Oshkosh Corp (OSK) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Oshkosh Corporation Fiscal 2017 Third Quarter Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation. Thank you. You may begin.

Good morning, and thanks for joining us. Earlier today, we published our third quarter 2017 results. 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 is 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, includes 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 could 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.

Thanks, Pat. Good morning, everyone, I'm happy to announce another quarter of strong results at the Oshkosh Corporation. We grew revenue in all 4 business segments, led by our defense segment. And we grew both adjusted operating income and adjusted operating income margin, leading to an adjusted earnings per share of $1.84 versus $1.13 in the prior year quarter. It was a successful quarter by many measures, including ending the quarter with higher backlogs in all of our non-defense segments. These positive results have been fueled by the efforts of our proud and dedicated team members across the globe.

As many of you know, we're celebrating our 100th anniversary, and we recently held an engaging weekend of events, including a parade with more than 60 of our products, hosted thousands of friends and family for an open house at one of our Oshkosh manufacturing facilities and even entertained our guests with a truck rodeo. It was a great way to recognize the efforts of our team members, past and present, who have helped make Oshkosh Corporation the great company it is today.

As we look at our third quarter and year-to-date results, it's clear that we're doing better than we expected at our Analyst Day last September. The macroeconomic factors that drive our markets have held up or improved versus what we expected last September. We have seen that translate into a healthy rental equipment market, which has led to demand for access equipment that's higher than we expected. We've also seen that translate into solid market conditions for a number of our other businesses. Our 15,000 team members have also maintained focus on improved operational performance, contributing to our better-than-expected results as we continue to execute the company's MOVE strategy. We saw that in our defense segment, as we executed on the large international M-ATV order, and in fire & emergency segment as they have continued to deliver improved results. And while we're pleased with our performance, we know we have more to do and believe there are many opportunities for us in 2018.

As a result of our solid performance and driven by our outlook for the remainder of the year, we are raising our full year adjusted earnings per share estimate range from $3.20 to $3.50 to a range of $3.80 to $3.90.

Please turn to Slide 4 to begin a discussion for each of our business segments. The access equipment team put up a very solid performance in the third quarter, surpassing our expectations as they achieve positive sales growth and strong operating income margin growth compared to the prior year quarter. Last quarter, we spoke about the seasonally important spring and early summer time period, which is a big driver for this business. We saw strong market conditions through that period this year. And more importantly, we believe our rental company customers also performed well during the period. Orders in the quarter were up more than 15% compared with 2016, highlighting the excellent follow-through we've seen, with customer orders following the strong engagement we had at both The Rental Show and ConExpo. Backlog was also up nearly 40% at the end of the quarter. This performance highlights our improved outlook for the access equipment market in this segment since we first discussed our view for 2017 last fall.

So what's driving this improved outlook? At its core, we believe it's improved customer sentiment, driven by improved rental equipment market conditions for access equipment in North America. Utilization rates for access equipment are solid, and used equipment values have improved. We've also recently heard some of the publicly traded rental companies talk about improvement in rental rates. Construction data in the U.S. remains generally positive, which we believe is supporting improved rental company sentiment. We expect rental companies will continue to take a responsible approach to capital expenditures as they balanced economic-driven demand with replacement dynamics that we continue to believe will turn from a headwind to a tailwind. We're also seeing the European access equipment market remains solid, and the Asian market continues to grow, driven by ongoing product adoption.

In January this year, we announced restructuring plans that we expect will drive improved performance in this segment. Let's take a look at our progress. Our plans include transferring North American aftermarket parts distribution to third party-managed distribution centers in Atlanta and Las Vegas. We recently began shipping a limited number of line items from the Atlanta location, following our successful launch in late March at the Las Vegas location. We're also consolidating telehandler manufacturing both in the United States and Europe. Both of these moves are in process, and we're pleased with the progress we have made. Dave will discuss the expected savings as well as the restructuring-related charges we recorded in the quarter in a few minutes.

Please turn to Slide 5 for a discussion of defense segment. Our defense team delivered strong results this quarter as they successfully ramped up sales from the first half of the year. The quarter was highlighted by an increase in international M-ATV sales as we continue to execute on the large order we received last year and the continued ramp-up of JLTV sales. The team also continued to assimilate the higher number of team members required to support the increased sales level expected this year and in the future.

The JLTV program continued to proceed on track in the third quarter. We're working closely with the program office as our vehicles are being driven every single day during this period of heavy testing. The more exposure this vehicle gets, the more interest it generates. The U.S. Marines have indicated that they would like to increase their quantity of JLTVs from approximately 5,500 units to more than 9,000 units. The U.S. Air Force also said they would like to acquire JLTVs. Outside the U.S., we're recently pleased to learn that the State department approved the possible foreign military sale to the U.K. MoD for up to a maximum of 2,747 JLTVs. Previously, quantities of 750 units have been discussed. While we view this approval as positive and we expect to receive an order from the U.K., the actual order quantity and its timing remain to be seen. But we are confident that international JLTV sales will be solid revenue and profit generators for our defense business in the coming years.

We exited the third quarter with nearly $1.2 billion of backlog for 2018 and almost $1.4 billion if we include yesterday's $195 million JLTV contract announcement. We expect orders by September 30 for additional FMTVs and JLTVs for delivery in 2018, with funding coming from the recently approved fiscal 2017 federal budget. Combined with normal annual aftermarket volume, we expect to have line of sight for $1.7 billion of defense sales for 2018 at the end of this fiscal year.

We're also continuing discussions with several countries in the Middle East for additional orders, including vehicle sustainment opportunities. We now believe we are looking at a late fall time frame for any significant new international orders, which would still allow us time to achieve some sales in late 2018, supplementing the $1.7 billion visibility we expect to have by September 30. As we noted at our Analyst Day last fall, we don't expect to be as dependent on international volumes to achieve our sales targets in 2018 as we have been in 2017.

Our defense team submitted its proposal for the FMTV recompete contract in the quarter. We expect an announcement of the winning bidder in mid-2018. In the meantime, we expect to receive contract modifications for our existing FMTV contract that will allow us to continue deliveries under the current contract into 2020 as we don't expect that the new A2 models will go into Full Rate Production until 2021.

Finally, the president signed the FY '17 budget into law in early May, just a short time after our Q2 earnings release and conference call. We received orders for different programs from the 2017 budget, most notably for FHTV deliveries scheduled in 2018 and 2019, and the JLTV order we received yesterday for 2018 deliveries. There are still significant 2017 budget funds approved for additional JLTVs that support our 2018 outlook, as we noted earlier. We are also closely watching the progress of the president's 2018 budget request and will provide an update on upcoming earnings calls.

Let's turn to Slide 6 to discuss the fire & emergency segment. We enjoyed another solid quarter in our fire & emergency segment with increases in sales, operating income, operating income margin and backlog. The highlight of the quarter was segment operating income margin at 10.9%. We remain committed to achieving annual double-digit operating income margins in this segment in the near future.

The formula in fire & emergency has been pretty consistent over the past several years, with success being achieved through a combination of new product launches, initiatives to drive margin improvement, a focus on simplification and pricing discipline. The fire & emergency team will continue to utilize these tools to drive future success.

The Ascendant class of aerials continues to be a highlight for this business as we successfully launched several new Ascendant variants at the FDIC trade show in April in response to customer demand. These new offerings, in addition to the strong traditional Pierce lineup, are driving the sales performance of the segment.

The U.S. fire apparatus market remains 20% to 25% below pre-recession levels, but the ongoing trend of growth in market share to peers has helped drive the segment's improved results. [Fleet ages] continue to grow, and we believe this projects well for the firetruck market in the future as replacement demand will need to increase.

We also continue to feel the impact of a strong U.S. dollar that presents a challenge for our team in international markets. This is a dynamic that we've been dealing with for several years. So despite a domestic market that is still not hitting on all cylinders and ongoing foreign exchange headwinds, we are pleased with the strong performance of the fire & emergency team and remain confident in our plans going forward.

Please turn to Slide 7, and we'll talk about our commercial segment. We've talked about the steep branch in the back half of the year for the commercial segment during our Q2 earnings call. The commercial team made progress in the third quarter. However, there is still substantial work to be done. While the team delivered year-over-year revenue growth, led by an increase in refuse collection vehicle sales, they fell short from an operational efficiency standpoint needed to hit the revised targets for the second half of the year. We had strong backlogs in this segment and added resources and personnel to support our simplification activities. And we're encouraged by the simplification initiatives under development and believe it will likely take several quarters before we see these initiatives translate into meaningful improvement in the segment's performance.

From a market perspective, we saw continued improvement in the refuse collection vehicle market in the third quarter. The domestic RCV market recently exceeded pre-recession levels. The concrete mixer market, on the other hand, remains at levels 20% to 25% below pre-recession normal market levels as customers have been hesitant to shed their cautious approach to capital expenditures. Longer-term, we continue to believe there are significant opportunities for this segment, driven by positive domestic construction forecast, infrastructure potential and housing expansion. Each of these should be positive for our RCVs, concrete mixers and other commercial product lines.

Well, that wraps it up for our 4 business segments. I'm going to turn it over to Dave to discuss our financials and updated outlook for 2017 in greater detail.

Thanks, Wilson. Good morning, everyone. Please turn to Slide 8. We're pleased to report third quarter results that reflect overall strong performance during the seasonally busiest time of the year, positioning us to deliver strong earnings growth for the full year. Consolidated net sales for the quarter were $2.04 billion, up 16.6% from the third quarter of 2016. Sales were up compared to the prior year quarter in all 4 segments, led by a more than 80% increase in defense segment sales, driven by continued deliveries of M-ATVs to an international customer and the ongoing JLTV production ramp.

Access equipment segment sales were up approximately 3%. The higher sales in this segment are a reflection of solid rental company demand that Wilson referenced. Higher fire & emergency segment sales were driven by increased fire apparatus unit volumes and improved pricing. And commercial segment sales reflect higher RCV volume after several quarters of weaker RCV sales.

Consolidated adjusted operating income for the third quarter was $222.5 million or 10.9% of sales compared to $146.8 million or 8.4% of sales in the prior year quarter. Higher operating income in the defense, access equipment and fire & emergency segments drove the higher consolidated operating income.

We noted on the last earnings call that there were opportunities for better results in the access equipment segment if market conditions held through the seasonally busiest period of the year. And that's what we saw in the quarter, as evidenced by the 14.4% adjusted operating income margin in this segment. We also said there were opportunities for better results in the defense segment if they were able to efficiently execute the expected sales jump in the first half to the second half of the year. The 12.9% operating income margin in this segment is confirmation that the defense team successfully made the jump. Fire & emergency results reflect the benefits of simplification initiatives on pricing, along with higher sales volume. Commercial results jumped from the first half of the year on an expected rebound in RCV volume as we continue to work through the operational challenges we discussed last quarter.

Adjusted access equipment segment and consolidated operating income for the third quarter 2017 exclude $10.6 million of restructuring costs recorded as part of our previously announced restructuring plan. As a reminder, we continue to expect access equipment restructuring actions announced in January to deliver annualized cost reductions of $20 million to $25 million, with partial year savings of $15 million to $20 million expected in 2018. Implementation costs to achieve these savings are expected to be $45 million to $50 million, with approximately $41 million to be incurred in this fiscal year. We recorded a cumulative $28 million of implementation costs through the third quarter. Additional information on segment performance can be found in the appendix to our slide presentation.

Adjusted earnings per share for the quarter was $1.84 compared to $1.13 in the prior year quarter. And the adjusted tax rate was 33.2%, which included discrete tax benefits of $3.9 million.

Please turn to Slide 9 for a review of our updated expectations for 2017. We're significantly increasing our full year adjusted EPS estimate from a range of $3.20 to $3.50 to a range of $3.80 to $3.90 as a result of our strong third quarter execution and expectations for continued solid markets and execution by Oshkosh team members. We now expect full year sales to be approximately $6.75 billion compared to our previous expectation of $6.6 billion to $6.7 billion. And adjusted operating income is now expected to be $480 million to $490 million, up from our prior expectation of $415 million to $445 million.

We expect access equipment segment sales and adjusted operating income margin to be approximately $2.95 billion and 9.75% to 10%, respectively. This compares to our prior expectations of $2.8 billion of sales and an adjusted operating income margin range of 8.75% to 9%. The increase in expected results for this segment is driven by improved rental industry market conditions, which have translated into solid demand for access equipment, along with a continued strong product mix.

We are slightly decreasing our defense segment sales estimate to $1.825 billion from $1.85 billion as a result of the timing of aftermarket sales. And we are increasing our defense segment operating income margin estimate to a range of 11% to 11.2% compared to our previous expectation of 10%. The increased margin estimate range is a result of the strong operational execution shown by the defense team in the third quarter as they ramped up sales from the first half of the year levels and an expectation that the solid execution will continue through the fourth quarter.

We're also increasing our sales and operating income margin estimates for the fire & emergency segment to approximately $1.025 billion and 9.7%, respectively. This compares to our prior estimates of $1 billion and 8.5%. The increased sales estimate is driven by timing of deliveries, and the higher margin expectation is the result of continued benefits realized from the execution of simplification initiatives and the benefits of improved absorption on a higher volume.

We're slightly lowering our commercial segment sales estimate from $975 million to $950 million. And we are lowering our expected operating income margin for this segment from a range of 5% to 5.5% to a range of 4.5% to 5%, reflecting the continued operational challenges that the commercial team is working through. We knew we needed to execute at a high level to achieve the prior estimated margin range for this segment after a weak first half of the year. And while the team made progress in the third quarter, we now believe we're going to fall short of the sales and operating income targets we set on the last earnings call.

We've increased our estimate for corporate expenses from $145 million to $150 million, mostly to reflect higher incentive compensation expense as a result of the higher estimated full year consolidated results. The adjusted tax rate estimate has been refined to approximately 32.5%, and we now expect free cash flow for the year to be approximately $150 million, an increase over our previous estimate of 0 to $50 million. The improvement in expected free cash flow was related to updated expectations on timing of payment on the large international M-ATV order. And our estimated share count remains unchanged at 76 million.

I'll turn it back over to Wilson now for some closing comments.

Thanks, Dave. We've talked about Oshkosh being a different integrated global industrial, and I believe you're seeing that today with our strong performance and our strong outlook for 2017. We're still early in the planning process for 2018 and will provide our first formal financial outlook for 2018 on our next earnings call. Based on the solid base that we're building in defense for next year and the positive market conditions we're seeing in our non-defense businesses, we are confident about our prospects. That said, we know we have opportunities to capture and more work to do, and we're excited to get at this work and show the world what our Oshkosh family is capable of achieving.

At this time, I'll turn it back over to Pat to get the Q&A started.

Thanks, Wilson. (Operator Instructions)

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

(Operator Instructions) Our first question comes from the line of Steve Volkman with Jefferies.

So I just wanted to start off on your sort of outlook, your revised outlook for the year here. And I'm trying to just get a sense of how you're thinking about whether there were some timing issues that sort of helped the third quarter, either from a margin or a volume perspective. And specifically, it seems like some of the segments, the performance kind of dropped a little more than I would've expected in the fourth quarter. Like access, for example, the -- sort of the implied margin drop in access in the fourth quarter is a little bigger than I would've expected. And I'm just curious sort of how we should think about that. And then I have a quick follow-up.

Okay, Steve. We'll see if I can hit all this. But I think one thing to consider is when we provided the outlook at the end of last quarter, we were providing an outlook for the year and really an implied for the second half. So we didn't give specific guidance on Q3 versus Q4 other than to say we expected Q3 to be up year-over-year. So I guess I would suggest maybe we should all take a look at this from a second half perspective versus a Q3 to Q4. But all that being said, when you look sequentially, Q3 to Q4, volumes are coming down in access. And that's largely what we typically see from a seasonality standpoint. A couple of other things, I guess, I would consider there from a mix standpoint: We did have a pretty favorable mix in the third quarter with the -- driven by higher aerial work platforms mix. We think that's probably going to moderate a little bit in the fourth quarter. Additionally, if you look at the production cadence, Q3 was the highest production cadence for the year. So from an absorption standpoint, we'll probably see a little bit of a drag sequentially. And then just what I would call just timing of discretionary spend from third quarter to fourth quarter, but not a lot of driver from that. But those are probably the things that come to mind immediately when I think about Q3 to Q4.

Okay. Great. And can I ask you to just in speak a little bit more about pricing? Because I think you mentioned pricing sort of positive in fire & emergency. And then I think this is the first quarter I haven't seen you complain about pricing in access. So I'm curious kind of what's changing here and whether that's sort of shorter term or something you think is longer term.

Yes, and I guess we would probably not characterize it as complaining about pricing. But...

Reporting.

My words.

Understood. So third quarter year-over-year, I think you had a good observation, especially in access. We really didn't see a lot of pricing impact one way or the other, so -- and that is a change from what we've seen in the last number of quarters. And sequentially from Q2 to Q3, it was actually probably ticked up a little bit. Now we realize that, that is 1 quarter, and that doesn't necessarily make a trend. But it -- we were certainly pleased to see that we didn't have to report out on pricing being a driver year-over-year this quarter.

And sorry, expectation in the fourth quarter, does that continued? Or...

Expectation is, let's call it, largely flat with what we saw in the third quarter.

Our next question comes from the line of Jerry Revich with Goldman Sachs.

This is Abdul Tambal on for Jerry Revich. My first question is for defense. So you've had some success in international JLTV bookings over the past quarter. Can you just give us an update on when you'll be allowed to ramp up production for foreign sales?

Well, actually we haven't booked any international JLTV sales yet, Abdul. We've -- there were some reports out there where the U.K. MoD is working through a foreign military sale and talking about up to 2,700 roughly units, up from about 750 that they were talking originally. But that's not an actual order yet. That's working through the U.S. acquisition area to -- program office to work through officially an order we would expect. But we don't know the timing of the order at this time. We're not sure about the delivery schedule. That'll come out as we actually get the order. But we do anticipate JLTV international sales to start up later in 2019 and into 2020 when we go into a Full Rate Production mode with our U.S. customer.

Got it. And then just for access equipments, so can you talk about your expectation on price versus material costs in the coming quarters? Would you be able to increase pricing to offset steel cost inflation here?

Well, obviously, we got a positive view of the market or a more positive view than we had previously. We're just in our planning process for our fiscal 2018, and the details of that will come together in the coming months here. I think any OEM would strive to deliver positive pricing. I think you heard on the prior question, we did see some, what I would call, positive dynamics from that standpoint in the quarter just ended. But again that's 1 quarter, and so we'll have to see kind of how the market dynamics play out. But again, we're certainly -- have a positive view of what we saw in the quarter just ended.

Yes, and our current forecast includes all the steel cost that are in this fiscal year.

Our next question comes from the line of Ann Duignan with JP Morgan.

This is Christie Wei on for Ann Duignan. I was wondering if you could discuss what your expectations for equipment going into oil and gas would be, given the recent moderation in rig count.

Well, Christie, when we look at oil and gas, obviously, our customers interface in that segment. And what we've heard is it's not a very large part of their business. And so if you look at our business on oil and gas, there's usually 1 or 2 of our machines around a rig. And so moderating a little is not going to cause much in our categories. We watch that closely. We stay close to our customers. But it has been a slow moderation. We don't expect that to be impactful on our business today.

Our next question comes from the line of Tim Thein with Citigroup.

I wanted to come back to the earlier question on pricing in access in North America. And I -- obviously, it's been -- always been a competitive market. But I'm curious if you've seen maybe more of a step-up in response from any of your peers and just I -- based on public data that's been released in the past day or so, there's a fairly significant divergence in terms of margins between JLG and some of its peers. So I'm just -- want to get an update there in terms of what the team is seeing on that front.

Sure, Tim. And you know we don't comment on our peers, but you can talk to them about their business. What I would say is our access team -- I would say this about all 4 of our segments today, are focused on pricing discipline throughout the markets, whether it's North America, Europe, Asia-Pacific. There are times where you'll see some irrational behavior. But for the most part, we've seen pretty good rational behavior over the last several quarters. It's been pretty stable from a pricing environment. We continue to work against some of the currency issues that face us out there due to the strong dollar. But all in all, we're pleased with the quarter. As Dave mentioned, it's 1 quarter, and we'll have to continue to work at that to hold that price, improve it where we can. But it is something, as you know, we've been battling for the last couple of years.

Okay. Got it. And then we touched on the product mix earlier. Just curious what -- or if any or all that the mix between -- from a customer standpoint, how that played in terms of NRC versus the independents in terms of the deliveries in the quarter relative to maybe a year ago.

Yes, I would say compared to a year ago, Tim, we've had a little stronger mix from an IRC standpoint. Not a large swing but a little stronger than the past year.

Our next question comes from the line of Mike Shlisky with Seaport Global Securities.

I was curious, do you have the ability to be well above $1.7 billion next year? Are there other contracts that could be won? I mean, if you just win one like you won yesterday, you'll be from the low end, all of a sudden, at the high end of your overall guidance. Kind of curious whether you think it's going to kind of scrape by, or if it possibly could be at the mid- to high end kind of when all is said and done.

Mike, I'll start and let Wilson conclude if he wants. But when we made the commentary about where we think we'll be at the end of September, that does contemplate some additional orders yet between now and the end of September with FY '17 U.S. Department of defense funds. So we've largely got that baked in. And when you look domestically, we think we've got a pretty good viewpoint there. There probably isn't a lot of upside domestically. What'll probably fill in, in the gaps would be the international piece.

Yes, and I would just put a plug in for our defense team on the international side. They're working on several opportunities. We expect to be able to talk more about those in the late fall. But some of that, Mike, could materialize into late '18 sales. And it's not just M-ATVs. It's heavies. It's FMTVs. There's some sustainment opportunities. So we have several different opportunities working. It's not just M-ATVs in the least.

Okay, got it. And then for my follow-up for defense, I appreciate the color on backlog visibility. I also want to ask about margins there as well. I know you've been -- said in the past at your Analyst Day kind of high single digits might be where it ends up. But yet what you've seen so far on your performance this year with the team, that's ramped up quite nicely here and obviously, your ongoing cost-structure reductions and efficiencies, do you think you might be able to scratch 10% next year in defense? I do know it's a bit lower mix next year with less M-ATVs. But do you think you might get some good efficiencies and get a little bit above that sort of mid- to high-single-digit range for next year?

Mike, I -- you're right in terms of we are going to see some mix impact next year with the lower M-ATV volumes. But I believe that is widely understood on the street. At this time, I think our view as the high single-digit operating income margins that we talked about last year is still kind of how we're thinking about FY '18. As I said earlier, it's early yet, and we're still in the process of putting together the budget for fiscal '18. But high single-digit operating income margin seems to be kind of where we're honing in on.

Our next question comes from the line of David Raso with Evercore ISI.

My question's trying to look out to '18 on access. I know it's a bit early, but the conversations you're having with the majors and even some of the independents, I mean, what's the tone at this stage for their needs for next year? And if maybe you can also give us a feel for where you think this year ends up versus replacement demand in '18?

Well, David, we have discussions with our customers. They're ongoing, as you know. And it's a little difficult right now to talk about '18 because they're in the middle of their calendar year, which is our fiscal year. But I can tell you the discussions that we are having, a lot of positive sentiment out there. You're seeing some consolidation, so that shows that there's some optimism in the market. We're seeing really good fundamentals. You've heard some of the public companies talk about utilization rates, use rates. And now we're seeing some actual rate expansion. So I think there's a lot of positives around it. The surveys are all in the positive mode. So we're thinking positively about '18. But at this stage, we're not sure if '18 or '19 where we'll see this inflection in replacement. But I think what we would tell you today, like from this big third quarter we had, we believe it's more around equipment usage demand versus replacement demand.

Okay. And I'm just trying to think through the early tone. Is it booms? Is it scissors? Where's the demand? Because even within the backlog you have today, I know you mentioned the fourth quarter will skew a little more normal, teles versus aerials. But in the backlog today, what's the mix? Is it a little skewed toward booms, scissors? Is it teles? Just trying to get a feel for what's in the backlog. Because obviously, again, the margins for the fourth quarter are implying down access margins year-over-year.

David, I guess what I would go back to is what we said earlier is we think we're going to see a little more of a shift to a more normal mix in the fourth quarter. And as it relates to 2018, I'll go back to Wilson's point. It's still early. The rental companies, I think, are still focused on executing for their second half of the year here. I think it's all probably going to come together in the next 3 to 5 months between now and the end of the calendar year. As it relates to year-over-year, we are saying that volumes are going to be down a little bit in the fourth quarter. I think when we look at mix, it might be a little weaker year-over-year. But it's to be seen. What we said on our last earnings call is if everything comes together, we could outperform, which we did in our third quarter. Depending on where the ultimate mix ends up for this quarter, is there a little bit of upside? There probably is in that segment.

As you know, David, this is a segment that the backlogs are little shorter than our other segments. So they're still getting sales for this quarter, and that's what David is relating to. There could be some upside for us depending on the mix that they bring in at the end of this quarter.

Okay, and a follow-up on the balance sheet. It appears, looking at the end of the year, I mean, your net debt-to-EBITDA could be down to 0.6 of EBITDA; the net debt-to-cap, midteens. How are you thinking of use of balance sheet cash flow going into '18?

We talked in the past about the opportunistic approach to our capital allocation strategy, first and foremost, making sure that we do have a strong balance sheet. After that, making sure that we're investing in the business appropriately, which we believe we are. And then after that, it really gets into the opportunistic from a standpoint of returning cash to shareholders, looking at potential external opportunities to acquire companies. And depending on what we see, we may let the cash accumulate a little bit on the balance sheet, again waiting for that right time to make a move. We want to make sure that if we do make a move that it's the right move at the right time. We don't want to do something just for the sake of doing it.

And our goal's always been, over the cycle, to return 50% of our cash to shareholders.

I appreciate that comment about the cash piling up. But it's been 3 quarters in a row, really many quarters, actually, more than that, just basically no share repo at all. But it does sound like then just the takeaway, and it takes 2 to tango. But the lean here is looking for opportunistic acquisitions than share repo at the moment.

I think we would still say opportunistic, David. I don't think we have a bias necessarily one way or the other.

Our next question comes from the line of Nicole DeBlase with Deutsche Bank.

So I want to focus a little bit on the fire & emergency segment. Starting with revenues, the revenue growth is really, really strong this quarter. I'm curious what drove that. Was it a pull forward of demand? Or what caused the big step-up?

I don't think it was a pull forward of demand. I think we did have 1 international larger deal that comes to mind, just -- and that's just a function of timing, right, because those can be somewhat lumpy. But overall, continue to see strong demand domestically, continue to see improved performance overall operationally out of the segment there. So we like to pass along a couple of kudos to the fire & emergency team for that. But overall, I think it's just a reflection of what we're seeing in the market here as well as the timing on international deliveries.

Okay, understood. And then for my follow-up, I'm looking at the margins in that segment, really impressive this quarter. And it looks like you're now projecting almost 10% for the full year, which I think from the Analyst Day, was kind of your more medium-term target. So I'm curious, do you see additional medium-term upside to that 10% margin level?

Well, Nicole, I could tell you, fire & emergency's going to drive -- continue driving there. Last couple of years, they've had roughly 200 basis points of improvement. That'll be a tough pace for them to stay on, but we do expect them to continue to improve. Probably not at that type of level. But what we said in our prepared remarks is that we expect them to achieve the 10% OI target sooner rather than later.

Our next question comes from the line of Pete Skibitski with Drexel Hamilton.

Let me start out. I guess I'm curious, can you tell us how many M-ATV deliveries you actually delivered in the quarter?

Overall, it was around about 1/3 of the nearly 1,000 that we're forecasting for the year.

Okay, okay. And then if that -- some of that 1,000 has slid into '18? Or have you always expected something to go into '18?

No, we always expected a smaller quantity to end up in '18. But the 1,000 for this year, roughly a 1,000 contemplated that.

Okay, okay. And then can you tell us the composition of your defense backlog, just on a rough basis, heavies, medium, JLTVs, et cetera?

Yes, we can, but I don't have that...

Do you want to follow up later? We -- why don't we do that, Pete? I don't -- we don't have a schedule in front of us.

Okay, okay, not a problem. And then just 1 top level one on access on the revenue side. I'm wondering what's kind of surprised you guys the most as you come through the year. I know we've had, I think, a couple of guidance increases now. Have there been kind of 1 or 2 remarkable items to call out on the strength in terms of IRCs. I think, you touched on earlier being way better than expected or AWPs being way better than expected. Can you speak to that?

Well, I don't know that we agree with those last 2 comments you made there, Pete. But what I will tell you that we talked about at our last earnings call after Q2, is that May and June are kind of the pivot months for the access business. And we said if those are stronger than our current -- there could be some upside for access for the year, and that's what we saw, is a very strong May, June. So I wouldn't say it's anything out of the ordinary other than you have a North American market that's running a little bit better than we expected.

Our next question comes from the line of Jamie Cook with Crédit Suisse.

I guess 2 questions. One, as I think about access again, not that you really want to talk about '18, but conceptually, with the restructuring benefits coming through in 2018 with pricing being less of a headwind and end markets inflecting higher potentially, is it fair to assume you should be able to do better than the 20% or so implied incremental margin as we think about this year? And then my second question is on the cash flow side. The cash flow is surprising on the upside in 2017, just the drivers behind that. And then should we still expect '18 to be a pretty big cash flow year with the international M-ATVs?

Okay. Jamie, starting on access incremental. We are going to go back to it's early. We're still in the process of developing our outlook for '18. But that being said, the benefits of the restructuring actions that we announced earlier this year and that we expect to see next year, that in and of itself should drive some positive incremental margin to what you would typically expect from this business. And as it relates to pricing dynamics and those other things, that'll all be pulled together as we prepare our formal outlook for fiscal 18, which we'll talk about on our next earnings call. But certainly, the benefits of the restructuring should be a positive for us. In regards to free cash flow, as we said on the remarks, that's largely a timing issue between '17 and '18. When we came into the year, we were expecting a certain payment cadence from our international customer on the large M-ATV order. What we have seen is the cadence being a little quicker than we anticipated. So that's why you're seeing a better '17 that will pull from '18. But that being said, we still expect to have -- or would expect to have a healthy free cash flow in '18 as well.

Our next question comes from the line of Charlie Brady with SunTrust Robinson Humphrey.

Just, I guess, quick one on commercial. As we look at concrete and refuse and coming from the guidance that you put out there, it sort of implies a pretty good downtick in Q4. And I'm just trying to square up, is that between the 2 big chunks there, refuse and concrete? Are you expecting a downtick year-over-year in both sides? Or is it just really just concrete is having even a larger decline than you would have expected previously?

Charlie, is the question sequentially from Q3, is that what -- where you're going? Or...

I'm looking at year-over-year, right? Your guidance implies a down fourth quarter year-over-year. And I'm just trying to square up where the delta is between the 2 big chunks in that business.

What we would show in the fourth quarter is that we believe both of them will be down year-over-year based on the current outlook.

No, no. I mean, I get that. I mean, that's -- but I'm trying to...

No, okay. The question was 1 down versus the other. I think it's -- part of this is just driven by what we've talked about in terms of the operational execution that we've seen and have struggled with a little bit as we come through the year here. The backlogs are strong, as you can see for both product categories. We are getting into the typical seasonal cadence that you would see later in the quarter with concrete. But part of this whole story is just getting back on our cadence from a production and delivery standpoint. And we believe that will put us in a much better position as we get into '18 and execute in the next year.

Our next question comes from the line of Seth Weber with RBC Capital Markets.

Just wanted to go back to the defense margin discussion. So the implied margin here for the fourth quarter is down quite a bit from the third quarter, even though revenues looks like it's going to be up materially. So I'm trying to understand what's going on, I guess, from a mix perspective or whatnot, that would cause the margin to drop sequentially after the strong third quarter.

Sure. So a couple of things there. One, Seth, would be, call it again, this discretionary spend timing that we're seeing. If you think about some of the engineering and new product development spending as well as some of the marketing spend, that's going to be heavier in Q4 than Q3. Absorption's another player in this. If we -- from a production standpoint, a lot of the M-ATVs that we're going to sell in the fourth quarter were already going down the line in the third fiscal quarter. So we'll see some impact from that. And then the last thing overall will just be aftermarket mix. We had a pretty favorable mix in aftermarket in the third quarter. And based on what we're seeing today, we don't expect that to be quite as strong in the fourth quarter.

Okay, that's helpful, Dave. And then maybe just going back to a commercial discussion. I mean, how long do we let this go for? Is there some sort of line in the sand that we're looking at here going forward where, if performance doesn't get better by X or under a certain revenue cadence, do you make more dramatic moves for that segment? Maybe just how are you thinking about that?

Sure, Seth. We believe this is a good business. They're the market leader in refuse and concrete mixers. They've had some operational issues that we believe are being corrected, and we're putting some simplification issues in there that's going to work this business a lot like what we did at fire & emergency. You've seen that group come together over the last couple of years. Now we're not expecting it to take that long for commercial to turn around. So going forward, I think you know, every year, with our board and an outside third party, we look at some of the parts of all of our businesses and make sure that they are worth more to us than anyone else or a standalone. I can assure you today, commercial is worth more to us than anyone else in that scenario. So our goal is to get it back on the right track. Some of the structural changes that we're going to make, we're optimistic about it, that we can get it on the right path to where -- much like what you've seen us do with fire & emergency. So we're -- we've got a good team there. They're going to battle through this, and we think the dynamics in the market, refuse looks to be steady going forward. And then concrete mixers have been choppy, but that's a real old fleet out there, about an average age of 10 years. So we like the opportunities coming up, especially if the construction forecast hold. It can be a really good business.

Our next question comes from the line of Stanley Elliott with Stifel.

On the defense margins, have you all changed your assumptions of what the JLTV could be kind of on the longer-term sort of a contract?

No, we have not, Stanley. And as you know, under the percentage of completion method that we use, that is something that we look at every quarter, and we'll continue to look at that. And as we've said in the past, we think we probably need to get a little more road or mileage under our belt here in terms of producing the units and seeing where we kind of get to a steady run rate at before we make any meaningful decisions regarding margins on that program.

Okay, perfect. So really more of just a kind of work with manufacturing, getting a little bit better, and then kind of reassessing at some point down the road, is a fair way to think about it.

Yes. Again, we take a look at it every quarter. We're required to under GAAP. And so we make an estimate every quarter, all the way out to the end of the current contract, which is into, like, 2023 or something like that. So a lot of assumptions go into that, and that's why we want to be a little bit further into the contract before we make any concrete decisions regarding margin one way or the other.

No, I think that's fair. And speaking of concrete, now, but speaking of commercial in general, right, I mean, you guys have done a nice job of putting in a lot of new technologies on the fire side. Are the refuse and the concrete placement markets the same level where you can come up with these sort of technologies to drive margin improvements? Or is it really going to be more a structural change, costs out to get the margins where you want to see them?

Well, it's a little both of that, Stanley. We've got a lot of focus on, not just product fitness, but process fitness. And we've see that really help fire & emergency. So there's an internal component that we can drive that's not just about operational efficiencies on a shop floor. But now there is some automation opportunities with these businesses, and we've done some of that and will continue to assess that going forward. But that's something we evaluate each month. And right now, what we're really focused on is a structural change in this business to drive it more similar to fire & emergency, using some platform teams, again focused on some process fitness, driving complexity out of this business with the big goal of just simplifying all of our work there.

Our next question comes from the line of Ross Gilardi with Bank of America Merrill Lynch.

Wilson, you were just talking about some of the consolidation going on in the rental space before. And I'm just curious, do you foresee any share shifts, either to your favor or to your detriment, kind of over the next 6 to 12 months perhaps out of some of those combinations where you might be more or less linked to either the buyer or the seller?

Ross, we've seen some of those shifts over the past during some consolidation. I wouldn't say they're significant shifts. That share moves around. But at this point, we haven't seen any consolidation that we would view as bad for us.

Okay, got it. And then just on back on defense, and realizing it's early and so forth, you gave a lot of color on the expected backlog by the end of the year. But if you kind of take what your -- the midpoint of your guide and then margin guidance, right around 11% for this -- for the year now for defense, and you kind of think high single digits being 8.5% for next year on $1.7 billion, it implies kind of like a 45% to 50% decremental. I'm just wondering if that resonates with what you're trying to communicate. And is that basically just the mix impact of more JLTVs, fewer M-ATVs?

Ross, I'll start. In terms of the $1.7 billion visibility, that's what we expect to have good solid visibility as of the end of September, so the end of this fiscal year. And as Wilson mentioned, we believe there are opportunities to take the number above that for next year with some of the international opportunities that we believe are going to be concluded sooner rather than later. And so I guess, I would say I wouldn't necessarily think of $1.7 billion as a top line number for defense next year. In terms of the actual high single-digit operating income margin, that's a range, and we aren't going to necessarily say what that range is. You guys can decide that. But we do know that there is going to be a mix shift impact as a result of going from nearly 1,000 M-ATVs this year down to certainly a significantly lower quantity next year. I don't think that's really news to anybody. But what I think what we are continuing to focus on and pleased with how the team is executing and setting themselves up for next year is their ability to achieve that high single-digit operating income margin.

Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Just one quick follow-up to that defense. As you move into '18 and you run through the existing international order, how should we think about the cadence of deliveries for domestic production? Do we get back to a more level-loaded production run?

Again, we haven't put that together for '18 yet, but my initial reaction to that would be I would expect so, but we would need to confirm that with the defense team.

Our next question is a follow-up from the line of Pete Skibitski with Drexel Hamilton.

Just wanted to ask on the ongoing telehandler weakness. Wilson, how much of that is driven by your product line rationalization? How much is driven by the strong dollar and maybe some share loss because of that? I'm just curious as to the drivers and then maybe your line of sight in terms of when that might bottom.

Sure, Pete. Good question. We made a conscious decision to streamline our European telehandler line, kind of an 80-20 process that we're pleased with where we're going with that. At the same time, we made the decision to consolidate our telehandler manufacturing in the U.S., knowing that these 2 moves could create a problem with the market and some loss of share, which it did. The telehandler market performed a little bit better than we forecasted, so that hurt us in that area. And then we have had some issues battling against currency with some of the international competitors. So it's kind of a combination of those 3 things. We think the telehandler market though, we like our position today, and we see a good view going forward with it.

Ladies and gentlemen, we have come to the end of our time for questions. I'll turn the floor back to Mr. Jones for any final comments.

Thank you, operator. Thanks, everyone, for joining us. We appreciate your interest in our company. I look forward to speaking with you on the road or in Oshkosh or during an investor conference. Have a good day.

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