Oshkosh Corporation — Q3 2023 Form 10-Q
Business context and period: Unaudited results cover the three and nine months ended September 30, 2023, compared with the same 2022 periods. Oshkosh reports Access, Defense and Vocational segments. Effective January 2023, Vocational combined the former Fire & Emergency and Commercial businesses; prior-period segment data was recast.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2,509.9 million | $2,066.7 million | $7,191.1 million | $6,078.4 million |
| Gross income / margin | $468.1 million / 18.7% | $288.6 million / 14.0% | $1,226.4 million / 17.1% | $739.4 million / 12.2% |
| Operating income / margin | $256.5 million / 10.2% | $117.2 million / 5.7% | $622.2 million / 8.7% | $225.3 million / 3.7% |
| Net income | $183.7 million | $66.9 million | $447.2 million | $98.8 million |
| Diluted EPS | $2.79 | $1.02 | $6.80 | $1.49 |
| Operating cash flow | Not presented quarterly | $120.0 million | $138.3 million |
Q3 sales rose 21.4% year over year; nine-month sales rose 18.3%. Gross margin improved 470 basis points in Q3 and 490 basis points year to date. Management attributed stronger results primarily to higher volume, price increases, improved product mix and easing supply constraints. Nine-month operating cash flow fell despite higher earnings, principally because of working-capital use, including lower customer advances and higher receivables.
Segments and other key indicators
- Access: Q3 sales increased 27.0% to $1.32 billion and operating income rose 93.5% to $229.9 million; operating margin was 17.4% versus 11.4%. Higher volume, pricing, logistics and mix contributed.
- Defense: Q3 sales declined 3.6% to $500.1 million, while operating income was $22.8 million versus $3.1 million. The prior-year quarter included unfavorable contract catch-up adjustments; 2023 included an $8 million gain on the snow-removal business sale. JLTV sales were $213 million in Q3 and $716 million year to date.
- Vocational: Q3 sales increased 35.4% to $692.6 million and operating income increased 63.6% to $52.5 million. Results included AeroTech from its August 1 acquisition date.
- Backlog: $15.7 billion at September 30, up 21.1% from a year earlier. Approximately 84% was not expected to be filled in fiscal 2023. Backlog can be canceled or modified and is not necessarily indicative of future sales.
- Long-term performance obligations: $10.69 billion at September 30, 2023; $846.3 million was expected to be recognized in the remaining three months of fiscal 2023.
Liquidity, debt and capital allocation
Cash was $106.1 million at September 30, down from $805.9 million at year-end 2022. Total debt was $1.10 billion, compared with $604.7 million at year-end; this included $505 million drawn on the revolving facility and $597.5 million of long-term debt, net. Debt-to-total-capitalization increased to 23.7% from 16.0%. The company had $580.7 million of unused revolver capacity, after borrowings and letters of credit. Its revolving facility matures in March 2027 and bore a 6.55% rate at quarter-end. Oshkosh reported compliance with its leverage covenant and expected to remain compliant.
Nine-month investing cash outflow was $1.19 billion, including $995.8 million for business acquisitions; capital expenditures were $228 million. Financing activities provided $371.3 million, including revolving-credit borrowings. The company paid $80.3 million in dividends and repurchased $22.6 million of stock year to date. Management expected approximately $550 million of operating cash flow and $300 million of capital expenditures for fiscal 2023.
Acquisitions, unusual items and outlook
- On August 1, Oshkosh acquired AeroTech for $803.3 million net of cash acquired, funded with cash and revolving-credit borrowings. AeroTech contributed $115.8 million of sales through September 30. Preliminary purchase accounting recorded $363.4 million of goodwill and $241.4 million of amortizable intangible assets; valuation allocations may change.
- Hinowa was acquired in January for $186.8 million net of cash acquired and contributed $56.8 million of sales from acquisition through September 30.
- Fiscal 2023 guidance was raised to sales of $9.65 billion, operating income of $815 million and diluted GAAP EPS of $8.75. Adjusted EPS guidance was $9.50, a non-GAAP measure; the filing reconciles it to GAAP EPS and identifies acquisition-related and other adjustments.
- Segment outlook: Access sales of about $5.0 billion and operating margin of 15.0%; Defense sales of about $2.1 billion and margin of 3.0%; Vocational sales of about $2.5 billion and margin of 7.5%. Corporate expenses were expected to be $180 million. Q4 EPS guidance was approximately $1.95.
- Fiscal 2023 guidance includes a combined $0.75 per-share net charge for purchased-intangible amortization, acquisition costs, business-sale results, inventory fair-value step-up and restructuring, partly offset by a pension settlement, plus related tax effects.
- Defense contract estimates are judgment-sensitive: nine-month net contract adjustments reduced operating income by $23.6 million, versus a $38.2 million reduction in 2022. The USPS NGDV contract also accounts for most deferred contract costs, which reached $623.1 million.
Risks and contingencies
Management cited cyclical demand in access, fire, refuse and aviation markets; supply-chain and production constraints; input-cost, pricing and labor risks; and risks in integrating AeroTech and achieving expected benefits. Defense exposures include contract cost estimates, delivery schedules, federal budget uncertainty and the JLTV follow-on award: Oshkosh’s protest was denied, and it expected to build JLTVs under the current contract through the end of fiscal 2024. Other identified risks include receivable collection, foreign-exchange movements, cybersecurity, government-contractor compliance and warranty claims.
At September 30, customer financing guarantees covered $671.1 million of indebtedness, with estimated maximum loss exposure of $108.1 million; residual-value guarantees covered $122.4 million of equipment value, with estimated maximum exposure of $13.3 million. Product and general-liability claims had estimated net liabilities of $45.9 million. Bid, performance and specialty bonds totaled $2.42 billion. Management did not expect these matters to have a material effect, while noting uncertainty. The filing reported no legal proceedings under the listed item. Disclosure controls were deemed effective; AeroTech was excluded from the planned year-end internal-control assessment scope while integration proceeds.
Important facts for investors to verify
- Whether improved supply availability, price realization and product mix continue to support margins as input costs and demand change.
- Whether the $9.50 adjusted EPS outlook and $550 million operating-cash-flow expectation are achieved; review the GAAP-to-non-GAAP reconciliation and working-capital trends.
- How AeroTech integration, preliminary purchase accounting, acquisition-related costs and added revolving debt affect earnings, cash generation and credit metrics.
- Defense contract performance, JLTV production after fiscal 2024, and the cost, schedule and recoverability assumptions behind USPS NGDV deferred contract costs.
- Whether backlog converts to sales as expected, given cancellation or modification risk, and whether guarantee, warranty and litigation exposures remain within recorded estimates.