Oshkosh Corporation — Q2 2023 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods. Oshkosh reports Access, Defense and Vocational segments; Fire & Emergency and Commercial businesses were combined into Vocational in 2023, and comparative segment information was restated. The company manufactures access equipment, military and postal vehicles, fire and emergency vehicles, refuse vehicles and related products and services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,413.1 million | $2,066.0 million | $4,681.2 million | $4,011.7 million |
| Gross income / margin | $424.5 million / 17.6% | $247.0 million / 12.0% | $758.3 million / 16.2% | $450.8 million / 11.2% |
| Operating income / margin | $234.9 million / 9.7% | $76.3 million / 3.7% | $365.7 million / 7.8% | $108.1 million / 2.7% |
| Net income | $175.0 million | $32.1 million | $263.5 million | $31.9 million |
| Diluted EPS | $2.67 | $0.49 | $4.01 | $0.48 |
- Q2 sales increased 16.8% year over year; operating income rose 207.9%. Management attributed the improvement primarily to higher pricing, increased volume and favorable product mix as supply availability and production throughput improved.
- Q2 segment sales and operating income: Access $1,328.3 million and $211.7 million; Defense $498.1 million and $6.3 million; Vocational $587.5 million and $60.5 million. Access drove most of the sales and earnings growth. Defense sales declined 7.6% in Q2, while Vocational sales rose 6.5%.
- For the first six months, operating cash flow was negative $46.6 million, versus negative $22.9 million in 2022. Cash used in investing was $295.4 million, including $187.9 million for Hinowa and $129.8 million of capital expenditures. Cash used in financing was $109.1 million. Cash declined to $355.5 million from $805.9 million at year-end 2022.
- At June 30, cash was $355.5 million, long-term debt net of issuance costs was $597.3 million, and shareholders’ equity was $3,396.8 million. Debt to total capitalization was 15.0%, compared with 16.0% at year-end. The $1.1 billion revolving credit facility had $1.09 billion of available capacity before the AeroTech acquisition; there were no revolver borrowings at June 30. The company reported compliance with its leverage covenant.
- Current assets were $4,386.8 million and current liabilities $2,418.0 million. Working capital was $1,968.8 million; cash and cash equivalents were lower than at year-end. Inventory was $1,900.2 million, up from $1,865.6 million.
Material changes and notable items
- Access sales rose 35.9% in Q2, reflecting higher volume, pricing and $23 million of Hinowa sales. Access operating margin increased to 15.9% from 7.4%.
- Defense operating income was affected by unfavorable contract estimate adjustments: a $11.3 million reduction in Q2 2023, primarily from higher-than-anticipated material costs, versus a $23.6 million reduction in Q2 2022. The JLTV program contributed $238.8 million of Q2 sales. Oshkosh’s protest concerning the JLTV follow-on award was denied; current JLTV production is expected to continue through fiscal 2024.
- Six-month results include a $13.3 million pretax loss on the March sale of the rear-discharge concrete mixer business, a $5.9 million write-down of an equity-method investment, and a $4.7 million gain on a pension-advisor mediation settlement. The company also recorded restructuring costs.
- Hinowa was acquired January 31, 2023 for $186.8 million net of cash acquired. The acquisition added $106.4 million of goodwill, allocated to Access.
- On August 1, 2023, after quarter-end, Oshkosh acquired AeroTech for $800 million, subject to customary adjustments. It expects to fund the purchase using available cash and approximately $575 million of revolver borrowings. Management anticipated a temporary increase in debt to capitalization to about 25%; initial purchase accounting was incomplete at filing.
- After quarter-end, the company also sold its 49% interest in Mezcladoras for $2.9 million, expecting a roughly $1.9 million loss, and sold its snow-removal business for $17.1 million, expecting a gain. Both effects were expected in Q3.
Guidance, outlook and risks
- Management raised fiscal 2023 guidance to GAAP diluted EPS of $7.65, consolidated sales of $9.5 billion and operating income of $725 million. Adjusted EPS guidance was $8.00, excluding specified items; the reconciliation includes a $0.17 per-share loss on sale, $0.09 acquisition costs, $0.09 investment impairment, a $0.05 pension settlement benefit and $0.05 restructuring costs.
- Fiscal 2023 segment outlook: Access sales of $4.9 billion and operating margin of 14.0%; Defense sales of $2.1 billion and margin of about 3.0%; Vocational sales of about $2.5 billion and margin of 6.3%. Vocational guidance includes expected AeroTech sales of $300 million and a margin reduction related to purchase accounting. Corporate expenses are expected to be $180 million.
- Management forecast Q3 diluted EPS of about $2.07, citing expected similar supply-chain conditions to Q2, higher interest expense and lower interest income after AeroTech funding, and lower miscellaneous income. The forecast includes about $0.08 per share of AeroTech acquisition costs.
- Fiscal 2023 operating cash flow guidance was reduced to about $550 million from $650 million, due to anticipated higher receivables from increased sales and higher NGDV start-up investment. Capital expenditure guidance was $350 million, including NGDV facility and manufacturing-capacity investments.
- Backlog was $15.0 billion at June 30, up 14.9% year over year; approximately 30% was expected to be delivered in fiscal 2023. Backlog is subject to cancellation, modification and changes in contract terms and is not a guarantee of future sales.
- Management cited ongoing risks from supply-chain and logistics constraints, input-cost inflation and labor availability; cyclical construction and equipment markets; Defense contract cost-estimation and award/order timing; USPS program demand; receivable collectability; product warranty claims; currency and international operations; and integration and realization of AeroTech benefits. Defense contract estimates are judgmental, and contract adjustments reduced six-month net income by $19.8 million, or diluted EPS by $0.30.
- Other exposures include customer credit guarantees covering $691.9 million of indebtedness, with estimated maximum loss exposure of $115.4 million; residual-value guarantees of $127.4 million, with estimated maximum loss exposure of $20.5 million; and $2.08 billion of bid, performance and specialty bonds. The company said it did not expect warranty, litigation or other ordinary-course claims to have a material effect, while acknowledging outcomes are uncertain. No legal proceedings were reported under Part II, Item 1.
Most important facts for investors to verify
- Whether supply-chain recovery, production throughput and pricing persist sufficiently to deliver the raised fiscal 2023 guidance and margins.
- Whether operating cash flow improves as forecast despite receivables growth and NGDV start-up spending, and the cash and debt impact of AeroTech funding.
- AeroTech’s finalized purchase-price allocation, integration costs, expected contribution and whether its anticipated sales and recurring service revenues are realized.
- Defense program developments, including JLTV production through fiscal 2024, future orders and the effect of material-cost estimates and cumulative contract adjustments.
- Backlog conversion, timing and cancellation or modification risk, particularly the proportion expected to ship after fiscal 2023.
- Exposure to guarantee claims, warranty costs, legal contingencies, working-capital requirements and the company’s ability to remain within credit-facility covenants after the acquisition.