Oshkosh Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended March 31, 2020; comparisons are with the same periods in 2019. The filing was signed April 29, 2020. All financial figures below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $1,796.7 | $1,990.2 | $3,491.8 | $3,793.6 |
| Gross income | $292.4 | $357.9 | $581.9 | $686.2 |
| Operating income | $133.6 | $175.6 | $242.7 | $336.1 |
| Net income | $68.6 | $128.5 | $144.3 | $237.5 |
| Diluted EPS | $0.99 | $1.82 | $2.09 | $3.33 |
| Operating margin | 7.4% | 8.8% | 7.0% | 8.9% |
- Q2 sales fell 9.7% year over year; six-month sales declined 8.0%. Operating income fell 23.9% in Q2 and 27.8% for the six-month period.
- Q2 cost of sales was 83.7% of sales versus 82.0% a year earlier; management attributed the deterioration primarily to adverse product mix. Gross margin was approximately 16.3% versus 18.0% in Q2.
- Q2 results included an after-tax $6.5 million refinancing charge (about $0.10 per diluted share) and an $11.4 million European deferred-tax valuation allowance (about $0.16 per share). The latter also contributed to a 35.8% Q2 effective tax rate, versus 21.9% a year earlier.
- Segment sales in Q2: Access equipment $693.0 million, down 29.8%; Defense $615.0 million, up 26.4%; Fire & emergency $255.6 million, down 9.7%; Commercial $236.7 million, down 0.5%. Defense growth reflected the JLTV program; access and fire & emergency were affected by pandemic disruptions.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $64.8 million, down from $153.0 million; investing cash outflow was $37.1 million and financing cash outflow was $73.1 million. Cash declined $44.5 million from fiscal year-end to $403.9 million.
- At March 31, cash was $403.9 million, total debt was $822.3 million, and shareholders’ equity was $2,689.0 million. Debt to total capitalization was 23.4%, compared with 24.0% at September 30, 2019. The balance sheet also included $180.1 million of operating lease liabilities.
- Available liquidity was approximately $1.2 billion: $403.9 million cash plus $787.8 million of unused revolving-credit capacity. The $850 million revolver matures in April 2023; the company reported covenant compliance and expected to meet covenants over the next 12 months.
- Inventory rose to $1,655.9 million from $1,249.2 million at fiscal year-end, and inventory turns fell to 4.0 from 5.2. Management linked the increase to the sudden drop in access-equipment demand. Days sales outstanding rose to 67 from 63.
- The company issued $300 million of 3.10% senior notes due 2030, redeemed its $250 million 5.375% notes due 2025, and prepaid term-loan installments and part of the term-loan balloon. Six-month dividends were $0.60 per share; share repurchases were paused in March.
Outlook, risks and notable items
- Oshkosh withdrew its fiscal 2020 financial expectations on March 23, 2020 and provided no updated forecast, citing uncertainty from COVID-19. Management expected Q3 FY2020 to be the most challenging quarter across segments. It stated that operating cash flow should remain positive in FY2020 and that liquidity should be sufficient for operations over the following 12 months.
- Management targeted $80–$100 million of pretax cost reductions in the second half of FY2020 through salary reductions, furloughs and other actions, and reduced expected FY2020 capital spending to approximately $110 million from the prior $150 million expectation. Access-equipment North American plants had shutdowns from March 30 through April 27, with additional planned monthly two-week shutdowns through July.
- COVID-19 risks include customer order cancellations or delays, reduced demand, supplier and workforce disruptions, delayed fire-vehicle inspections and acceptance, and possible production interruptions. Management said all products and services were considered essential under applicable government orders at the time of the filing.
- Total backlog was $5.98 billion, down 3.2% year over year. Access backlog fell 45.5% to $844.4 million; Defense backlog rose 10.3% to $3.41 billion; Fire & emergency backlog rose 21.6% to a record $1.33 billion; Commercial backlog fell 10.9% to $400.2 million. About half of total backlog was not expected to be filled in FY2020. Long-term unsatisfied performance obligations totaled $4.96 billion.
- Potential exposures include customer credit guarantees covering $775.5 million of customer debt, with estimated maximum loss exposure of $152.5 million; residual-value guarantees covered $92.3 million of equipment value, with estimated maximum loss exposure of $12.1 million. Product and general liability reserves were $40.0 million. Management said it did not expect claims or proceedings to materially affect the company, while noting uncertainty in resolution.
Key facts for investors to verify
- Whether demand, cancellations, production schedules and supplier availability recover as assumed, particularly in Access and Commercial.
- Whether backlog converts to revenue on schedule, including the impact of customer acceptance delays and the fact that roughly half was not expected to ship in FY2020.
- Whether inventory levels, receivables and operating cash flow improve as production and customer demand adjust.
- Whether the planned cost reductions and lower capital spending are achieved without impairing production capacity or customer service.
- Future liquidity, covenant headroom and exposure under customer guarantees if economic conditions or used-equipment values weaken further.
- The effects of the European deferred-tax valuation allowance, tax-audit outcomes and defense-contract estimate changes on future earnings.