Oshkosh Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended June 30, 2020; compared with the corresponding 2019 periods. Unaudited results. Dollar amounts are in millions except per-share data.
Business context and results
Oshkosh manufactures access equipment, defense vehicles and services, fire and emergency vehicles, and commercial vehicles and equipment. COVID-19 materially weakened demand, especially in construction-related markets, and disrupted production and customer deliveries.
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $1,580.8 | $2,392.7 | $5,072.6 | $6,186.3 |
| Gross income | $257.5 | $433.9 | $839.4 | $1,120.1 |
| Gross margin | 16.3% | 18.1% | 16.6% | 18.1% |
| Operating income | $118.6 | $257.8 | $361.3 | $593.9 |
| Operating margin | 7.5% | 10.8% | 7.1% | 9.6% |
| Net income | $80.2 | $191.9 | $224.5 | $429.4 |
| Diluted EPS | $1.17 | $2.72 | $3.26 | $6.05 |
Q3 sales declined 33.9% and operating income declined 54.0% year over year. Access Equipment sales fell 60.9%; Defense sales rose 7.1%, while Fire & Emergency and Commercial sales declined 8.9% and 16.3%, respectively. For the nine-month period, sales fell 18.0% and operating income fell 39.2%.
Cash flow, balance sheet and liquidity
- Operating cash flow was $36.4 for the first nine months, versus $105.8 in 2019. Investing used $58.5; financing used $95.1. Cash declined $116.8 to $331.6.
- Capital expenditures were $73.2 through June; management expected approximately $110 for fiscal 2020. Inventory rose to $1,714.4 from $1,249.2 at September 30, 2019, and inventory turns declined from 5.2 to 3.7.
- Total debt was $822.5 and cash was $331.6 at June 30, implying net debt of approximately $490.9. Debt to total capitalization was 22.9%, compared with 24.0% at fiscal year-end. The company reported compliance with credit-agreement covenants.
- Cash plus unused revolving-credit capacity was approximately $1.1 billion: cash of $331.6 and available facility capacity of $792.1. Management said liquidity should be sufficient for operations over the next twelve months.
- Current assets were $3,453.4 and current liabilities $1,629.3. The $850 million revolving facility matures in April 2023; outstanding letters of credit reduce its available capacity. Long-term debt included $300 million of 4.600% notes due 2028 and $300 million of 3.100% notes due 2030.
Material changes and unusual items
- COVID-19-related lower volume and adverse product mix pressured profitability; favorable price/cost dynamics and cost reductions partly offset the impact. Q3 cost of sales rose to 83.7% of sales from 81.9%.
- In February 2020, Oshkosh issued $300 million of 3.100% senior notes due 2030, redeemed its $250 million 5.375% notes due 2025, and prepaid term-loan installments and part of its balloon payment. The refinancing generated $8.5 of debt-extinguishment expense.
- Q3 included $8.4 of after-tax restructuring charges, or $0.12 per diluted share. The company recorded $10.2 of pre-tax restructuring charges through June 30.
- Oshkosh declared quarterly dividends of $0.30 per share. It paused share repurchases in March 2020; first-nine-month repurchases totaled $40.8, compared with $283.9 in the prior-year period.
Outlook, management commentary and risks
Oshkosh withdrew its fiscal 2020 financial expectations in the second quarter and was still not providing guidance, citing uncertainty in the duration and effects of the pandemic, customer demand, supply chain, and production. Management reported more than 200 supplier shutdowns during Q3 without major supplier-induced line stoppages, but noted ongoing production and supply risks. Temporary cost actions were expected to reduce fiscal 2020 pre-tax costs by more than $100.
The company announced permanent restructuring measures, including closing its Medias, Romania facility, relocating rear-discharge concrete mixer production from Dodge Center, Minnesota, and workforce reductions. Management estimated combined annualized savings of $30–$35 when completed, with some benefit expected in fiscal 2021 and full impact in fiscal 2022. Access Equipment production shutdowns were extended into July, August, and September.
- Backlog at June 30 was $5.29 billion, up 5.8% year over year: Defense $3.28 billion and Fire & Emergency $1.16 billion increased; Access Equipment ($556.9) and Commercial ($287.6) declined. About 68% of backlog was not expected to be filled in fiscal 2020; backlog is not necessarily an indicator of future sales.
- U.S. government sales represented approximately 34% of nine-month revenue. Defense contract profitability depends in part on cost estimates, contract changes, delivery schedules, and customer acceptance and funding.
- Customer credit guarantees covered $750.5 of indebtedness, with estimated maximum loss exposure of $151.3; residual-value guarantees covered $99.6 of equipment value, with estimated maximum loss exposure of $11.7. Economic weakness could reduce collateral and used-equipment values.
- Other risks include pandemic-related demand and operating disruption, customer credit and receivable collection, warranty claims, foreign exchange, and legal and environmental matters. Management did not expect ordinary-course claims and proceedings to have a material effect; product and general liability reserves were $34.8.
- A $11.4 tax valuation allowance against certain European deferred tax assets contributed to nine-month tax charges. On July 20, 2020, the company sold CON-E-CO; an immaterial gain was expected in fiscal Q4.
Important facts for investors to verify
- Whether Access Equipment demand, inventory levels, and production recover, and how COVID-19 affects suppliers, customers, and deliveries.
- Whether backlog converts to revenue on the expected timetable, particularly given that most backlog was not expected to ship in fiscal 2020.
- Progress, execution costs, and realized savings from the announced restructuring actions.
- Operating cash generation and working-capital needs, including inventory and receivables, as well as covenant headroom and available liquidity.
- Potential exposure from customer financing guarantees, warranty and product-liability claims, and Defense contract estimate changes.
- Subsequent reported results and any reinstated guidance; this filing provides no fiscal 2020 financial outlook.