter than in the third quarter.

So I don't know that that's going to be necessarily be a big headwind next year. Again, yet to be determined I think a little bit there. You touched on absorption. We certainly have under produced to sales this year as we've brought the inventory levels down in that segment. So the headwind that we've experienced this year from that standpoint, we certainly should not have next year and may actually be a little bit of a tailwind for us. So there's a number of moving pieces, but we know that -- we talked about targets of, call it, the mid 20% incremental or decremental margins and I think that's what we would be shooting for next year, depending on the extent of the downturn that we see in the market.

Tim Thein

And then, just may be some help on the ASP for the M-ATV award, I know that there's more to it than this, but if I just take the change in the segment guidance implied for the full year and divide it by the 175, it implies kind of a low $400,000 per unit which I'm guessing is probably not the right answer, but maybe it would be a little lower than I'd expect so maybe a little help there.

David Sagehorn

Yes, your number is low, there is a number of miscellaneous items additionally moving around, but typically if you go back to what we sold M-ATVs to the U.S. government, that was close to $550,000 range. So start there and think about probably a little inflation over time.

Tim Thein

Additional models as well.

David Sagehorn

Additional models as well, yes.

Tim Thein

The variance, the different functionality.

David Sagehorn

We're precluded, Tim, from talking a lot about that contract just because of the terms of the contract itself, but again, if you start with what we sold into the U.S. or that's a decent starting point.

Wilson Jones

Tim, this is Wilson. If I could just dial back a little bit, maybe one more piece of color on your access question. We're in kind of a challenging time and we're taking probably a -- maybe a more conservative approach to 2017 and not ready to talk about it in full, but you keep in mind the rental companies, most of them are on calendar years.

So to work on our next year's forecast, with our fiscal year starting in October, a lot of those companies are still formulating their 2017 plan. So, we're very preliminary in our view now. And again, we'd maybe view this being too conservative for next year, we're not sure about that, but we thought we would stay on that side versus the opposite.

And then just one closing remark, I enjoyed reading your report this morning and just want to let you know, I appreciate you recognizing our defense business as a visible catalyst, that's something that we see as a real game changer for us going forward and just want to let you know, I appreciate you recognizing that.

Operator

Our next question comes from Eli Lustgarten with Longbow Research. Please state your question.

Eli Lustgarten

First, back on the defense business, during your remarks you indicated that, I think you said $1.6 billion of the $2.3 billion backlog is deliverable for 2017, is that accurate? And that doesn't include spare parts or any other stuff, so if you have $1.6 billion of that backlog, I assume that the revenue potentially could be somewhat higher than that?

Wilson Jones

Yes, you're spot on, Eli, that does not include aftermarket, so that's a good number for 2017--

Eli Lustgarten

And we wouldn't be surprised if -- the margin should at least hold next year if not improve, is that a fair statement?

David Sagehorn

We've got a pretty decent mix for next year, Eli.

Wilson Jones

Eli, we'll share more of that with you at the Analyst Day.

Eli Lustgarten

I figured that, I just want to make sure, but we have to get there. Now, as far as the AWP market, the big thing is obviously besides, you went to market as the amount of equipment coming back from the oilfield, can you say might be not only where your inventory numbers were, would you say you probably be in line at the end of the year, but we think the industry would be?

And with production closer to retail sales, your sales number next year, because it's under produced. Is it partly that even if you have downscale sale, you probably would have improved profitability as opposed to this, it's not a decremental margin, but just to be able to show improvement and profitability just because of the absorption?

Wilson Jones

Eli, I think we're going to stay away from that second question, again we'll define that better for you in 2017. On the oil and gas question, what we're hearing from majority of our customers is, they feel that that's all been absorbed, majority of it has. So our inventory is not as extensive in oil and gas, as some of the others say, dirt equipment OEM. So we think we're in pretty good shape in oil and gas. We did notice -- watching the data that uptick in rig count which is nothing to celebrate yet, but it is a positive step. But I think we're in pretty good shape from an oil and gas standpoint.

Eli Lustgarten

Let me try the profitability number. Is there any reason to assume why margins wouldn't improve next year if you are producing closer -- to actual sales as opposed under production?

David Sagehorn

Yes, as we said on the prior call, Eli, there is a number of things that are going to be in play here. You've got the actual volume level itself and absorption depending on the magnitude of the decline could be a tailwind for us. Pricing year-over-year and that's yet to be determined, but that could be flattish to down, yet to be seen as we said.

Material costs, while we have seen a spike, we started to see some things still come down a little bit over the past few weeks and the third party reports we read, we expect it to continue to come down here, but that could be a little bit of a headwind for us. So, there is just -- we're still early, as Wilson said, a lot of moving pieces and we'll try to pull that together in a more cohesive manner for the Analyst Day call.

Operator

Our next question comes from Jamie Cook with Credit Suisse. Please state your question.

Jamie Cook

Just a couple of questions. Wilson, I was hoping you could provide -- I mean, you said, you've made progress on funding of the international M-ATV. Any color that you could share, I assume the 175 of international M-ATVs for the fourth quarter you have funding for. And can you talk about the progress on the remaining 825 and just over time, based on the contract, how we should think about that impacting receivables over time?

And then my second question is, your guidance, you increased your free cash flow guidance nicely in the quarter, it seems fairly fourth quarter weighted, so Dave, if you could just provide a little color on why the fourth quarter's cash flow is so strong? Thank you.

Wilson Jones

Thanks Jamie. Look, Dave and I'll both tackle this one for you. We did make good progress. This is our fifth contract and actually is the largest contract with this customer. We do expect to deliver 175 units in our fourth quarter. What we expect to do is, approximately a 1,000 will be in our next year, fiscal year 2017 and then we will have a carry-over of some into 2018.

So this a pretty big contract for us, one that we did lean ahead on some long lead-time items and that's going to help us improve the fourth quarter as we mentioned in our prepared remarks. I think what you need to keep in mind and Dave will jump in here on the free cash flow in just a second, is we're going to generate some working capital or have some working capital flowing in 2017 to build this contract with payments and this is weighted toward the second half of 2017, so you'll see some of that carry-over from a free cash issued into 2018. So I'll stop and let Dave jump in on your free cash flow question.

David Sagehorn

Yes, Jamie, if you recall back, probably the last several quarters we've talked a little bit about seeing some of our international defense customers' kind of slowdown their payment cadence and that applied to us as well. So what we're seeing is, we've had really good progress and working through that situation and you are going to see the benefit of that in the fourth quarter free cash flow numbers and that's really the reason that we're taking the free cash flow outlook up for the year is a progress we've made on all this.

Just to dial back a little bit to a comment that Wilson made on the large order that we received in the second quarter, as he said, we expect about a 1000 units under that contract for fiscal 2017, weighted more heavily towards the second half of the year and just under the standard contract terms, there will be a working capital build and that we'll collect probably more of the cash in 2018 than 2017 on that contract.

So just from a free cash flow cadence, we're going to have strong free cash flow this year. We'll invest a little in that contract in fiscal 2017 and then reap some of the benefits in fiscal 2018.

Jamie Cook

Sorry, just to be clear, do you have the funding for the 175 and I guess the positive is, I assumed the 175 would subtract from the 1,000, so the contract is actually larger than the initial 1,000?

David Sagehorn

Yes. Well, we've always said that it was for more than a thousand units, well over. Yes and we're giving a probably little more quantification of that or an idea of how much more than a 1,000 that is. And again, we're a little handcuffed by the terms of the contract, what our customer is allowing us to say on this. So we're trying to be as helpful as we can with it.

Wilson Jones

I think one other answer for you there Jamie is, we talked in our last call about coordinating a funding and delivery schedule and that is in place today. We have that in place. So, this contract is good to go.

Operator

Our next question comes from Peter Skibitski with Drexel Hamilton. Please state your question.

Peter Skibitski

Yes, just to be clear, it is a follow-up on that. So defense backlog was up about $600 million. So that's the whole order actually in backlog now, just to be clear?

David Sagehorn

The whole order is actually in backlog, Pete.

Peter Skibitski

Okay. And that follow-on order that's kind of positive for 2,000 units, that's still potentially out there as well?

Wilson Jones

Yes. Pete, we have several opportunities that we continue to work on and obviously we're going to be careful on how we talk about those until we get the actual order in contract, but there's a lot of good activity in the Middle East right now around our products.

Peter Skibitski

And with JLTV, are the margins on that program better than you expected? It sounds like that was a positive benefit this quarter?

David Sagehorn

Yes, there was a positive benefit this quarter, Pete, from the standpoint of, when we put together the initial forecast, we knew we were going to have some tests support costs for that program in the second half of the year here. And really I'll take the responsibility for this, I didn't equate or assign the revenue that was going to be associated with those in the outlook for the year. It wasn't a large amount for the year, we're talking less than $10 million, but we had the costs in, but we didn't have the revenue in the prior outlook.

Peter Skibitski

I see. I thought I could just ask one last one, Dave, with this kind of huge inflow of cash in the fourth quarter, your share count looks like it doesn't assume much in the way of share repurchases. But the way you guys trade is, it seems like you'd get a lot of bang for your buck repurchase wise, how are you guys thinking at this point in terms of capital deployment?

David Sagehorn

Yes, I think our outlook or view on capital deployment really hasn't changed. We had talked about coming into the year, returning a significant amount of the free cash flow to shareholders. If you think back to our first quarter, we repurchased around $100 million of stock and then through the dividend, along with that, we will have accomplished returning significant amount of cash to shareholders.

As we just said on the last question, we do expect there to be working capital investment in fiscal 2017 to help support that M-ATV contract. So, I wouldn't expect a lot in the way of share repurchases in our fourth quarter, but it is certainly something that we will continue to look at. We do want to return cash to shareholders and we also want to make sure that we're in a position that we can strive to increase the dividend rate each year as well.

Operator

Our next question comes from Ann Duignan with JPMorgan. Please state your question.

Ann Duignan

And I am looking forward to having a smile on my face having driven the JLTV.

Wilson Jones

If you are driving and I'm riding with you.

Ann Duignan

Of course I will. Anyway, can you just describe what happens in the European election with the Department of Defense budgets? I mean we know the President has requested a budget, but what happened between now and November or now and next January, when everything changes?

David Sagehorn

Good question, Ann, I think we've seen the last several years where budgets have not generally been completed on a timely basis and what we've lived under in those situations are continuing resolutions, where they will basically continue to fund at the prior-year levels. If we think about the impact of that on Oshkosh for our fiscal 2017, with the almost $2.3 billion of backlog, $1.6 billion of that for our fiscal 2017 that are domestic programs, we've largely got almost all of that in backlog already.

So they'll work through and they'll finalize the fiscal 2017 budget when they finalize that and that really would impact more our fiscal 2018 sales, but we believe there is certainly plenty of time for them to work through the budget and get the dollars flowing down to the contracting agencies, such that we really don't expect much of an impact overall.

Wilson Jones

Just to add a little bit to that, Ann. We've had no gains or losses, so our funding levels have stayed intact through the June, fiscal year 2016 Omnibus reprogramming. Through Congress, that's all fully authorized now from Congress and the Senate, so if you look out there, this is all public information, but in the budget for fiscal 2017, we got some really nice increases in FHTV and FMTV and of course, they've been pulled volumes in the JLTV, so rough order of magnitude, there's well over $1 billion in just domestic business that's in this present budget 2017. So we're certainly looking at this as a really great extension to a good pipeline that's already in place.

Ann Duignan

So no risk as far as you're concerned in terms of demand being pushed out or deliveries being pushed out, that we can foresee at those point?

Wilson Jones

Not that we can foresee at this time.

Ann Duignan

And then, I think you called out a stronger demand in telehandlers. You usually think of telehandlers as being more oil and gas related or European maybe, can you just give us some color on where that telehandler demand was strong and what's going on there?

Wilson Jones

Yes, there is a little uptick in residential construction in certain states Ann and our telehandlers go in first there and worked around -- work a home site there, multi-family, there is a little bit of an uptick there with the uses of telehandler. We've seen some -- from a commercial standpoint some -- little more office work going on.

There has been some hotel work, our rental own customers have better specifics on all of the different facets of the markets that's going on, but we have seen a little bit of an increase there in just jobs that are coming out of ground now. We were in Florida and Texas for the last couple of weeks and a lot of work going on there now -- projects in Florida, Texas seems to be getting past some of the weather issues and a lot of good construction going on in those two states.

Ann Duignan

Okay, so what is general U.S. non-res construction in general that's supporting--?

Wilson Jones

Little bit of res, but mostly non-res.

Operator

Our next question comes from Stephen Volkmann with Jefferies. Please state your question.

Stephen Volkmann

Maybe start with just a quick follow-on to that. Obviously the mix has hurt margins a little bit in access with telehandlers this year. Do you have any visibility or thoughts as to what that mix might look like in 2017?

David Sagehorn

See, we're still pulling together the outlook for 2017 and as Wilson said, the national rental companies here, they are still kind of mid-year. And so our guys are having a lot of discussions with them, but at this point, we don't have a firm outlook yet on 2017 mix.

Stephen Volkmann

And then, I'm curious just Dave about how the accounting works for JLTV? I guess, this is percentage of completion, please correct me if I'm wrong,

Wilson Jones

Yes.

Stephen Volkmann

Yes, so does that mean that, as you start to deliver on this contracted margins, I know you don't want to get too specific on that, but that we should expect margins to kind of come out of the gate at fairly reasonable levels or is this a situation where we would expect the first few units to be sort of minimally profitable and then it kind of ramps up over time?

David Sagehorn

Yes, under the percentage of completion and we're using a cost-to-cost methodology under that. We will provide a forecast or a projection of the full program profitability, that will be our profit rate for the full program and we will recognize profit at that level each quarter throughout the life of the program and then we will assess each quarter whether we think that profit level for the full program is still appropriate or not.

And if we deem it necessary or appropriate to adjust it, what will happen is, there would be a cumulative catch up for all the sales that were recognized in previous quarters. And we've used this approach on some of our prior contracts as well.

Stephen Volkmann

And then, just order of magnitude and if you want to push this off, fine, but I'm wondering, there's quite a few deliveries obviously under M-ATV next year and I'm wondering, this could be a pretty big drag on free cash flow, I guess, you may actually not even generate any free cash flow next year, is there any way to just sort of size that with some big brackets?

David Sagehorn

I think we will push it off a little bit to the Analyst Day, but directionally you're right, it is a large contract. It is more heavily weighted to the second half of the year. So, yes, there will be a meaningful investment in working capital. It's a transitionary investment, obviously it ramps up and then ramps back down as you get paid under the terms of the contract. But as I said, strong free cash flow this year, we're going to see the impact of that investment in working capital on our free cash flow next year and then 2018 we'll benefit from that.

Operator

Our next question comes from Seth Weber with RBC Capital Markets. Please state your question.

Seth Weber

Just wanted to go back to the defense margin question for a second. Dave, you called out that the JLTV payment was not hugely significant. So, can we think about this, the third quarter margin, the low 7% range as sort of the margin for the baseline business. Is there anything else in there? It sounds like margins benefited from cost reductions and efficiencies went up, But I would assume that continues going forward. So is there some reason why the 7%ish wouldn't be a good way to think about the baseline defense business here?

Wilson Jones

Yes, I think we're going to ask you to be patient and wait for the Analyst Day. There is a lot of moving pieces in terms of the components of what's in the defense business and what's the definition of the base business versus how we're looking at the composition in the coming years. So I think we can do better justice to that with a little more time at the Analyst Day.

Seth Weber

And on the JLTV program, I think last quarter on the call, you kind of recalibrated the delivery cadence, is there anything that's changed? I think you had previously -- I think you kind of reset to about 250 units or something this year or a low number this year and then maybe 750 or so next year, is that still kind of the right way to think about it going into 2018 or so?

Wilson Jones

Yes, we did recalibrate last call and those numbers are still in play. The 2017 number went from 250 to 750 and then the 2018 number went from 500 to 2000 and in 2019, it went from a 1000 to 3000. So, basically ore [ph] production went from 1750 up to 5750.

Seth Weber

Right, okay, so no changes there. And just my follow-up on the mixture business, the cement mixture business, I mean given the Highway Bill and things like that, I mean, it's a little surprising that you've seen some mixed results there, do you have any thoughts on what's causing the bifurcation in that market?

Wilson Jones

Well, we do expect to benefits on from that, but if you look at the statistics that are out there, Portland cement, for instance these -- but a lot of our roads and highways are asphalts. I think a lot of people just assuming that everything is concrete, but the majority are asphalt. Now more of the Federal highways are going more to concrete which again we'll benefit from. But I think if you listen out there, some of the asphalt companies are doing pretty well now and those seem to be some other jobs that kicked off early, but we certainly do plan to benefit from that.

But that's a business, it's just -- it's been choppy and our customers, they know that the commercial chassis are available and they know, we have capacity in the industry, so there's a lot of just waiting and seeing when they get some bigger jobs, they know that there is some units available that they can get for pretty quick delivery, so that's an issue we're just going to have to continue work through.

Operator

Our next question comes from Jerry Revich with Goldman Sachs. Please state your question.

Jerry Revich

I'm wondering if you can talk about with the new access equipment you had, excellent performance in Europe, can you just give us some flavor in terms of where the major countries in terms of where your shipments into Germany et cetera stand versus prior cycle levels, just to calibrate that for us and to the extent you're comfortable talking about it. Can you comment on what the business has been like in July in the broader EU area in terms of from an inquiry level standpoint? Thanks.

Wilson Jones

Jerry, I want to be careful, obviously there is some competitive concerns here about where we're doing well or not doing well. What I will say is, historically we've done well in several areas in Europe, Benelux has always been a good area for us. The Nordics, we've done well over the years in the UK, I think most of Europe where were we see construction, you see JLG doing fairly well.

So I wouldn't say anything has really changed and where we're having our success. Europe's fleet is still very old and we see continued opportunities there with some construction, but obviously we're going to be a little guarded as we go here and watching and seeing what else occurs with Brexit and anything around that. Again, that's a very small part of our business, but we'll have to see from a macro standpoint what that does for Europe.

David Sagehorn

Jerry, you had asked about compared to prior levels Europe overall -- I think this is a market that's still probably down, I guessing, close to 40% from what we saw in 2007 and 2008, it has just recovered much slower than what we saw in North America.

Jerry Revich

In defense, you had really excellent margin performance in the quarter. You mentioned one of the platform was repriced. Can you just share with us which platform just so we can understand order of magnitude and then with M-ATV shipping in the fourth quarter, the 175 units, did you get any absorption benefit in the third quarter as you started the work?

Wilson Jones

Yes. Jerry. We on a regular basis go through pricing renegotiations with our government customers on some of these base programs that we have. We aren't going get into the specifics as to which program was reprised in the quarter or such that we could see the benefit in the quarter, but it is something that occurs on a regular basis.

And then in terms of the absorption impact. Yes, we were building some units here in the third quarter for the international M-ATV contract, so that certainly did help the volumes running through the factories. I don't have at my fingertips an impact on what that would have been on absorption, but given the overall volumes that we're talking about, it wasn't a major driver of performance in the quarter.

Operator

Our next question comes from Mircea Dobre with Robert Baird. Please state your question.

Mircea Dobre

Just sticking with defense, can you maybe help us understand a little bit more about your maintenance and parts types revenue going into next year or maybe even what you're able to do this year? And then also in defense, any color that you can provide us on Army LRV program, as well as maybe the longer term JLTV international demand potential?

David Sagehorn

Mirc, I'm sorry, I'll take the aftermarket question. So typically in the defense segment depending on the new truck volumes you are going to see our aftermarket business be 15%-ish to 20%-ish of that segment sales. And I think as we're thinking about 2017, it's probably a decent range to think about as well.

Mircea Dobre

Great.

Wilson Jones

On the LRV, Mirc, not a lot has changed since we last discussed that with you and that we do see it as an opportunity for JLTV, but most of the discussions right now is just around JLTV. We're excited that's in the conversation, but we'll shortly provide some more details as those come in to play for us. But for now, it's kind of a second thing we're working on with our U.S. customer. On the JLTV, international opportunities, I believe you ask about, we do have a lot of inquiries, especially after being at the Eurosatory show in Paris and see that as a viable product. We do see that is out more into the future, right now probably the biggest opportunity we have from an international standpoint is M-ATVs in the Middle-East region.

Mircea Dobre

And then my follow-up maybe for you Dave. I'm trying to get a little more comfortable with your working capital dynamics and I appreciate all the commentary for next year, given what's going on in your defense business, but if we can, maybe separate defense from your other segments, can you maybe give us an update as to what's going on with receivables and inventory elsewhere and how you're thinking about that going forward?

David Sagehorn

Sure. I would say, as it relates for example to AR, the DSO trend that we've generally seeing there outside of defense has held steady. You are typically going to see a little bit longer terms internationally than you see domestically, but that's -- again, that's typical. So, really, I would say, we haven't seen a lot of change there and I don't expect that we're going to see much change as we head into 2017 or go through 2017 from that standpoint.

The inventory outside of defense and we've talked about bringing the inventory levels down in the access equipment segment. I want to complement the team out there for successfully doing that and made great progress in the third quarter. I think we're going to end the fiscal year with inventory levels that are better aligned to where the market is than when we came into the year. So I don't think we're going to need to see any real inventory builds next year, but I also don't think we're going to see a lot of inventory flushing out next year from the non-defense segments either.

Mircea Dobre

But, David, if I may, in access equipment inventory specifically, where do you expect to end the year versus where you started it? Can you give us a number there or quantify it somehow?

David Sagehorn

Sure. I don't have it at my fingertips, but from memory, I would say that we're looking at several $100 million less inventory in the access equipment segment as we exit this year than when we entered the year.

Operator

Our next question comes from Charlie Brady with SunTrust. Please state your question.

Charlie Brady

Just on defense, I don't know -- maybe I missed it, but in the release you talk about a contractual price increase, can you just give us more detail on where that came from and maybe the magnitude of that? And are there follow-on contractual price increases yet to come?

David Sagehorn

There was a question earlier Charlie and we go through this on kind of a normal basis with our contracts that are multi-year. And as I said earlier, we're not going to get into specifically which contract or contracts, but this is somewhat of a normal case that we renegotiate the contracts and it just happened to be that this year compared to last year, we were operating under a new pricing regime on some of those contracts. So it wasn't the biggest driver in the quarter, but it certainly was something that we did benefit from.

Charlie Brady

Okay and just on the M-ATV orders as you go through 2017, do you expect the cadence of deliveries to be relatively stable? I'm assuming it's a -- you are going to ramp up from Q4, but there was a little bit of ramp, but relatively stable as you go through the year or does it get fairly lumpy and how you'd plan on delivering that?

David Sagehorn

I'm sorry, on what program again or--

Charlie Brady

On the M-ATV that you are delivering to the Saudis?

David Sagehorn

Yes, to our Middle East customers that we haven't identified, we do expect that that's going to be more heavily weighted to the back half of the fiscal year. So if you think of the third and the fourth quarter. I would say, significantly more heavily weighted to the back half of the year.

Operator

Our next question comes from Mike Shlisky with Seaport Global. Please state your question.

Mike Shlisky

I wanted to turn to fire real quick. You mentioned that global market continues to kind of mask the recovery here. I was wondering if you can update us as to what inning you think we're in in that fire market recovery?

Wilson Jones

Well, first of all, Mike, thanks for asking about our fire business. They're doing a wonderful job there and really on a nice margin enhancement road. So thanks for asking about it. Right now the market has been growing in about 6% to 8% pace and the good news is, Pierce has been basically double that in their growth. So we estimate the market in 2016 to be around 4500 units from a domestic standpoint, the historical market size has always been in the 500 to 5500.

So this is coming out of the recession and building back up. But the way we view it is, it's still going to be a slow growth market. The good news for us is it's a very aged fleet out there and our fire & emergency team is doing a great job of growing share in a slower growth market.

Mike Shlisky

I also want to ask about your corporate costs, there has been some ups and downs through some of the accounting around incentive comp et cetera. Can you give us a sense as to where you think the appropriate run rate is going forward? It looks like you're looking around maybe the high $30 million, almost like $40 million in the fourth quarter. Is that kind of the way things might roll going into 2017?

David Sagehorn

Mike, we're still working on the budget for fiscal 2017. So that hasn't been finalized yet. On a full year this year we're talking about $150 million to $155 million I think that's, I'll call it, in the ballpark, for next year, I don't think it would be any higher than that and I don't know though that we have a lot of opportunity for less than that.

Mike Shlisky

Look, perhaps ask in different way. I mean if you see earnings grow next year in a modest way and some of us do feel that way, is there a chance we'll have additional stock incentive compensation in 2017 that you actually did not see in 2015 or a higher dollar amount in 2017 versus 2016 of that one item?

David Sagehorn

From an incentive compensation standpoint, there could be some additional pressure on that, but again, I think we're going to look that ways to keep the overall corporate costs at, what I would call, a manageable or a reasonable level. So if we see some upward pressure on that which would certainly be a good thing, because it means we're doing well. Then we may be able to manage a few costs in other areas of corporate to not see a big increase next year.

Operator

Our next question comes from David Raso with Evercore ISI. Please state your question.

David Raso

I have a couple questions. But you would want to give a little more color on the M-ATV totals before, it's now in the backlog, so I assume it's appropriate to ask now. I used to model as 1,400 units, 1,200 next year, 200 in 2018, obviously some got pulled forward. Is that a fair number for the total order?

David Sagehorn

That was a ballpark.

Wilson Jones

We're in the ballpark, David.

David Sagehorn

So if we say 175 this year, call it, approximately 1,000 next year and the rest going over into 2018 that's in the ballpark.

David Raso

And just for modeling purposes, back half loaded you mentioned, but I mean, should we think of it as, literally like 200 first half, 800 back half, just to help with the modeling, is it that back half loaded?

David Sagehorn

It's significantly back half loaded.

David Raso

All right. We can talk offline about that. The fourth quarter defense margin, you're implying a fourth quarter defense margin that's no better than the third quarter, but let's say the M-ATV shipments are a positive mix comment. Is there something else about that fourth quarter defense margin that we should digest to not think the margins up sequentially?

David Sagehorn

Well, I think the one thing that comes to mind is, we do expect that the request for proposals for the FMTV re-compete to get the street, so there will be some investments or costs associated with that, there will be a little bit of a drag on margins in the fourth quarter.

David Raso

And back to the thoughts around access next year on the mix, I know it's early, you haven't a ton of conversations with the rental companies about next year with any firm discussions, but telehandlers, at least if we speak about the current backlog, are tele the larger percent of the backlog today than a year ago and within teles, obviously when oil and gas is weak, you are not getting the £10,000 to £12,000, you're getting a £5,000 or £6,000, £7,000 going into resi, that's also at least usually a negative mix. So I'm just trying to understand what's the mix we're sitting on today as at least a base case for the mix for 2017?

Wilson Jones

Dave, we're going to have to do a little math. So I don't have that right handy here, but we certainly can get you that number.

David Raso

Okay. How about the idea at least of -- it sounds like from your commentary, Europe up next year, North America down next year are the key components of the aggregate access base-case modestly lower next year?

Wilson Jones

David, you know the market very well and it's hard to pinpoint, again our customers are in the middle of their year. So we're still pulling and defining that, working through the analysis. Directionally, we would think that the replacement -- lack of replacement needed would be an issue in North America. So that would be where we would be mostly down. We would say today, Europe seems to be doing okay.

So I think directionally you're right, but we just want to be careful and I think we're taking a conservative look at this. We have some good meetings set up, discussions over the next two weeks and that's going to help us get a little more clarity of what our customers are thinking for 2017.

David Sagehorn

And David, back to your question on backlog composition. Telehandlers as a percentage of total backlog last year was a little higher than it was this year at June 30.

David Raso

Okay, so that's a positive and maybe the mix within teles is negative, but at least the aggregate base-case, it's a heavy tele backlog going into next year is incorrect, you would argue the fact that it's a little bit lower than a year ago.

David Sagehorn

Yes, I think we're actually probably going to see in the fourth quarter a little positive mix versus last year.

Operator

Our next question comes from Stanley Elliott with Stifel. Please state your question.

Stanley Elliott

Going back to the fire business, lots of new products did come out over the past several years, is the focus going forward to or are there holes in the portfolio where you want to come up with new products or do you feel like, all of the focus is going to be on really improving the manufacturing process and driving towards that 10%, sort of op margin?

Wilson Jones

Well, we're going to do both, Stanley. The focus inside fire & emergency will continue, they have a lot of runway there, a lot more initiatives coming out of there, all of the MOVE initiatives. And then, being the leader of the industry, new product development, we have a nice multi-generational product plan that you'll see us continue to develop and introduce new innovations that -- what we're really focused on is introducing products that really provide that long term sustainable competitive advantage for us and they have a nice pipeline of those coming for us here in the future. So we're going to continue to do both and again they are performing well and I like the progress we're making in fire & emergency.

Stanley Elliott

Yes, absolutely. On the access business, I believe you said growth in Asia-Pacific, is that more product adoption picking up or do you think the construction markets in those -- in that region have bottomed and maybe even improved?

Wilson Jones

It's really adoption. We're seeing more and more opportunities there. They have some -- safety regulations are becoming more prominent with governance around those safety regulations. We have seen labor rates tick up a little bit, so we can make the productivity case with our machines.

So overall, it's adoption we're seeing, what I would call, bigger, more professional rental companies develop in that region which is driving more for our machines better technology. So it's a nice adoption play and it is -- it's growing and making some big moves, but you have to keep in mind we're coming up from a very little base there.

Operator

Our next question comes from Ross Gilardi with Bank America Merrill Lynch. Please state your question.

Ross Gilardi

I just want to understand a little bit better, how are you able to avoid steel cost inflation, because clearly it's been a pretty significant spike. I mean is it that you have more annual contracts? Is it that you had re-stock steel at a much lower price? Help us there a little bit in why isn't this a big risk into early 2017?

David Sagehorn

I don't think Ross that we said we were going to totally avoid it. I think we'll see different dynamics in our various businesses in defense. Historically, just the way that we -- the contract mechanisms that we have with our government afford us the opportunity to enter into long term supply arrangements with our customers. And if you dial back over time, 2008, 2004 when we went through very major steels spikes, we saw very little impact from that on our defense business and we expect we're going to see the -- have the same result this time.

If you think about our other businesses, we generally lock on a quarterly basis and there is a lag to that. Steel, if it stays where it is and again, we've seen it start to come down in the last several weeks and what we're reading is, at least many of the experts think it's going to continue to come down some more. But if there is, it does stay elevated. We'll probably see the impact of that starting later in this calendar year.

But what I would say is, steel isn't -- it's not all of our cost of goods sold and if you look historically, when we have went through meaningful increases in steel, we have not seen -- steel jumped 30%, our cost of goods sold doesn't jumped 30%. There is a muted impact just because of it is only a certain percent of our cost of goods sold and our supply chain team has a number of tools that they like to use to mitigate this to the extent that they can.

Wilson Jones

Yes, I think, one just -- little more color to add there Ross is, the big part of steel that we buy is plate and if you look at the average plate price 2016 versus 2015 is actually down for us. So the plate price is -- they've all been kind of moving up and down this summer, but all the groups we work with, they don't believe that those steel prices are sustainable, there is just too much capacity in the market and so their forecast is for to continue to come down to a more normal pace.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to management for closing remarks.

Wilson Jones

Well, thank you for participating on our call today. We have a talented, motivated team that is dedicated to exceeding our customers' expectations and delivering strong shareholder value. We hope to see all of you at our upcoming Analyst Day. Thanks for your time. Have a good day.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

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