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Text: Earlier today, we published our third quarter 2020 results.
A copy of the release is available on our website at oshkoshcorp.com.
Our presenters today include Wilson Jones, Chief Executive Officer; John Pfeifer, President and Chief Operating Officer; and Mike Pack, Executive Vice President and Chief Financial Officer.
I want to start today by sharing how proud I am of the hard work and disciplined execution our Oshkosh team members have demonstrated, as we manage through the current pandemic-induced environment.
The underlying strength we derive from our people-first culture has been a key enabler to our success, as we navigate through these challenging times.
We often talk about how we are better together, and we are exhibiting that with our results this quarter.
For the third quarter, we delivered sales of nearly $1.6 billion, adjusted earnings per share of $1.29, and our consolidated backlog is up nearly 6% versus the prior year, as we controlled what we can control, while responding quickly to challenges outside of our control.
Given the conditions present in our markets in the U.S. and around the world, we believe this represents solid performance.
The duration impact of the pandemic on the economy remain uncertain, but the resiliency of Oshkosh team members has been impressive, as we responded to a variety of challenges, including changing customer demand, new working protocols and supply chain disruptions, among others.
We believe our values and strengths as a different, integrated global industrial are even more pronounced versus our competitors in times like these.
We implemented the temporary cost reductions we discussed last quarter.
Those actions are evident, not only in our third quarter results, but should also benefit us as we manage through the ongoing uncertainty.
Recently, we also announced some permanent cost reductions in areas of our business most significantly impacted by changes in customer demand as a result of the pandemic.
John and Mike will discuss those actions and the related impacts in their sections.
Also I want to take a moment to congratulate John on his recent promotion to President.
It's a testament to John's strong leadership and dedication to a people-first culture.
I look forward to continuing to work with him, as we lead this great team here at Oshkosh.
Before I provide an update on each of our segments, I'd like to provide a brief update on our operations, including our people and supply chains.
Across the company, we are focused on maintaining the safety of our team members and preventing the spread of the virus, with increased social distancing, both in the offices and throughout our manufacturing facilities.
While this can make completing work more challenging, we have maintained strong efficiencies.
I am proud of the way our team has remained disciplined in maintaining these strict protocols.
We also successfully navigated through over 200 supplier shutdowns early in the quarter to continue production without any major supplier induced line stoppages.
This is a true testament to the focused efforts of our supply chain team, our integrated capabilities and our strong supplier partners.
While we've largely stabilized our operations and supply chains, elevated infection rates in parts of the U.S. extend production and supplier risks, and we will remain diligent in our actions.
Additionally, we've carried out our return to work or return to the office actions for our team members.
I won't go into all the details, but about half of our office workforce physically enters our facilities for work each day with appropriate social distancing and cleaning protocols in place.
Essentially, we implemented changes that enable Oshkosh team members to work-from-home when they need to and work in our facilities when they need to and they can do it seamlessly.
Now I'll move to our segment updates and kick it off with Access Equipment.
Our Access Equipment segment has experienced the negative impacts of the current business landscape more intensively than any other segment in our company with year-over-year revenues down more than 60% in the quarter.
Despite these challenges, our team rallied quickly with aggressive steps to reduce production at the factories and to lower our costs, resulting in solid, adjusted decremental margins of just under 20% and an adjusted operating income margin of 8.4%.
This performance is impressive given the significant declines in access equipment markets in North America, Europe and other parts of the world.
On our second quarter call, we discussed temporary manufacturing closures in the segment during the third quarter.
And with market recovery timing still uncertain, we shutdown production for the month of July, and we will have two-week shutdowns in both August and September.
Wilson mentioned that we also have taken some permanent actions to reduce our costs, particularly in this segment.
We announced the closure of our Medias, Romania facility at the end of June, which will occur over the next 12 months.
We remain committed to the EMEA market and will be able to serve it more efficiently from our existing global manufacturing footprint, including plants in France and the U.K. in addition to the facilities rationalization, we also reduced our office staffing in the segment with a modest workforce reduction.
Our simplification framework has been an important enabler for our ability to deliver robust margins throughout the business cycle, as well as relocate production so that we can operate with improved logistics and customer service levels.
While COVID-19 has impacted access equipment markets around the world, we are staying flexible and nimble in our approach to managing the business.
However, given the uncertainty around the broader economic recovery, we are not in a position to provide an industry or Oshkosh specific outlook at this time.
We know that access equipment will come back, but we do not currently have a time frame.
We will control what we can and make the right decisions that we believe will facilitate our success when demand returns.
We are further encouraged by the age of access equipment fleets, particularly in North America, that we expect will be a positive demand driver in future quarters.
Finally, just as we discussed last quarter, our facility in China is back online, and we retain our positive outlook for this market as demand is returning.
Our team in China has plenty of experience in both the demand and supply sides of the market, and we remain very bullish on our prospects for long-term growth in China.
Please turn to page five, and I'll discuss our defense segment.
Our defense segment performed well in the quarter as the team continues to ramp up the JLTV program, which helps provide a solid foundation for the company with a large backlog and multiyear visibility.
Department of Defense and our allies.
We continue to work with a number of foreign governments on JLTV opportunities.
And while we are not making any announcements today, we have a strong pipeline of opportunities and expect that we will be discussing additional international successes in future quarters.
Our defense backlog remains solid at nearly $3.3 billion, up over 15% from the prior year which provides good visibility, especially given the current environment where the pandemic has limited visibility across many industries.
During the quarter, we announced a joint venture to manufacture tactical wheeled vehicles in Saudi Arabia.
We have been working with our partner, Al-Tadrea, for the past two years to finalize the agreement.
This is part of our longer-term plan to be an integrated strategic partner with his key U.S. Ally for defense vehicles and life cycle services.
This is an important milestone for our international defense activities.
Before I wrap up my comments on our defense segment, I want to congratulate both our production UAW team member in Oshkosh and our leaders in the business for agreeing to a new collective bargaining agreement which provides continuous coverage through September 2027.
This is a great example of the benefits of working together and reaching solutions that provide security and peace of mind for our team members as well as continuity for our company.
Fire & Emergency delivered a strong quarter with a 15.7% adjusted operating income margin.
Last quarter, the segment experienced some challenges with a supplier issue that impacted both our shipping schedule and our margins.
This supplier issue is behind us, which paved the way for a great quarter as the team focused on operations and delivered impressive results despite lower year-over-year sales.
Customer travel restrictions implemented during March, eased midway through the third quarter.
This was a positive development for the team, but given the recent increase in COVID-19 cases and states reinstating quarantines for travel, we may experience temporary sales headwinds in the fourth quarter.
As we discussed on the last earnings call, we expected third quarter orders to be down year-over-year and sequentially and that was the case.
Remember, we are coming off a quarter that was an all-time record for orders and we expected there to be a pause in orders due to the pandemic.
The backlog continues to be robust, providing visibility well into 2021.
Even with strong year-to-date orders, we will continue to monitor the pandemics impact on municipal budgets which could impact spending on fire trucks in the future.
It's clear that customer demand for both concrete mixers and refuse collection vehicles has been impacted by the pandemic.
As construction work was limited and often stopped at various locations across North America over the past three months, we expected concrete mixer sales and orders to slow.
That has been the case.
RCV demand tends to be more stable and we've seen residential trash collection remains strong and even elevated in some cases, but we've also seen nonresidential refuse collections slow during the shutdown and this has had a negative impact on demand for RCVs in the current environment.
Despite these challenges, commercial really came through with a solid margin quarter.
This can be attributed to quick actions and a passionate culture that permeates throughout the business.
Those of you that have followed us for the past few years know that we are committed to simplification throughout Oshkosh and we began journey a couple years ago in the commercial segment.
As part of this journey, we are transferring concrete mixer production from our facility in Dodge Center, Minnesota to consolidate production in our other mixer facilities in North America.
Thus, Dodge Center will become a focused RCV operation.
This will reduce costs and better position both the mixer and the RCV businesses for success in the future as they'll benefit from focused facilities.
The transition will occur over the next six months for this important step in our simplification journey.
Also, we recently sold our concrete batch plant business, Con-E-Co.
We regularly review all of our business for value and strategic fit within our company.
We determined that Con-E-Co was a better fit with a different owner and closed on the transaction last week.
We think this will help us more effectively focused our resources in the commercial segment.
Before I leave this segment, I wanted to mention the ramp-up of our new front discharge concrete mixer, the S Series 2.0 complete with industry-leading connectivity and productivity technologies.
We're pleased with customer orders and interest levels, even against the backdrop of the pandemic.
We believe this redesign mixer will be a long-term driver of solid performance for the company.
Watch for new megatrend technologies applied to this vehicle in the future.
This wraps it up for our business segments.
During our last earnings call, we commented that we expected the third quarter to be a challenging quarter and it was.
However, strong execution by our teams, combined with rapid implementation of cost reduction actions allowed us to effectively manage the business and deliver solid adjusted consolidated decremental margins of 15.9% for the quarter on a significant decrease in year-over-year sales.
Consolidated net sales for the quarter were $1.6 billion, down 33.9% from the prior year quarter, a significant decrease in access equipment sales and, to a lesser extent, decreases in fire & emergency and commercial sales were the primary drivers of the lower consolidated sales, offset in part by higher defense sales.
Access equipment sales were negatively impacted by customer pushouts, some cancellations and lower order intake rates as a result of COVID-19 and the related shelter-in-place restrictions driving low levels of job site activity throughout much of the U.S. and the world.
Defense sales growth in the quarter reflected the continued JLTV production ramp and higher aftermarket parts and service sales, partially offset by lower FHTV volumes.
Fire & emergency sales were lower than the prior year quarter, primarily as a result of decreased production line rates necessitated by COVID-19 related workforce availability and supply chain disruptions offset in part by a catch-up of units affected by the supplier quality issue we noted last quarter.
And commercial segment sales were lower than the prior year quarter, driven by a combination of lower demand for refuse collection vehicles and concrete mixers as well as some production disruptions, both caused by COVID-19.
Consolidated adjusted operating income for the third quarter was $128.8 million or 8.1% of sales compared to $257.8 million or 10.8% of sales in the prior year quarter.
Access equipment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of the facility shutdowns during the quarter, offset in part by favorable price cost dynamics, lower incentive compensation expense, the benefit of temporary cost reductions, and more amortization expense.
Defense operating income increased as a result of an unfavorable prior year cumulative catch-up adjustment, higher sales volume, and the benefit of temporary cost reductions, offset in part by higher warranty costs.
Fire & emergency third quarter adjusted operating income declined due to lower sales volume and adverse sales mix, largely offset by improved pricing, lower incentive compensation expense, and the benefit of temporary cost reduction actions.
Commercial segment third quarter operating income increased compared to the prior year quarter as a result of the absence of inefficiencies caused by a weather-related partial roof collapse in the prior year and favorable price cost dynamic, offset in part by lower sales volume.
Adjusted earnings per share for the quarter was $1.29 compared to earnings per share of $2.72 in the third quarter of 2019.
Third quarter results benefited by $0.03 per share from share repurchases completed in the prior 12 months.
During the second quarter, we withdrew our financial expectations as a result of the evolving impact of COVID-19.
While we have seen stabilization in our supply chain and operations, recent increases in infection rates in parts of the U.S. continue to drive potential supply chain and production risk.
Further, the cadence of customer demand in our access equipment and commercial mixer businesses remains uncertain.
As a result, we're not in a position to provide updated expectations for the fiscal year.
Last quarter, we announced decisive actions to reduce pre-tax cost by $80 million to $100 million for the year in response to the uncertainties caused by COVID-19.
These cost reduction actions include salary reductions, furloughs, temporary plant shutdowns, limiting travel and reducing project costs, and other discretionary spending.
As a result of the outstanding focus by our teams, we now expect these temporary cost reduction measures to exceed $100 million in fiscal 2020.
As John discussed, we have also announced permanent restructuring actions in our access equipment and commercial segments, which are expected to yield combined annualized cost savings of $30 million to $35 million once complete.
We expect to begin realizing some benefits of these actions in 2021, with the full impact of these actions by 2022.
As we shared with you on the last call, we established a playbook of options to respond to the pandemic.
With recovery trending at a slower pace, permanent cost actions were prudent.
Our balance sheet remains strong with available liquidity of approximately $1.1 billion, consisting of cash of approximately $300 million and availability under our revolving line of credit of approximately $800 million at the end of the quarter.
Share repurchases remain paused during the quarter and we will reevaluate them as we gain further clarity on the recovery of our end markets.
On the second quarter earnings call, we discussed our target of achieving mid-20% adjusted decremental margins, both on a consolidated basis and within the access equipment segment for the year.
We were able to exceed those targets during the third quarter with disciplined execution and the help of our cost reduction initiatives.
We expect the benefit of cost reduction activities to be lower in the fourth quarter compared to the third quarter as shelter-in-place restrictions have eased, leading to increased expenses.
Nonetheless, we expect to achieve the targeted mid-20% adjusted decremental margins, both in the fourth quarter and for the full year on a consolidated basis.
We have a strong culture with strong leaders at Oshkosh.
Our revenues and earnings were down in the quarter from last year, but given the challenges we've been facing, we're proud of our performance.
We have a strong balance sheet with ample liquidity.
Our defense and fire & emergency backlog provide visibility well into 2021 and we took aggressive actions early during the pandemic to lower our costs.
Our team has managed production and supply chain disruptions very effectively and has kept Oshkosh on the right path during these challenging times.
I am reassured by our strength and resourcefulness and believe we can deliver solid sales and earnings performance over the long term.
After the follow-up, we ask that you get back in queue if you'd like to ask additional questions.

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compname reports q3 adjusted earnings per share $1.29 excluding items.
q3 adjusted earnings per share $1.29 excluding items.

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