Oshkosh Corporation — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended March 31, 2021; unaudited. Comparisons are with the corresponding 2020 periods unless stated otherwise. Oshkosh manufactures access equipment, defense vehicles, fire and emergency vehicles, and commercial vehicles.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,889.0 million | $1,796.7 million | $3,465.5 million | $3,491.8 million |
| Gross income | $315.1 million | $292.4 million | $557.7 million | $581.9 million |
| Operating income | $140.8 million | $133.6 million | $236.7 million | $242.7 million |
| Net income | $99.6 million | $68.6 million | $169.1 million | $144.3 million |
| Diluted EPS | $1.44 | $0.99 | $2.45 | $2.09 |
| Operating margin | 7.5% | 7.4% | 6.8% | 7.0% |
Q2 sales rose 5.1% and diluted EPS increased 45%. Six-month sales declined 0.8%, while net income rose about 17%. Gross margin was approximately 16.7% in Q2 versus 16.3% a year earlier. Q2 operating income benefited from higher volume, mix and lower pandemic-related spending, partly offset by higher incentive compensation and weaker Defense contract adjustments.
Q2 segment sales were Access Equipment $738.2 million, Defense $614.7 million, Fire & Emergency $312.5 million and Commercial $230.0 million. Access Equipment, Fire & Emergency and Commercial operating income improved year over year; Defense operating income fell to $35.5 million from $59.7 million, reflecting lower contract catch-up gains and production-line reorganization costs.
Cash flow, balance sheet and liquidity
- Operating cash flow was $694.9 million for the six months, compared with $64.8 million used in the prior-year period. Management attributed the improvement principally to Access Equipment inventory management; changes in operating assets and liabilities contributed $456.3 million.
- Investing cash outflow was $145.6 million, including $112.1 million paid for the Pratt Miller acquisition. Financing cash outflow was $38.0 million. Cash increased to $1,093.2 million from $582.9 million at September 30, 2020.
- Total debt was $818.3 million, versus $823.1 million at September 30, 2020; cash exceeded debt by about $274.9 million. Debt-to-total-capitalization was 21.3%. The company had $829.5 million of unused revolving-credit capacity and reported compliance with its debt covenants.
- Current assets were $3,981.1 million and current liabilities $1,902.5 million, a current ratio of approximately 2.1. Customer advances rose to $706.0 million from $491.4 million.
- Cash dividends declared were $0.33 per share in Q2, versus $0.30. No shares were repurchased in the first six months of FY2021.
Material changes and notable items
- On January 19, 2021, Oshkosh acquired Pratt Miller for $116.1 million, including contingent consideration. The business contributed $17.7 million of sales from acquisition through March 31; preliminary allocation recorded $75.4 million of goodwill in Defense.
- On February 23, 2021, the USPS selected Oshkosh for its Next Generation Delivery Vehicle program. The initial $482 million contract covers engineering, tooling and factory build-out. The 10-year IDIQ contract allows orders for 50,000 to 165,000 vehicles; production deliveries are expected to begin in the second half of calendar 2023.
- Backlog at March 31 was $6.74 billion, up 12.6% year over year. Access Equipment backlog rose 80% to $1.52 billion; Defense backlog was $3.50 billion; Fire & Emergency was $1.27 billion; Commercial was $449.7 million. Approximately 47% of total backlog was not expected to be filled in FY2021.
- Restructuring continued in Access Equipment, including planned closure of the Medias, Romania facility and completed closure of a California service center. The company reported $2.9 million of net restructuring charges for the first six months, plus other related costs.
Outlook, management commentary and risks
Management reinstated FY2021 expectations: sales of $7.75–$7.95 billion, operating income of $592.5–$637.5 million, and diluted EPS of $6.10–$6.60. The outlook includes $16.5 million of Access Equipment restructuring costs and $1.0 million of Defense acquisition costs. Management expected approximately $770 million of operating cash flow, $120 million of capital expenditures and an approximately 22% effective tax rate.
Segment outlook included Access Equipment sales of $3.15–$3.35 billion and operating margin of 10.00%–10.75%; Defense sales of approximately $2.5 billion and margin of approximately 8%; Fire & Emergency sales of approximately $1.2 billion and margin of approximately 14%; and Commercial sales of approximately $925 million and margin of approximately 7%. Management expected Q3 consolidated sales to increase approximately 40% year over year.
Management cited strong demand recovery, especially in Access Equipment, and production rates returning to pre-pandemic levels. It also warned of semiconductor, resin, steel and other supply constraints that could interrupt production, elevated steel costs, and supplier-chassis imbalances. The outlook assumes no major supply-driven production interruptions. Other risks include COVID-19 impacts, cyclical end markets, government procurement and USPS order volumes, contract cost estimates, acquisition integration, warranty claims, customer credit and used-equipment values. The USPS minimum order is conditional on satisfactory completion of the NEPA environmental review; protests, congressional action, budget constraints, or higher engineering and facility costs could affect the program.
Defense revenue and profit depend in part on cost-to-cost contract estimates. Q2 Defense contract estimate adjustments reduced sales by $3.1 million and operating income by $3.6 million, while the prior-year quarter included favorable adjustments. The filing also disclosed customer financing guarantees, legal and product-liability matters, and performance bonds; management did not expect these matters to materially affect financial condition, results or cash flows.
Investor facts to verify
- Whether supply shortages and higher input costs affect production, margins and FY2021 guidance.
- Actual USPS program orders, NEPA progress, production-facility costs and timing; the contract permits a wide range of vehicle quantities.
- Whether Access Equipment backlog converts to sales and margins, and whether Defense contract estimates or production-line inefficiencies change.
- How much of the strong operating cash flow is sustained, given the substantial working-capital contribution.
- Pratt Miller integration, final purchase-price allocation and achievement of contingent-consideration revenue targets.
- Exposure under customer credit guarantees: $767.8 million guaranteed indebtedness with estimated maximum loss exposure of $147.1 million; residual-value guarantees carry estimated maximum exposure of $13.3 million.