Business context and reporting period
Oshkosh Corporation’s unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the first quarter of 2022. The company makes Access equipment, Defense vehicles and systems, and Vocational vehicles and equipment. Effective January 31, 2023, it combined its historical Fire & Emergency and Commercial businesses into the Vocational segment; comparative segment data was restated.
Financial results
Unless otherwise indicated, amounts are in millions of dollars.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $2,268.1 | $1,945.7 |
| Gross income / margin | $333.8 / 14.7% | $203.8 / 10.5% |
| Operating income / margin | $130.8 / 5.8% | $31.8 / 1.6% |
| Net income (loss) | $88.5 | $(0.2) |
| Diluted EPS | $1.34 | $0.00 |
| Cash from operating activities | $79.8 | $328.9 |
- Sales rose 16.6%, principally from Access volume and higher pricing. Gross margin improved 420 basis points; management cited better pricing and volume, partly offset by higher material and logistics costs.
- Segment sales and operating income: Access $1,193.2 and $135.0, versus $883.1 and $5.7; Defense $513.1 and $1.7, versus $535.6 and $19.4; Vocational $562.7 and $28.1, versus $529.3 and $41.0.
- Q1 operating cash flow fell year over year, mainly reflecting working-capital changes. Investing used $277.1, including $187.9 for Hinowa and $111.5 in capital expenditures; financing used $71.1. Cash declined to $538.7 from $805.9 at year-end 2022.
- Debt was $597.3, including $595.2 of long-term notes; shareholders’ equity was $3,247.2. Debt-to-total capitalization was 15.5%. Cash exceeded reported debt by approximately $58.6, a derived amount. The company had $1.09 billion of available revolving-credit capacity and was in covenant compliance.
- Q1 dividends declared were $0.41 per share; the company repurchased 173,169 shares for $15.2.
Material changes and unusual items
- Access sales increased 35.1%, supported by higher volume, pricing and Hinowa. Defense sales declined 4.2%, with lower JLTV volume; operating income was pressured by contract estimate adjustments, inventory reserves and product mix. Vocational operating income declined 31.5%, including the mixer-business sale loss.
- Q1 included a $13.3 pretax loss on the sale of the rear-discharge concrete mixer business, a $5.9 impairment of an equity-method investment, $2.8 of after-tax restructuring charges, and a $3.6 after-tax gain on a pension-advisor settlement. Contract cost estimate adjustments reduced Defense operating income by $13.4.
- Q1 2022 included an $18.1 tax charge related to prior-period foreign income tax treatment, contributing to its unusually high 97.7% effective tax rate; the Q1 2023 rate was 26.4%.
- The Hinowa acquisition, completed January 31 for $186.9 net of cash acquired, contributed $14.6 in sales after acquisition. On March 1, the company sold the rear-discharge mixer business for $32.9; it had Q1 sales of $25.9.
Outlook, risks and contingencies
- Management raised FY2023 GAAP diluted EPS guidance to $5.75, estimated operating income to $553, and sales to $8.65 billion. Adjusted EPS guidance was $6.00, excluding specified items. It forecast approximately $650 of operating cash flow and $350 of capital expenditures for FY2023.
- FY2023 segment outlook: Access sales of $4.4 billion and operating margin of 11.5%; Defense sales of $2.1 billion and margin of approximately 3.25%; Vocational sales of approximately $2.2 billion and margin of 7.3%. Management expected Q2 EPS of approximately $1.60 and said typical seasonality might not apply amid strong demand and supply constraints.
- Backlog reached a reported record $14.8 billion, up 16.9% year over year; approximately 42% was expected to be delivered in FY2023. Backlog can change or be canceled and is not a guarantee of future sales.
- The Department of Defense awarded the JLTV follow-on production contract to another company. Oshkosh filed a protest; success is uncertain. The current JLTV contract was expected to contribute approximately $1 billion of FY2023 sales, with orders possible through Q4 2023 and deliveries through FY2024.
- Management identified persistent supply-chain and logistics constraints, input-cost and labor pressures, cyclical end markets, Defense contract cost-estimation uncertainty, foreign-exchange exposure, customer-credit and used-equipment-value risks, and acquisition-integration and government-contracting risks.
- At March 31, customer credit guarantees covered $718.0 of indebtedness, with estimated maximum loss exposure of $119.3; residual-value guarantees covered $120.0 of equipment value, with estimated maximum loss exposure of $12.8. The company also disclosed $2.06 billion of bid, performance and specialty bonds. Management did not expect ordinary-course litigation, warranty or other claims to have a material effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Whether Access demand, pricing and margin gains continue, and whether supply constraints ease sufficiently to convert backlog to sales.
- Progress and financial effects of the JLTV protest and transition from the existing contract.
- Delivery timing, cancellation or modification risks within the $14.8 billion backlog, including USPS NGDV program assumptions.
- Whether FY2023 operating cash flow and capital-spending expectations are achieved given working-capital needs and planned capacity investments.
- Final Hinowa purchase-price allocations and realization of expected benefits; also monitor the remaining mixer-business transition and related investment impairment.
- Movement in Defense contract estimates, guarantee exposures, and customer and used-equipment credit risks.