Company Quick10K Filing
Quick10K
Oshkosh
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$81.72 70 $5,720
10-Q 2018-12-31 Quarter: 2018-12-31
10-K 2018-09-30 Annual: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-K 2016-09-30 Annual: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-K 2015-09-30 Annual: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-K 2014-09-30 Annual: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-04-04 Officers
8-K 2019-02-05 Shareholder Vote
8-K 2019-01-30 Earnings
8-K 2018-11-19 Officers
8-K 2018-11-01 Earnings
8-K 2018-09-17 Officers
8-K 2018-09-11 Officers
8-K 2018-07-31 Earnings
8-K 2018-05-17 Enter Agreement, Exhibits
8-K 2018-05-08 Officers
8-K 2018-05-03 Off-BS Arrangement, Other Events, Exhibits
8-K 2018-04-03 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-02-12 Shareholder Vote
CCK Crown Holdings 7,570
NEWM New Media Investment Group 659
TRMD TORM 565
FBM Foundation Building Materials 539
SMBC Southern Missouri Bancorp 304
AEHR Aehr Test Systems 39
AEMD Aethlon Medical 13
MCOA Marijuana Co of America 0
TKLS Trutankless 0
TOGL Toga 0
OSK 2018-12-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 exhibit311123118.htm
EX-31.2 exhibit312123118.htm
EX-32.1 exhibit321123118.htm
EX-32.2 exhibit322123118.htm

Oshkosh Earnings 2018-12-31

OSK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 osk10q123118.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-31371
Oshkosh Corporation
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-0520270
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
P.O. Box 2566
Oshkosh, Wisconsin
 
54903-2566
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (920) 235-9151
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).            ý Yes    o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
 
 
Emerging growth Company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    o Yes     ý No
As of January 23, 2019, 70,046,674 shares of the registrant’s Common Stock were outstanding.




OSHKOSH CORPORATION
FORM 10-Q INDEX
FOR THE QUARTER ENDED DECEMBER 31, 2018

 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I - FINANCIAL INFORMATION
1
ITEM 1. FINANCIAL STATEMENTS
1
OSHKOSH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts; unaudited)

 
Three Months Ended 
 December 31,
 
 
 
As adjusted
 
2018
 
2017
Net sales
$
1,803.4

 
$
1,586.3

Cost of sales
1,475.1

 
1,343.3

Gross income
328.3

 
243.0

 
 
 
 
Operating expenses:
 
 
 
Selling, general and administrative
158.6

 
157.9

Amortization of purchased intangibles
9.2

 
10.6

Total operating expenses
167.8

 
168.5

Operating income
160.5

 
74.5

 
 
 
 
Other income (expense):
 
 
 
Interest expense
(13.7
)
 
(15.4
)
Interest income
2.2

 
1.7

Miscellaneous, net
(1.2
)
 
(0.2
)
Income before income taxes and earnings of unconsolidated affiliates
147.8

 
60.6

Provision for income taxes
39.7

 
4.7

Income before earnings of unconsolidated affiliates
108.1

 
55.9

Equity in earnings of unconsolidated affiliates
0.9

 
0.5

Net income
$
109.0

 
$
56.4

 
 
 
 
Earnings per share:


 
 
Basic
$
1.53

 
$
0.75

Diluted
1.51

 
0.74

 
 
 
 
Cash dividends declared per share on Common Stock
$
0.27

 
$
0.24


The accompanying notes are an integral part of these financial statements

1


OSHKOSH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions; unaudited)

 
Three Months Ended 
 December 31,
 
2018
 
2017
Net income
$
109.0

 
$
56.4

Other comprehensive income (loss), net of tax:
 
 
 
Employee pension and postretirement benefits

 
0.5

Currency translation adjustments
(8.8
)
 
2.1

Total other comprehensive income (loss), net of tax
(8.8
)
 
2.6

Comprehensive income
$
100.2

 
$
59.0


The accompanying notes are an integral part of these financial statements
1

2


OSHKOSH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share amounts; unaudited)

 
December 31,
 
September 30,
 
2018
 
2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
159.9

 
$
454.6

Receivables, net
1,072.1

 
1,521.6

Unbilled receivables, net
342.9

 

Inventories, net
1,291.6

 
1,227.7

Other current assets
77.7

 
66.0

Total current assets
2,944.2

 
3,269.9

Property, plant and equipment, net
487.1

 
481.1

Goodwill
1,005.2

 
1,007.9

Purchased intangible assets, net
460.0

 
469.4

Other long-term assets
133.6

 
65.9

Total assets
$
5,030.1

 
$
5,294.2

 
 
 
 
Liabilities and Shareholders Equity
 
 
 
Current liabilities:
 
 
 
Revolving credit facilities and current maturities of long-term debt
$

 
$

Accounts payable
608.4

 
776.9

Customer advances
425.2

 
444.9

Payroll-related obligations
119.8

 
192.5

Other current liabilities
324.8

 
275.8

Total current liabilities
1,478.2

 
1,690.1

Long-term debt, less current maturities
818.3

 
818.0

Other long-term liabilities
322.4

 
272.6

Commitments and contingencies


 


Shareholders equity:
 
 
 
Preferred Stock ($0.01 par value; 2,000,000 shares authorized; none issued and outstanding)

 

Common Stock ($0.01 par value; 300,000,000 shares authorized; 75,101,465 shares issued)
0.7

 
0.7

Additional paid-in capital
797.6

 
814.8

Retained earnings
2,090.8

 
2,007.9

Accumulated other comprehensive loss
(124.7
)
 
(106.8
)
Common Stock in treasury, at cost (5,075,430 and 2,730,707 shares, respectively)
(353.2
)
 
(203.1
)
Total shareholders’ equity
2,411.2

 
2,513.5

Total liabilities and shareholders equity
$
5,030.1

 
$
5,294.2


The accompanying notes are an integral part of these financial statements

3


OSHKOSH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In millions, except per share amounts; unaudited)

 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock in
Treasury,
at Cost
 
Total
Balance at September 30, 2017
$
0.9

 
$
802.2

 
$
2,399.8

 
$
(125.0
)
 
$
(770.5
)
 
$
2,307.4

Net income

 

 
56.4

 

 

 
56.4

Employee pension and postretirement benefits,
net of tax of $0.2

 

 

 
0.5

 

 
0.5

Currency translation adjustments

 

 

 
2.1

 

 
2.1

Cash dividends ($0.24 per share)

 

 
(18.0
)
 

 

 
(18.0
)
Repurchases of Common Stock

 

 

 

 
(63.7
)
 
(63.7
)
Exercise of stock options

 
(1.8
)
 

 

 
10.4

 
8.6

Stock-based compensation expense

 
7.5

 

 

 

 
7.5

Payment of stock-based restricted and performance shares

 
(8.6
)
 

 

 
8.6

 

Shares tendered for taxes on stock-based compensation

 

 

 

 
(7.4
)
 
(7.4
)
Balance at December 31, 2017
$
0.9

 
$
799.3

 
$
2,438.2

 
$
(122.4
)
 
$
(822.6
)
 
$
2,293.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock in
Treasury,
at Cost
 
Total
Balance at September 30, 2018
$
0.7

 
$
814.8

 
$
2,007.9

 
$
(106.8
)
 
$
(203.1
)
 
$
2,513.5

Effect of adopting new Accounting Standard Updates (ASU):
 
 
 
 
 
 
 
 
 
 


Revenue recognition (ASU 2014-09)

 

 
(60.4
)
 

 

 
(60.4
)
Tax accounting for intra-entity asset
transfers (ASU 2016-16)

 

 
44.5

 

 

 
44.5

Tax impact of U.S. tax reform on Accumulated Other Comprehensive Income (ASU 2018-02)

 

 
9.1

 
(9.1
)
 

 

Balance at October 1, 2018
0.7

 
814.8

 
2,001.1

 
(115.9
)
 
(203.1
)
 
2,497.6

Net income

 

 
109.0

 

 

 
109.0

Currency translation adjustments

 

 

 
(8.8
)
 

 
(8.8
)
Cash dividends ($0.27 per share)

 

 
(19.3
)
 

 

 
(19.3
)
Repurchases of Common Stock

 

 

 

 
(170.0
)
 
(170.0
)
Exercise of stock options

 
(1.8
)
 

 

 
3.5

 
1.7

Stock-based compensation expense

 
7.9

 

 

 

 
7.9

Payment of stock-based restricted and performance shares

 
(23.3
)
 

 

 
23.3

 

Shares tendered for taxes on stock-based compensation

 

 

 

 
(6.9
)
 
(6.9
)
Balance at December 31, 2018
$
0.7


$
797.6


$
2,090.8


$
(124.7
)

$
(353.2
)

$
2,411.2


The accompanying notes are an integral part of these financial statements

4


OSHKOSH CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions; unaudited)

 
Three Months Ended 
 December 31,
 
2018
 
2017
Operating activities:


 


Net income
$
109.0

 
$
56.4

Depreciation and amortization
28.7

 
31.4

Stock-based compensation expense
7.9

 
7.5

Deferred income taxes
(1.0
)
 
(27.8
)
Gain on sale of assets
(0.8
)
 
(0.6
)
Foreign currency transaction gains
(0.2
)
 
(0.8
)
Other non-cash adjustments
(0.9
)
 
0.9

Changes in operating assets and liabilities
(228.6
)
 
(37.8
)
Net cash provided (used) by operating activities
(85.9
)
 
29.2

 
 
 
 
Investing activities:
 
 
 
Additions to property, plant and equipment
(13.2
)
 
(18.7
)
Additions to equipment held for rental
(5.9
)
 
(1.2
)
Proceeds from sale of equipment held for rental
2.3

 
2.5

Other investing activities
1.7

 
(0.8
)
Net cash used by investing activities
(15.1
)
 
(18.2
)
 
 
 
 
Financing activities:


 


Proceeds from issuance of debt (original maturities greater than three months)

 
6.5

Repayments of debt (original maturities greater than three months)

 
(5.0
)
Repurchases of Common Stock
(176.9
)
 
(71.1
)
Dividends paid
(19.3
)
 
(18.0
)
Proceeds from exercise of stock options
1.7

 
8.6

Net cash used by financing activities
(194.5
)
 
(79.0
)
 
 
 
 
Effect of exchange rate changes on cash
0.8

 
0.1

Decrease in cash and cash equivalents
(294.7
)

(67.9
)
Cash and cash equivalents at beginning of period
454.6

 
447.0

Cash and cash equivalents at end of period
$
159.9

 
$
379.1

 
 
 
 
Supplemental disclosures:
 
 
 
Cash paid for interest
$
13.4

 
$
6.8

Cash paid for income taxes
5.6

 
0.8


The accompanying notes are an integral part of these financial statements

5

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



1.    Basis of Presentation

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (which include normal recurring adjustments, unless otherwise noted) necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and notes thereto included in the Annual Report on Form 10-K of Oshkosh Corporation for the year ended September 30, 2018. The interim results are not necessarily indicative of results for the full year. “Oshkosh” refers to Oshkosh Corporation not including its subsidiaries and “the Company” refers to Oshkosh Corporation and its subsidiaries. Certain reclassifications have been made to the fiscal 2018 financial statements to conform to the fiscal 2019 presentation.



2.    New Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued new revenue recognition guidance (Accounting Standard Codification (ASC) 606) to provide a single, comprehensive revenue recognition model for all contracts with customers, Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard supersedes all existing U.S. GAAP guidance on revenue recognition and is expected to require the use of more judgment and result in additional disclosures.

The Company adopted the new guidance on October 1, 2018 following the modified retrospective method of transition. The Company applied the new guidance to contracts that were not completed at the date of initial adoption, resulting in a reduction of retained earnings by $60.4 million, after-tax, at that date. For contracts that were modified prior to October 1, 2018, the Company considered the aggregate impact of all modifications that occurred prior to the effective date of the standard for purposes of identifying performance obligations, determining transaction price and allocating transaction price to performance obligations. Prior period comparative information was not recast to reflect the impact of the new guidance and therefore continues to be reported under the accounting guidance in effect during those periods.

Under the new guidance, the majority of the Company’s contracts with the U.S. government will follow an over time model using the cost-to-cost method to measure performance. Previously the Company had recognized revenue from these contracts on the percentage of completion method using either the cost-to-cost or the units-complete method. In addition, the new guidance changes the definition of a contract, resulting in the Company no longer considering unexercised government options in the measurement of completion and profitability. The new guidance is expected to result in additional volatility in the Company’s earnings based upon the date of receipt of contract orders.

In the fire & emergency segment, the point in time at which “control transfers” to the customer differs from when the Company no longer maintains “risk of loss”, which under the new guidance delays the point in time at which the Company will recognize revenue on contracts for which the end user, rather than the Company’s dealer, is the Company’s customer. In the commercial segment, the Company builds certain units on chassis owned by the end customer. Revenue related to these arrangements moves from a point in time revenue recognition model to an over time model that will be measured using the cost-to-cost method of percentage-of-completion as the Company is enhancing a customer asset. In addition, under the new guidance, the Company defers revenue, including the estimated profit, for service warranties instead of recording a liability for estimated costs.

See Note 3 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the Company’s revenue recognition method under the new revenue guidance.


6

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The cumulative effect of initially applying the new revenue recognition guidance to the Company’s Consolidated Financial Statements as of October 1, 2018 was as follows (in millions):
 
 
Balance as of September 30, 2018
 
Cumulative Impact from Adopting New Revenue Standard
 
Balance as of October 1,
2018
Assets
 
 
 
 
 
 
Receivables, net
 
$
1,521.6

 
$
(248.9
)
 
$
1,272.7

Unbilled receivables, net
 

 
309.7

 
309.7

Inventories, net
 
1,227.7

 
(75.9
)
 
1,151.8

Other current assets
 
66.0

 
0.3

 
66.3

Total current assets
 
3,269.9

 
(14.8
)
 
3,255.1

Other long-term assets
 
65.9

 
18.7

 
84.6

Total assets
 
5,294.2

 
3.9

 
5,298.1

 
 
 
 
 
 
 
Liabilities and Shareholders Equity
 
 
 
 
 
 
Customer advances
 
$
444.9

 
$
27.2

 
$
472.1

Other current liabilities
 
275.8

 
6.4

 
282.2

Total current liabilities
 
1,690.1

 
33.6

 
1,723.7

Other long-term liabilities
 
272.6

 
30.7

 
303.3

Retained earnings
 
2,007.9

 
(60.4
)
 
1,947.5

Total shareholders equity
 
2,513.5

 
(60.4
)
 
2,453.1

Total liabilities and shareholders equity
 
5,294.2

 
3.9

 
5,298.1



7

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The impact from adopting the new revenue recognition guidance on the Company’s Condensed Consolidated Financial Statements as of and for the three-month period ended December 31, 2018 was as follows (in millions):
 
 
Three Months Ended December 31, 2018
 
 
As Reported
 
Previous Accounting Guidance
 
Impact of New Revenue Recognition Standard
Condensed Consolidated Statement of Income
 
 
 
 
 
 
Net sales
 
$
1,803.4

 
$
1,765.3

 
$
38.1

Cost of sales
 
1,475.1

 
1,462.2

 
12.9

Gross income
 
$
328.3

 
$
303.1

 
$
25.2

 
 
 
 
 
 
 
Operating income
 
$
160.5

 
$
135.3

 
$
25.2

 
 
 
 
 
 
 
Income before income taxes and earnings of unconsolidated affiliates
 
$
147.8

 
$
122.6

 
$
25.2

Provision for income taxes
 
39.7

 
33.7

 
6.0

Income before earnings of unconsolidated affiliates
 
108.1

 
88.9

 
19.2

Equity in earnings of unconsolidated affiliates
 
0.9

 
0.9

 

Net income
 
$
109.0

 
$
89.8

 
$
19.2

 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
Basic
 
$
1.53

 
$
1.26

 
$
0.27

Diluted
 
1.51

 
1.25

 
0.26

 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
As Reported
 
Previous Accounting Guidance
 
Impact of New Revenue Recognition Standard
Condensed Consolidated Balance Sheet
 
 
 
 
 
 
Assets
 
 
 
 
 
 
Receivables, net
 
$
1,072.1

 
$
1,349.2

 
$
(277.1
)
Unbilled receivables, net
 
342.9

 

 
342.9

Inventories, net
 
1,291.6

 
1,356.5

 
(64.9
)
Other current assets
 
77.7

 
77.6

 
0.1

Total current assets
 
2,944.2

 
2,943.1

 
1.1

Other long-term assets
 
133.6

 
120.9

 
12.7

Total assets
 
5,030.1

 
5,016.3

 
13.8

 
 
 
 
 
 
 
Liabilities and Shareholders Equity
 
 
 
 
 
 
Customer advances
 
$
425.2

 
$
416.5

 
$
8.7

Other current liabilities
 
324.8

 
311.5

 
13.3

Total current liabilities
 
1,478.2

 
1,456.2

 
22.0

Other long-term liabilities
 
322.4

 
289.4

 
33.0

Retained earnings
 
2,090.8

 
2,132.0

 
(41.2
)
Total shareholders equity
 
2,411.2

 
2,452.4

 
(41.2
)
Total liabilities and shareholders equity
 
5,030.1

 
5,016.3

 
13.8



8

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory. The standard requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset when the transfer occurs as opposed to when the asset is transferred to an outside party. The standard does not apply to intra-entity transfers of inventory. The Company adopted ASU 2016-16 on October 1, 2018 following the modified retrospective approach through a cumulative effect adjustment, which resulted in an increase to retained earnings of $44.5 million.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The standard requires that an entity report the service cost component of net periodic pension and postretirement cost in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The remaining components of net benefit costs are required to be presented in the income statement separately from the service component and outside a subtotal of income from operations. The amendment further allows only the service cost component of net periodic pension and postretirement costs to be eligible for capitalization, when applicable. The Company adopted ASU 2017-07 on October 1, 2018. The impact of this standard was a reclassification of $0.7 million of other components of net periodic pension cost to “Miscellaneous, net” on the Condensed Consolidated Statement of Income for the three months ended December 31, 2017. The Company utilized a practical expedient included in the ASU which allowed the Company to use amounts previously disclosed in its Employee Benefit Plans footnote for the prior period as the estimation basis for applying the required retrospective presentation requirements.

In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”), thereby eliminating the resulting stranded tax effect. The Company adopted ASU 2018-02 on October 1, 2018. The Company increased retained earnings by $9.1 million upon adoption of ASU 2018-02 to eliminate the tax effects stranded in accumulated other comprehensive income resulting from the Tax Reform Act.

Standards not yet adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), and has since issued amendments to this standard, which requires lessees to reflect most leases on their balance sheet as lease liabilities with corresponding right-of-use assets, while leaving presentation of lease expense in the statement of income largely unchanged. The standard also eliminates the real-estate specific provisions that exist under current U.S. GAAP and modifies the classification criteria and accounting lessors must apply to sales-type and direct financing leases. The Company will be required to adopt ASU 2016-02 and related amendments to the standard as of October 1, 2019. The Company is currently evaluating the impact of ASU 2016-02 on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The standard requires a change in the measurement approach for credit losses on financial assets measured on an amortized cost basis from an incurred loss method to an expected loss method, thereby eliminating the requirement that a credit loss be considered probable to impact the valuation of a financial asset measured on an amortized cost basis. The standard requires the measurement of expected credit losses to be based on relevant information about past events, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. The Company will be required to adopt ASU 2016-13 as of October 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2016-13 on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The standard simplifies the measurement of goodwill impairment by eliminating the requirement that an entity compute the implied fair value of goodwill based on the fair values of its assets and liabilities to measure impairment. Instead, goodwill impairment will be measured as the difference between the fair value of the reporting unit and the carrying value of the reporting unit. The standard also clarifies the treatment of the income tax effect of tax deductible goodwill when measuring goodwill impairment loss. The Company will be required to adopt ASU 2017-04 as of October 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2017-04 on the Company’s consolidated financial statements.


9

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



3.    Revenue Recognition

Revenue is recognized when control of the goods or services promised under the contract are transferred to the customer either at a point in time (e.g. upon delivery) or over time (e.g., as the Company performs under the contract) in an amount that reflects the consideration to which the Company expects to be entitled in exchange for the goods or services. The Company accounts for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. If collectability is not probable, the sale is deferred until collection becomes probable or payment is received.

Contracts are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, the expected consideration (e.g., the transaction price) is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation, which are determinable based on observable stand alone selling prices or are estimated using an expected cost plus a margin approach. Revenue is then recognized for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred. When the amount of consideration allocated to a performance obligation through this process differs from the invoiced amount, it results in a contract asset or liability. The identification of performance obligations within a contract requires significant judgment.

The following is a description of the primary activities from which the Company generates revenue.

Access equipment, Fire & emergency and Commercial segments revenue

The Company derives revenue in the access equipment, fire & emergency and commercial segments (non-defense segments) through the sale of machinery, vehicles and related aftermarket parts and services. Customers include distributors and end-users. Contracts with customers generally exist upon the approval of a quote and/or purchase order by the Company and customer. Each contract is also assessed at inception to determine whether it is necessary to combine the contract with other contracts.

The Company’s non-defense segments offer various customer incentives within contracts, such as sales and marketing rebates, volume discounts and interest subsidies, some of which are variable and therefore must be estimated by the Company. Transaction prices may also be impacted by rights of return, primarily within the aftermarket parts business, which requires the Company to record a liability and asset representing its rights and obligations in the event a return occurs. The estimated return liability is based on historical experience rates.

Revenue for performance obligations consisting of machinery, vehicle and after-market parts (together “product”) is recognized when the customer obtains control of the product, which typically occurs at a point in time, based on the shipping terms within the contract. In the commercial segment, concrete mixer and refuse products are sold both on Company owned chassis and customer owned chassis. When performing work on a customer owned chassis, revenue is recognized over time based on the cost-to-cost method, as the Company is enhancing a customer owned asset.

All non-defense segments offer aftermarket services related to their respective products such as repair, refurbishment and maintenance (together “services”). The Company generally recognizes revenue on service performance obligations over time using the method that results in the most faithful depiction of transfer of control to the customer. Non-defense segments also offer extended warranty coverage as an option on most products. The Company considers extended warranties to be service-type warranties and therefore a performance obligation. Service-type warranties differ from the Company’s standard, or assurance-type warranties, as they are generally separately priced and negotiated as part of the contract and/or provide additional coverage beyond what the customer or customer group that purchases the product would receive under an assurance-type warranty. The Company has concluded that its extended warranties are stand-ready obligations to perform and therefore recognizes revenue ratably over the coverage period. The Company also provides a standard warranty on its products and services at no additional cost to its customers in most instances. See Note 13 of the Notes to Condensed Consolidated Financial Statements for further discussion on product assurance warranties.


10

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Defense segment revenue

The majority of the Company’s defense segment net sales are derived through long-term contracts with the U.S. government to design, develop, manufacture or modify defense products. These contracts, which also include those under the U.S. Government-sponsored Foreign Military Sales (FMS) program, accounted for approximately 90% of defense segment revenue in fiscal 2018. Contracts with defense segment customers are generally fixed-price or cost-reimbursement type contracts. Under fixed-price contracts, the price paid to the Company is generally not adjusted to reflect the Company’s actual costs except for costs incurred as a result of contract modifications. Certain fixed-price contracts include an incentive component under which the price paid to the Company is subject to adjustment based on the actual costs incurred. Under cost-reimbursement contracts the price paid to the Company is determined based on the allowable costs incurred to perform plus a fee. The fee component of cost-reimbursement contracts can be fixed based on negotiations at contract inception or can vary based on performance against target costs established at the time of contract inception. The Company will also design, develop, manufacture or modify defense products for international customers through Direct Commercial Sale contracts. The defense segment supports its products through the sale of aftermarket parts and services. Aftermarket contracts can range from long-term supply agreements to ad hoc purchase orders for replacement parts.

The Company evaluates the promised goods and services within defense segment contracts at inception to identify performance obligations. The goods and services in defense segment contracts are typically not distinct from one another as they are generally customized, have complex inter-relationships and the Company is responsible for overall management of the contract. As a result, defense segment contracts are typically accounted for as a single performance obligation. The defense segment provides standard warranties for its products for periods that typically range from one to two years. These assurance-type warranties typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. See Note 13 of the Notes to Condensed Consolidated Financial Statements for further discussion on product assurance warranties.

The Company determines the transaction price for each contract at inception based on the consideration that it expects to receive for the goods and services promised under the contract. This determination is made based on the Company’s current rights, excluding the impact of any subsequent contract modifications (including unexercised options) until they become legally enforceable. Contract modifications frequently occur within the defense segment. The Company evaluates each modification to identify changes that impact price or scope of its contracts, which are then assessed to determine if the modification should be accounted for as an adjustment to an existing contract or as a separate contract. Contract modifications within the defense segment are generally accounted for as a cumulative effect adjustment to existing contracts as they are not distinct from the goods and services within the existing contract.

For defense segment contracts that include a variable component of the sale price, the Company estimates variable consideration. Variable consideration is included within the contract’s transaction price to the extent it is probable that a significant reversal of revenue will not occur. The Company evaluates its estimates of variable consideration on an ongoing basis and any adjustments are accounted for as changes in estimates in the period identified. Common forms of variable consideration within defense segment contracts include cost reimbursement contracts that contain incentives, customer reimbursement rights and regulatory or customer negotiated penalties tied to contract performance.

The Company recognizes revenue on defense segment contracts as performance obligations are satisfied and control of the underlying goods and services is transferred to the customer. In making this evaluation, the defense segment considers contract terms, payment terms and whether there is an alternative future use for the good or service. Through this process the Company has concluded that substantially all of the defense segment’s performance obligations, including a majority of performance obligations for aftermarket goods and services, transfer to the customer continuously during the contract term and therefore revenue is recognized over time. For U.S. government and FMS contracts, this determination is supported by the inclusion of clauses within contracts that allow the customer to terminate a contract at its convenience. When the clause is present, the Company is entitled to compensation for the work performed through the date of notification at a price that reflects actual costs plus a reasonable margin in exchange for transferring its work in process to the customer. For contracts that do not contain termination for convenience provisions, the Company is generally able to support the continuous transfer of control determination as a result of the customized nature of its goods and services and contractual rights.

The defense segment recognizes revenue on its performance obligations that are satisfied over time by measuring progress using the cost-to-cost method of percentage-of-completion because it best depicts the transfer of control to the customer. Under the cost-to-cost method of percentage-of-completion, the defense segment measures progress based on the ratio of costs incurred to date to total estimated costs for the performance obligation. The Company recognizes changes in estimated sales or costs and

11

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


the resulting profit or loss on a cumulative basis. Cumulative estimate-at completion (EAC) adjustments represent the cumulative effect of the changes on prior periods. If a loss is expected on a performance obligation, the complete estimated loss is recorded in the period in which the loss is identified. For contracts with only aftermarket parts performance obligations, revenue is recognized at the time the parts are physically committed to the order or based on shipping terms depending on whether the contracts contain a termination for convenience clause. For performance obligations consisting solely of services, revenue is recognized by either using the cost-to-cost method of percentage-of-completion method or as the Company has the right to bill the customer in instances that billing rights approximates timing of transfer of control to the customer.

There is significant judgment involved in estimating sales and costs within the defense segment. Each contract is evaluated at contract inception to identify risks and estimate revenue and costs. In performing this evaluation, the defense segment considers risks of contract performance such as technical requirements, schedule, duration and key contract dependencies. These considerations are then factored into the Company’s estimated revenue and costs. Preliminary contract estimates are subject to change throughout the duration of the contract as additional information becomes available that impacts risks and estimated revenue and costs. In addition, as contract modifications (e.g. new orders) are received, the additional units are factored into the overall contract estimate of costs and transaction price. Contract adjustments in the defense segment increased net sales, operating income, net income and diluted earnings per share during the three months ended December 31, 2018 by $31.6 million, $30.3 million, $23.2 million and $0.32 per share, respectively.

Disaggregation of Revenue

The table below presents consolidated net sales disaggregated by segment and timing of revenue recognition (in millions):

 
Three Months Ended December 31, 2018
 
Access equipment
 
Defense
 
Fire & emergency
 
Commercial
 
Corporate and Intersegment Eliminations
 
Total
Point in time
$
807.8

 
$
0.3

 
$
290.9

 
$
121.2

 
$
(4.9
)
 
$
1,215.3

Over time
18.7

 
463.8

 
4.6

 
101.0

 

 
588.1

 
$
826.5

 
$
464.1

 
$
295.5

 
$
222.2

 
$
(4.9
)
 
$
1,803.4


See Note 19 of the Notes to Condensed Consolidated Financial Statements for further disaggregated sales information.

Contract Assets and Contract Liabilities

The Company is generally entitled to bill its customers upon satisfaction of its performance obligations, with the exception of its long-term contracts in the defense segment which typically allow for billing upon acceptance of the finished good, advance payments from customers primarily within the fire & emergency segment and extended warranties that are usually billed in advance of the warranty coverage period. Customer payment is usually received shortly after billing and payment terms generally do not exceed one year. With the exception of the fire & emergency segment, the Company’s contracts typically do not contain a significant financing component. In the fire & emergency segment, customers earn interest on customer advances at a rate determined in a separate financing transaction between the fire & emergency segment and the customer at contract inception. Interest due on customer advances of $3.6 million and $4.6 million was recorded in “Interest expense” in the Condensed Consolidated Statements of Income for the three months ended December 31, 2018 and 2017, respectively.

The timing of billing does not always match the timing of revenue recognition. In instances where a customer pays consideration in advance or when the Company is entitled to bill a customer in advance of recognizing the related revenue, the Company records a contract liability within “Customer advances”, “Other current liabilities” or “Other long-term liabilities” in the Condensed Consolidated Balance Sheet. Total contract liabilities were $549.0 million as of December 31, 2018, of which $425.2 million, $74.9 million and $48.9 million was included in “Customer advances”, “Other current liabilities” and “Other long-term liabilities”, respectively. The Company reduces contract liabilities when revenue is recognized. The Company recognized $236.0 million of revenue that was recorded as a contract liability as of the beginning of the period during the three months ended December 31, 2018.


12

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In instances where the Company recognizes revenue prior to having an unconditional right to payment, the Company records a contract asset within “Unbilled receivables, net” in the Condensed Consolidated Balance Sheet. The Company reduces contract assets when the Company has an unconditional right to payment. The Company periodically assesses its contract assets for impairment.

Contract assets and liabilities are determined on a net basis for each contract. The Company did not record any impairment losses on contracts from customers during the three-month period ended December 31, 2018. See Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information on the Company’s receivable balances.

The Company offers a variety of service-type warranties, including optionally priced extended warranty programs. Revenue related to service warranties is deferred until after the expiration of the standard warranty period. The revenue is then recognized in income over the term of the extended warranty period in proportion to the costs that are expected to be incurred. Changes in the Company’s service-type warranties were as follows (in millions):
 
Three Months Ended 
 December 31,
 
2018
 
2017
Balance at beginning of period
$
30.7

 
$
30.8

Adoption of ASC 606
35.7

 

Deferred revenue for new service warranties
10.5

 
2.7

Amortization of deferred revenue
(10.8
)
 
(2.6
)
Changes in liability for pre-existing warranties, net

 
(0.1
)
Balance at end of period
$
66.1

 
$
30.8


Remaining Performance Obligations

As of December 31, 2018, the Company had unsatisfied performance obligations for contracts with an original duration greater than one year totaling $3.23 billion, of which $1.73 billion is expected to be satisfied and revenue recognized in the remaining nine months of fiscal 2019, $1.45 billion is expected to be satisfied and revenue recognized in fiscal 2020 and $51.0 million is expected to be satisfied and revenue recognized beyond fiscal 2020. The Company has elected the practical expedient to not disclose unsatisfied performance obligations with an original contract duration of one year or less.

Practical Expedients and Policy Elections

The Company has elected to apply the following practical expedients and accounting policy elections when determining revenue from contracts with customers and capitalization of related costs:

Shipping and handling costs incurred after control of the related product has transferred to the customer are considered costs to fulfill the related promise and are included in “Cost of Sales” in the Condensed Consolidated Statement of Income when incurred or when the related product revenue is recognized, whichever is earlier.
Except for the fire & emergency segment, the Company has elected to not adjust revenue for the effects of a significant finance component when the timing difference between receipt of payment and recognition of revenue is less than one year.
Sales and similar taxes that are collected from customers are excluded from the transaction price.
The Company has elected to expense incremental costs to obtain a contract when the amortization period of the related asset is expected to be less than one year.


4.    Stock-Based Compensation

In February 2017, the Company’s shareholders approved the 2017 Incentive Stock and Awards Plan (the “2017 Stock Plan”). The 2017 Stock Plan replaced the 2009 Incentive Stock and Awards Plan (as amended, the “2009 Stock Plan”). While no new awards will be granted under the 2009 Stock Plan or its predecessor, the 2004 Incentive Stock and Awards Plan, awards previously made under these two plans that were outstanding as of the approval date of the 2017 Stock Plan will remain outstanding and continue to be governed by the provisions of the respective stock plan under which they were issued. At December 31, 2018,

13

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


the Company had reserved 7,184,803 shares of Common Stock available for issuance to provide for the exercise of outstanding stock options and the issuance of Common Stock under incentive compensation awards, including awards issued prior to the effective date of the 2017 Stock Plan.

The Company recognizes stock-based compensation expense over the requisite service period for vesting of an award, or to an employee’s eligible retirement date, if earlier and applicable. Total stock-based compensation expense, including cash-based liability awards, for the three months ended December 31, 2018 was $7.6 million ($6.5 million net of tax). Total stock-based compensation expense, including cash-based liability awards, for the three months ended December 31, 2017 was $8.5 million ($6.6 million net of tax).


5.    Employee Benefit Plans

Components of net periodic pension benefit cost were as follows (in millions):
 
Three Months Ended 
 December 31,
 
2018
 
2017
Components of net periodic benefit cost
 
 
 
Service cost
$
3.0

 
$
3.1

Interest cost
4.7

 
4.5

Expected return on plan assets
(5.0
)
 
(5.0
)
Amortization of prior service cost
0.4

 
0.4

Amortization of net actuarial loss

 
0.5

Net periodic benefit cost
$
3.1

 
$
3.5


Components of net periodic other post-employment benefit cost were as follows (in millions):
 
Three Months Ended 
 December 31,
 
2018
 
2017
Components of net periodic benefit cost
 
 
 
Service cost
$
0.8

 
$
0.9

Interest cost
0.5

 
0.5

Amortization of prior service benefit
(0.4
)
 
(0.2
)
Amortization of net actuarial gain
(0.1
)
 

Net periodic benefit cost
$
0.8

 
$
1.2


Components of net periodic benefit cost other than service cost are included in “Miscellaneous, net” in the Condensed Consolidated Statements of Income.


6.    Income Taxes

The Company recorded income tax expense of $39.7 million for the three months ended December 31, 2018, or 26.9% of pre-tax income, compared to $4.7 million, or 7.8% of pre-tax income, for the three months ended December 31, 2017. Results for the three months ended December 31, 2018 were unfavorably impacted by $7.3 million of net discrete tax charges, including $6.2 million of tax charges related to uncertain tax position reserves and a $0.8 million charge related to adjustments to the repatriation tax required under tax legislation enacted in the United States in December 2017. Results for the three months ended December 31, 2017 were favorably impacted by $10.3 million of net discrete tax benefits, including a $3.3 million benefit related to share-based compensation tax deductions, and a $6.5 million tax benefit related to tax legislation enacted in the United States.


14

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


On December 22, 2017, the Tax Reform Act was signed into law by President Trump. The Tax Reform Act significantly revised the U.S. corporate income tax regime by, among other things, lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018, while also repealing the deduction for domestic production activities, implementing a territorial tax system, imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries (the “Transition Tax”), and creating new taxes on certain foreign-sourced earnings. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted. The U.S. Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 118, which provided guidance on how to account for the effects of the Tax Reform Act under ASC 740, Income Taxes. SAB No. 118 enabled companies to record a provisional amount for the effects for the Tax Reform Act based on a reasonable estimate, subject to adjustment during a measurement period of up to one year.

The Company recorded $30.2 million of tax benefit during fiscal 2018 as a result of the remeasurement of deferred tax assets and liabilities required as a result of the Tax Reform Act, which completed the Company’s remeasurement of deferred taxes under the Tax Reform Act. The Company recorded net tax expense of $19.5 million during fiscal 2018 with respect to the Transition Tax. The Transition Tax amount was provisional and represented the Company’s best estimate as of September 30, 2018. An additional adjustment of $0.8 million was made to the Transition Tax liability in the three months ended December 31, 2018 based on the availability of additional information and technical guidance. The Company believes, based on current available technical guidance, the Transition Tax liability is complete. However, the amount may change if the Company receives additional regulatory guidance that impacts the Company’s position.

The Company’s liability for gross unrecognized tax benefits, excluding related interest and penalties, was $76.0 million and $33.7 million as of December 31, 2018 and September 30, 2018, respectively. Included in the Company’s December 31, 2018 liability for gross unrecognized tax benefits is a $6.2 million reserve related to an uncertain tax position related to the Transition Tax liability and a $35.8 million reserve recorded with respect to a temporary deferred position that the Company anticipates taking on its fiscal year 2019 federal income tax return. As of December 31, 2018, net unrecognized tax benefits, excluding interest and penalties, of $24.6 million would affect the Company’s net income if recognized.

The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in the “Provision for income taxes” in the Condensed Consolidated Statements of Income. During the three months ended December 31, 2018 and 2017, the Company recognized an expense of $0.2 million and $0.3 million, respectively, related to interest and penalties. At December 31, 2018, the Company had accruals for the payment of interest and penalties of $5.3 million. During the next twelve months, it is reasonably possible that federal, state and foreign tax audit resolutions could reduce net unrecognized tax benefits by approximately $7.0 million because the Company’s tax positions are sustained on audit, the Company agrees to their disallowance or the statutes of limitations close.


7.    Earnings Per Share

The reconciliation of basic weighted-average shares outstanding to diluted weighted-average shares outstanding was as follows:
 
Three Months Ended 
 December 31,
 
2018
 
2017
Basic weighted-average common shares outstanding
71,464,489

 
74,846,829

Dilutive stock options and other equity-based compensation awards
637,337

 
1,177,636

Diluted weighted-average common shares outstanding
72,101,826

 
76,024,465


Options not included in the computation of diluted earnings per share attributable to common shareholders because they would have been anti-dilutive were as follows:
 
Three Months Ended 
 December 31,
 
2018
 
2017
Stock options
943,089

 
261,675



15

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



8.    Receivables

Receivables consisted of the following (in millions):
 
December 31, 2018
 
September 30, 2018
U.S. government:
 
 
 
Amounts billed
$
190.6

 
$
156.3

Costs and profits not billed

 
235.4

 
190.6

 
391.7

Other trade receivables
856.0

 
1,089.4

Finance receivables
11.1

 
11.7

Notes receivable
1.1

 
1.4

Other receivables
34.5

 
48.6

 
1,093.3

 
1,542.8

Less allowance for doubtful accounts
(10.5
)
 
(9.9
)
 
$
1,082.8

 
$
1,532.9


Classification of receivables in the Condensed Consolidated Balance Sheets consisted of the following (in millions):
 
December 31, 2018
 
September 30, 2018
Current receivables
$
1,072.1

 
$
1,521.6

Long-term receivables
10.7

 
11.3

 
$
1,082.8

 
$
1,532.9


Due to the adoption of ASC 606, certain contracts in the defense and commercial segments are now recognized on the cost-to-cost method of percentage-of-completion. Costs and profits not billed under these contracts are now recognized as “Unbilled receivables, net” on the Company’s Condensed Consolidated Balance Sheets.

Finance and notes receivable accrual status consisted of the following (in millions):
 
Finance Receivables
 
Notes Receivable
 
December 31, 2018
 
September 30, 2018
 
December 31, 2018
 
September 30, 2018
Receivables on nonaccrual status
$
2.9

 
$
10.2

 
$

 
$

Receivables past due 90 days or more and still accruing

 

 

 

 
 
 
 
 
 
 
 
Receivables subject to general reserves
7.8

 
1.5

 

 

Allowance for doubtful accounts

 

 

 

Receivables subject to specific reserves
3.3

 
10.2

 
1.1

 
1.4

Allowance for doubtful accounts
(2.7
)
 
(2.8
)
 

 


Finance Receivables: Finance receivables represent sales-type leases resulting from the sale of the Company’s products and the purchase of finance receivables from lenders pursuant to customer defaults under program agreements with finance companies. As of December 31, 2018, approximately 87% of the outstanding finance receivables balance was due from three parties. Finance receivables originated by the Company generally include a residual value component. Residual values are determined based on the expectation that the underlying equipment will have a minimum fair market value at the end of the lease term. This residual value accrues to the Company at the end of the lease. The Company uses its experience and knowledge as an original equipment manufacturer and participant in end markets for the related products along with third-party studies to estimate residual values. The Company monitors these values for impairment on a periodic basis and reflects any resulting reductions in value in current earnings.

16

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Delinquency is the primary indicator of credit quality of finance receivables. The Company maintains a general allowance for finance receivables considered doubtful of future collection based upon historical experience. Additional allowances are established based upon the Company’s perception of the quality of the finance receivables, including the length of time the receivables are past due, past experience of collectability and underlying economic conditions. In circumstances where the Company believes collectability is no longer reasonably assured, a specific allowance is recorded to reduce the net recognized receivable to the amount reasonably expected to be collected. Finance receivables are written off if management determines that the specific borrower does not have the ability to repay the loan amounts due in full. The terms of the finance agreements generally give the Company the ability to take possession of the underlying collateral. The Company may incur losses in excess of recorded allowances if the financial condition of its customers were to deteriorate or the full amount of any anticipated proceeds from the sale of the collateral supporting its customers’ financial obligations is not realized.

Notes Receivable: Notes receivable include amounts related to refinancing of trade accounts and finance receivables. As of December 31, 2018, approximately 99% of the outstanding notes receivable balance was due from one party. The Company routinely evaluates the creditworthiness of its customers and establishes reserves where the Company believes collectability is no longer reasonably assured. Certain notes receivable are collateralized by a security interest in the underlying assets and/or other assets owned by the debtor. The Company may incur losses in excess of recorded allowances if the financial condition of its customers were to deteriorate or the full amount of any anticipated proceeds from the sale of the collateral supporting its customers’ financial obligations is not realized.

Quality of Finance and Notes Receivable: The Company does not accrue interest income on finance and notes receivable in circumstances where the Company believes collectability is no longer reasonably assured. Any cash payments received on nonaccrual finance and notes receivable are applied first to the principal balances. The Company does not resume accrual of interest income until the customer has shown that it is capable of meeting its financial obligations by making timely payments over a sustained period of time. The Company determines past due or delinquency status based upon the due date of the receivable.

Receivables subject to specific reserves also include loans that the Company has modified in troubled debt restructurings as a concession to customers experiencing financial difficulty. To minimize the economic loss, the Company may modify certain finance and notes receivable. Modifications generally consist of restructured payment terms and time frames in which no payments are required. Losses on troubled debt restructurings were not significant during the three months ended December 31, 2018 and 2017.

Changes in the Company’s allowance for doubtful accounts by type of receivable were as follows (in millions):
 
Three Months Ended December 31, 2018
 
Three Months Ended December 31, 2017
 
Finance
 
Notes
 
Trade and Other
 
Total
 
Finance
 
Notes
 
Trade and Other
 
Total
Allowance at beginning of period
$
2.8

 
$

 
$
7.1

 
$
9.9

 
$
1.5

 
$
10.0

 
$
6.8

 
$
18.3

Provision for doubtful accounts, net of recoveries
(0.1
)
 

 
0.7

 
0.6

 

 
(4.0
)
 
0.2

 
(3.8
)
Charge-off of accounts

 

 

 

 

 

 
(0.1
)
 
(0.1
)
Foreign currency translation

 

 

 

 

 
0.1

 

 
0.1

Allowance at end of period
$
2.7

 
$

 
$
7.8

 
$
10.5

 
$
1.5

 
$
6.1

 
$
6.9

 
$
14.5



17

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



9.    Inventories

Inventories consisted of the following (in millions):
 
December 31, 2018
 
September 30, 2018
Raw materials
$
672.7

 
$
639.2

Partially finished products
300.5

 
354.3

Finished products
417.0

 
330.2

Inventories at FIFO cost
1,390.2

 
1,323.7

Less: Excess of FIFO cost over LIFO cost
(98.6
)
 
(96.0
)
 
$
1,291.6

 
$
1,227.7


Due to the adoption of ASC 606, certain contracts in the defense and commercial segments are now recognized on the cost-to-cost method of percentage-of-completion. Costs incurred under these contracts are now recognized as “Unbilled receivables, net” on the Company’s Condensed Consolidated Balance Sheets.


10.    Property, Plant and Equipment

Property, plant and equipment consisted of the following (in millions):
 
December 31, 2018
 
September 30, 2018
Land and land improvements
$
54.3

 
$
54.2

Buildings
301.9

 
297.6

Machinery and equipment
677.6

 
673.0

Software and related costs
168.2

 
164.4

Equipment on operating lease to others
26.3

 
22.1

Construction in progress
17.5

 
11.4

 
1,245.8

 
1,222.7

Less accumulated depreciation
(758.7
)
 
(741.6
)
 
$
487.1

 
$
481.1


Depreciation expense was $19.1 million and $20.1 million for the three months ended December 31, 2018 and 2017, respectively. Capitalized interest was insignificant for all reported periods.

Equipment on operating lease to others represents the cost of equipment shipped to customers for whom the Company has guaranteed the residual value and equipment on short-term leases. These transactions are accounted for as operating leases with the related assets capitalized and depreciated over their estimated economic lives of five to ten years. Cost less accumulated depreciation for equipment on operating lease at December 31, 2018 and September 30, 2018 was $20.7 million and $17.2 million, respectively.


11.    Goodwill and Purchased Intangible Assets

Goodwill and other indefinite-lived intangible assets are not amortized, but are reviewed for impairment annually or more frequently if potential interim indicators exist that could result in impairment. The Company performs its annual impairment test in the fourth quarter of its fiscal year.


18

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following table presents changes in goodwill during the three months ended December 31, 2018 (in millions):
 
Access
equipment
 
Fire &
emergency
 
Commercial
 
Total
Net goodwill at September 30, 2018
$
880.9

 
$
106.1

 
$
20.9

 
$
1,007.9

Foreign currency translation
(2.5
)
 

 
(0.2
)
 
(2.7
)
Net goodwill at December 31, 2018
$
878.4

 
$
106.1

 
$
20.7

 
$
1,005.2


The following table presents details of the Company’s goodwill allocated to the reportable segments (in millions):
 
December 31, 2018
 
September 30, 2018
 
Gross
 
Accumulated
Impairment
 
Net
 
Gross
 
Accumulated
Impairment
 
Net
Access equipment
$
1,810.5

 
$
(932.1
)
 
$
878.4

 
$
1,813.0

 
$
(932.1
)
 
$
880.9

Fire & emergency
108.1

 
(2.0
)
 
106.1

 
108.1

 
(2.0
)
 
106.1

Commercial
196.6

 
(175.9
)
 
20.7

 
196.8

 
(175.9
)
 
20.9

 
$
2,115.2

 
$
(1,110.0
)
 
$
1,005.2

 
$
2,117.9

 
$
(1,110.0
)
 
$
1,007.9


Details of the Company’s total purchased intangible assets are as follows (in millions):
 
December 31, 2018
 
Weighted-
Average
Life (in years)
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
 
 
Distribution network
39.1
 
$
55.4

 
$
(31.3
)
 
$
24.1

Technology-related
11.9
 
104.7

 
(102.0
)
 
2.7

Customer relationships
12.8
 
554.9

 
(510.9
)
 
44.0

Other
16.2
 
16.4

 
(14.9
)
 
1.5

 
14.7
 
731.4

 
(659.1
)
 
72.3

Non-amortizable trade names
 
 
387.7

 

 
387.7

 
 
 
$
1,119.1

 
$
(659.1
)
 
$
460.0


 
September 30, 2018
 
Weighted-
Average
Life (in years)
 
Gross
 
Accumulated
Amortization
 
Net
Amortizable intangible assets:
 
 
 
 
 
 
 
Distribution network
39.1
 
$
55.4

 
$
(30.9
)
 
$
24.5

Technology-related
11.9
 
104.7

 
(101.8
)
 
2.9

Customer relationships
12.8
 
555.0

 
(502.3
)
 
52.7

Other
16.2
 
16.4

 
(14.8
)
 
1.6

 
14.7
 
731.5

 
(649.8
)
 
81.7

Non-amortizable trade names
 
 
387.7

 

 
387.7

 
 
 
$
1,119.2

 
$
(649.8
)
 
$
469.4


The estimated future amortization expense of purchased intangible assets for the remainder of fiscal 2019 and the five years succeeding September 30, 2019 are as follows: 2019 (remaining nine months) - $27.7 million; 2020 - $11.0 million; 2021 - $5.3 million; 2022 - $4.9 million; 2023 - $3.5 million; and 2024 - $1.7 million.


19

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



12.    Credit Agreements

The Company was obligated under the following debt instruments (in millions):
 
December 31, 2018
 
Principal
 
Debt Issuance Costs
 
Debt, Net
Senior Term Loan
$
275.0

 
$
(0.7
)
 
$
274.3

5.375% Senior Notes due March 2025
250.0

 
(2.3
)
 
247.7

4.600% Senior Notes due May 2028
300.0

 
(3.7
)
 
296.3

 
$
825.0

 
$
(6.7
)
 
$
818.3

 
September 30, 2018
 
Principal
 
Debt Issuance Costs
 
Debt, Net
Senior Term Loan
$
275.0

 
$
(0.8
)
 
$
274.2

5.375% Senior Notes due March 2025
250.0

 
(2.4
)
 
247.6

4.600% Senior Notes due May 2028
300.0

 
(3.8
)
 
296.2

 
$
825.0

 
$
(7.0
)
 
$
818.0


On April 3, 2018, the Company entered into a Second Amended and Restated Credit Agreement with various lenders (the “Credit Agreement”). The Credit Agreement provides for (i) an unsecured revolving credit facility (the “Revolving Credit Facility”) that matures in April 2023 with an initial maximum aggregate amount of availability of $850 million and (ii) an unsecured $325 million term loan (the “Term Loan”) due in quarterly principal installments of $4.1 million commencing September 30, 2019 with a balloon payment of $264.1 million due at maturity in April 2023. During fiscal 2018, the Company prepaid all required quarterly principal installments on the Term Loan through June 2022. At December 31, 2018, outstanding letters of credit of $87.7 million reduced available capacity under the Revolving Credit Facility to $762.3 million.

Under the Credit Agreement, the Company is obligated to pay (i) an unused commitment fee ranging from 0.125% to 0.275% per annum of the average daily unused portion of the aggregate revolving credit commitments under the Credit Agreement and (ii) a fee ranging from 0.563% to 1.75% per annum of the maximum amount available to be drawn for each letter of credit issued and outstanding under the Credit Agreement.

Borrowings under the Credit Agreement bear interest at a variable rate equal to (i) LIBOR plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied, or (ii) for dollar-denominated loans only, the base rate (which is the highest of (a) the administrative agent’s prime rate, (b) the federal funds rate plus 0.50% or (c) the sum of 1% plus one-month LIBOR) plus a specified margin, which may be adjusted upward or downward depending on whether certain criteria are satisfied. At December 31, 2018, the interest spread on the Revolving Credit Facility and Term Loan was 125 basis points. The weighted-average interest rate on borrowings outstanding under the Term Loan at December 31, 2018 was 3.77%.

The Credit Agreement contains various restrictions and covenants, including requirements that the Company maintain certain financial ratios at prescribed levels and restrictions, subject to certain exceptions, on the ability of the Company and certain of its subsidiaries to consolidate or merge, create liens, incur additional indebtedness, dispose of assets, consummate acquisitions and make investments in joint ventures and foreign subsidiaries.


20

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The Credit Agreement contains the following financial covenants:
Leverage Ratio: A maximum leverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated indebtedness to consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (EBITDA)) as of the last day of any fiscal quarter of 3.75 to 1.00.
Interest Coverage Ratio: A minimum interest coverage ratio (defined as, with certain adjustments, the ratio of the Company’s consolidated EBITDA to the Company’s consolidated cash interest expense) as of the last day of any fiscal quarter of 2.50 to 1.00.

With certain exceptions, the Credit Agreement limits the ability of the Company to pay dividends and other distributions, including repurchases of shares of its Common Stock. However, so long as no event of default exists under the Credit Agreement or would result from such payment, the Company may pay dividends and other distributions after April 3, 2018, in an aggregate amount not exceeding the sum of:
i.
$1.46 billion;
ii.
50% of the consolidated net income of the Company and its subsidiaries (or if such consolidated net income is a deficit, minus 100% of such deficit), accrued on a cumulative basis during the period beginning on April 3, 2018 and ending on the last day of the fiscal quarter immediately preceding the date of the applicable proposed dividend or distribution; and
iii.
100% of the aggregate net proceeds received by the Company subsequent to April 3, 2018 either as a contribution to its common equity capital or from the issuance and sale of its Common Stock.

The Company was in compliance with the financial covenants contained in the Credit Agreement as of December 31, 2018.

In March 2015, the Company issued $250.0 million of 5.375% unsecured senior notes due March 1, 2025 (the “2025 Senior Notes”). The proceeds of the note issuance were used to repay existing outstanding notes of the Company. On May 17, 2018, the Company issued $300.0 million of 4.600% unsecured senior notes due May 15, 2028 (the “2028 Senior Notes”). The Company used the net proceeds from the sale of the 2028 Senior Notes to repay certain outstanding notes of the Company and to pre-pay $49.2 million of quarterly principal installment payments under the Term Loan. The 2025 Senior Notes and the 2028 Senior Notes were issued pursuant to separate indentures (the “Indentures”) between the Company and a trustee. The Indentures contain customary affirmative and negative covenants. The Company has the option to redeem the 2025 Senior Notes for a premium after March 1, 2020. The Company has the option to redeem the 2028 Senior Notes at any time for a premium.

The fair value of the long-term debt is estimated based upon Level 2 inputs to reflect market rate of the Company’s debt. At December 31, 2018, the fair value of the 2025 Senior Notes and the 2028 Senior Notes was estimated to be $254 million ($257 million at September 30, 2018) and $296 million ($299 million at September 30, 2018), respectively. The fair value of the Term Loan approximated book value at both December 31, 2018 and September 30, 2018. See Note 18 of the Notes to Condensed Consolidated Financial Statements for the definition of a Level 2 input.


13.    Warranties

The Company’s products generally carry explicit warranties that extend from six months to five years, based on terms that are generally accepted in the marketplace. Selected components (such as engines, transmissions, tires, etc.) included in the Company’s end products may include manufacturers’ warranties. These manufacturers’ warranties are generally passed on to the end customer of the Company’s products, and the customer would generally deal directly with the component manufacturer.

Provisions for estimated warranty and other related costs are recorded at the time of sale and are periodically adjusted to reflect actual experience. Certain warranty and other related claims involve matters of dispute that ultimately are resolved by negotiation, arbitration or litigation. At times, warranty issues arise that are beyond the scope of the Company’s historical experience. It is reasonably possible that additional warranty and other related claims could arise from disputes or other matters in excess of amounts accrued; however, the Company does not expect that any such amounts, while not determinable, would have a material effect on the Company’s consolidated financial condition, results of operations or cash flows.


21

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Changes in the Company’s warranty liability were as follows (in millions):
 
Three Months Ended 
 December 31,
 
2018
 
2017
Balance at beginning of period
$
75.3

 
$
68.0

Adoption of ASC 606
(14.3
)
 

Warranty provisions
10.4

 
12.0

Settlements made
(11.0
)
 
(12.8
)
Changes in liability for pre-existing warranties, net
(1.2
)
 
1.2

Foreign currency translation
(0.1
)
 
0.1

Balance at end of period
$
59.1

 
$
68.5


Due to the adoption of ASC 606, the Company determined that certain warranties previously classified as assurance-type warranties are service-type warranties. The liabilities associated with service-type warranties are disclosed in Note 3 of the Notes to Condensed Consolidated Financial Statements.


14.    Guarantee Arrangements

The Company is party to multiple agreements whereby at December 31, 2018 it guaranteed an aggregate of $692.0 million in indebtedness of customers. The Company estimated that its maximum loss exposure under these contracts at December 31, 2018 was $122.9 million. Under the terms of these and various related agreements and upon the occurrence of certain events, the Company generally has the ability to, among other things, take possession of the underlying collateral. If the financial condition of the customers were to deteriorate and result in their inability to make payments, then loss provisions in excess of amounts provided for at inception may be required. While the Company does not expect to experience losses under these agreements that are materially in excess of the amounts reserved, it cannot provide any assurance that the financial condition of the third parties will not deteriorate resulting in the third partiesinability to meet their obligations. In the event that this occurs, the Company cannot guarantee that the collateral underlying the agreements will be sufficient to avoid losses materially in excess of the amounts reserved. Any losses under these guarantees would generally be mitigated by the value of any underlying collateral, including financed equipment, and are generally subject to the finance company’s ability to provide the Company clear title to foreclosed equipment and other conditions. During periods of economic weakness, collateral values generally decline and can contribute to higher exposure to losses.

Changes in the Company’s credit guarantee liability were as follows (in millions):
 
Three Months Ended 
 December 31,
 
2018
 
2017
Balance at beginning of period
$
10.4

 
$
9.1

Provision for new credit guarantees
1.3

 
1.3

Changes for pre-existing guarantees, net
(0.9
)
 

Amortization of previous guarantees
(0.7
)
 
(0.6
)
Balance at end of period
$
10.1

 
$
9.8



22

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



15.    Contingencies, Significant Estimates and Concentrations

Personal Injury Actions and Other - Product and general liability claims are made against the Company from time to time in the ordinary course of business. The Company is generally self-insured for future claims up to $5.0 million per claim. Accordingly, a reserve is maintained for the estimated costs of such claims. At December 31, 2018 and September 30, 2018, the estimated net liabilities for product and general liability claims totaled $36.7 million and $36.0 million, respectively. There is inherent uncertainty as to the eventual resolution of unsettled claims. Management, however, believes that any losses in excess of established reserves will not have a material effect on the Company’s financial condition, results of operations or cash flows.

Market Risks - The Company was contingently liable under bid, performance and specialty bonds totaling $623.4 million and $599.2 million at December 31, 2018 and September 30, 2018, respectively. Open standby letters of credit issued by the Company’s banks in favor of third parties totaled $87.7 million and $91.1 million at December 31, 2018 and September 30, 2018, respectively.

Other Matters - The Company is subject to environmental matters and legal proceedings and claims, including patent, antitrust, product liability, breach of contract, warranty and state dealership regulation compliance proceedings, that arise in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, management believes that the ultimate resolution of all such matters and claims will not have a material effect on the Company’s financial condition, results of operations or cash flows. Actual results could vary, among other things, due to the uncertainties involved in litigation.

Major contracts for military systems are performed over extended periods of time and are subject to changes in scope of work and delivery schedules. Pricing negotiations on changes and settlement of claims often extend over prolonged periods of time. The Company’s ultimate profitability on such contracts may depend on the eventual outcome of an equitable settlement of contractual issues with the Company’s customers.


16.    Shareholders Equity

On August 31, 2015, the Company’s Board of Directors increased the Company’s Common Stock repurchase authorization by 10,000,000 shares, increasing the repurchase authorization to 10,299,198 shares. The Company repurchased 2,563,087 shares of Common Stock under this authorization during the three months ended December 31, 2018 at a cost of $170.0 million. The Company repurchased 748,000 shares of Common Stock under this authorization during the three months ended December 31, 2017 at a cost of $63.7 million. As of December 31, 2018, the Company had repurchased 8,622,751 shares under this authorization, leaving 1,676,447 shares of Common Stock remaining. The Company is restricted by its Credit Agreement from repurchasing shares in certain situations. See Note 12 of the Notes to Condensed Consolidated Financial Statements for information regarding these restrictions.


23

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



17.    Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component were as follows (in millions):
 
Three Months Ended December 31, 2018
 
Employee
Pension and Postretirement Benefits, Net of Tax
 
Cumulative Translation Adjustments
 
Derivative Instruments
 
Accumulated Other Comprehensive Income (Loss)
Balance at September 30, 2018
$
(10.9
)
 
$
(96.2
)
 
$
0.3

 
$
(106.8
)
Tax impact of U.S. tax reform on Accumulated Other Comprehensive Income (ASU 2018-02)

(9.1
)
 

 

 
(9.1
)
Balance at October 1, 2018
(20.0
)

(96.2
)

0.3


(115.9
)
Other comprehensive income (loss) before reclassifications

 
(8.8
)
 

 
(8.8
)
Amounts reclassified from accumulated other
comprehensive income (loss)

 

 

 

Net current period other comprehensive income (loss)


(8.8
)



(8.8
)
Balance at end of period
$
(20.0
)

$
(105.0
)

$
0.3


$
(124.7
)
 
Three Months Ended December 31, 2017
 
Employee
Pension and Postretirement Benefits, Net of Tax
 
Cumulative Translation Adjustments
 
Derivative Instruments
 
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period
$
(46.2
)
 
$
(78.6
)
 
$
(0.2
)
 
$
(125.0
)
Other comprehensive income (loss) before reclassifications

 
2.1

 

 
2.1

Amounts reclassified from accumulated other comprehensive income (loss)
0.5

 

 

 
0.5

Net current period other comprehensive income (loss)
0.5

 
2.1

 

 
2.6

Balance at end of period
$
(45.7
)
 
$
(76.5
)
 
$
(0.2
)
 
$
(122.4
)

The effects of the reclassifications out of Accumulated other comprehensive income (loss) on the Condensed Consolidated Statements of Income were as follows (in millions):
 
Classification of income (expense)
 
Three Months Ended 
 December 31,
 
 
 
2018
 
2017
Amortization of employee pension and postretirement benefits items
 
 
 
 
 
Prior service costs
Miscellaneous, net
 
$

 
$
0.2

Actuarial (gains) losses
Miscellaneous, net
 
(0.1
)
 
0.5

Total before tax
 
 
(0.1
)
 
0.7

Tax provision (benefit)
 
 
0.1

 
(0.2
)
Net of tax
 
 
$

 
$
0.5



24

OSHKOSH CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



18.    Fair Value Measurement

FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability (i.e., exit price) in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 requires disclosures that categorize assets and liabilities measured at fair value into one of three different levels depending on the assumptions (i.e., inputs) used in the valuation. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment.

The three levels are defined as follows:
Level 1:
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2:
Observable inputs other than quoted prices in active markets for identical assets or liabilities, such as quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3:
Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

There were no transfers of assets between levels during the three months ended December 31, 2018.

The fair values of the Company’s financial assets and liabilities were as follows (in millions):
 
Level 1
 
Level 2
 
Level 3
 
Total
December 31, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
SERP plan assets (a)
$
20.2

 
$

 
$

 
$
20.2

Foreign currency exchange derivatives (b)

 
1.5

 

 
1.5

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange derivatives (b)
$

 
$
0.1

 
$

 
$
0.1

 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
SERP plan assets (a)
$
22.1

 
$

 
$

 
$
22.1

Foreign currency exchange derivatives (b)

 
0.8

 

 
0.8

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Foreign currency exchange derivatives (b)
$

 
$
0.2

 
$

 
$
0.2

_____________________________
(a) 
Represents investments in a rabbi trust for the Company’s non-qualified supplemental executive retirement plan (SERP). The fair values of these investments are determined using a market approach. Investments include mutual funds for which quoted prices in active markets are available. The Company records changes in the fair value of investments in “Miscellaneous, net” in the Condensed Consolidated Statements of Income.
(b) 
Based on observable market transactions of forward currency prices.