Oshkosh Corporation: Q1 FY2021 10-Q Summary
Reporting period: Three months ended December 31, 2020; comparative period is the three months ended December 31, 2019. Amounts are in U.S. dollars. Interim results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $1,576.5 million | $1,695.1 million | Down 7.0% |
| Gross income / margin | $242.6 million / 15.4% | $289.5 million / 17.1% | Margin down 1.7 percentage points |
| Operating income / margin | $95.9 million / 6.1% | $109.1 million / 6.4% | Down 12.1% |
| Net income | $69.5 million | $75.7 million | Down 8.2% |
| Diluted EPS | $1.01 | $1.10 | Down $0.09 |
| Operating cash flow | $368.1 million provided | $149.9 million used | Improved $518.0 million |
Cost of sales rose to 84.6% of sales from 82.9%. Management attributed lower operating income chiefly to lower sales volume and production absorption, partly offset by lower pandemic-related spending, favorable product mix, and higher Defense contract catch-up adjustments. The effective tax rate was 15.9%, versus 21.4%; Q1 FY2021 included $6.7 million of net discrete tax benefits. Net margin was approximately 4.4%, compared with 4.5%.
Segments and material changes
- Access Equipment: Sales fell 21.5% to $563.7 million; operating income declined to $24.9 million from $69.0 million. Lower demand, temporary shutdowns, restructuring costs, and unfavorable price/cost dynamics weighed on results.
- Defense: Sales increased 10.0% to $550.3 million; operating income rose to $52.8 million from $31.0 million. Higher aftermarket sales and favorable contract adjustments contributed; Q1 FY2021 contract adjustments increased operating income by $14.8 million, versus $3.8 million a year earlier.
- Fire & Emergency: Sales increased 6.6% to $273.9 million and operating income rose to $35.1 million, supported by international airport firefighting vehicle awards.
- Commercial: Sales decreased 12.7% to $195.7 million and operating income fell to $11.9 million, reflecting softer demand and higher material costs. Prior-year comparisons also included concrete batch plant sales; that business was sold in July 2020.
Reported net sales also reflect the transfer of the airport snow removal vehicle business from Fire & Emergency to Defense beginning October 1, 2020; prior-period segment figures were reclassified.
Liquidity, debt, and capital
At December 31, 2020, cash was $898.6 million, total debt was $818.1 million, and shareholders’ equity was $2,932.6 million. The company therefore had approximately $80.5 million of net cash; debt was 21.8% of total capitalization. Available liquidity was approximately $1.7 billion, including $831.5 million of unused revolving-credit capacity. The company reported compliance with its credit agreement covenants.
Operating cash flow benefited from improved Access Equipment inventory management and a large customer advance. Investing activities used $23.3 million; capital expenditures were $21.6 million. Financing activities used $32.3 million, including $22.5 million of dividends. The quarterly dividend declared was $0.33 per share, compared with $0.30 a year earlier. No shares were repurchased during the quarter.
Outlook, risks, and unusual items
- Management provided no quantitative FY2021 financial expectations, citing pandemic-related uncertainty. It expected Access Equipment sales to decline year over year in the first half, return to growth in the second half, and grow for the full year, while emphasizing uncertainty around the recovery.
- Access Equipment planned one-week monthly U.S. factory shutdowns during Q2 FY2021 and expected to return to normalized production by quarter-end. Commercial demand remained soft; Defense and Fire & Emergency backlogs provided visibility.
- Management warned that rapidly rising steel costs could pressure results in Q3 and Q4 FY2021; the magnitude and duration were uncertain. COVID-19 also continued to disrupt customers, suppliers, and manufacturing.
- Backlog was $5.70 billion, up 5.1% year over year. Defense backlog rose 14.1% to $3.40 billion, while Access Equipment backlog fell 23.7% to $771.5 million. Approximately 35% of total backlog was not expected to be fulfilled in FY2021; backlog is not a guarantee of future sales.
- After quarter-end, on January 19, 2021, Oshkosh acquired Pratt Miller for $115 million in cash. The purchase-price allocation remained preliminary.
- Access Equipment restructuring included facility closures and production moves; Q1 included $4.8 million of restructuring charges and $3.2 million of related costs, including accelerated depreciation and inventory obsolescence. The quarter also included $0.11 per share of after-tax restructuring charges and $0.01 per share of Pratt Miller-related costs.
- Guarantee exposures included $754.0 million of customer indebtedness with estimated maximum loss exposure of $155.4 million, and $92.1 million of residual-value guarantees with estimated maximum loss exposure of $12.2 million. Management said ordinary-course legal, warranty, and product-liability matters were not expected to have a material effect, while acknowledging uncertainty.
Most important facts for investors to verify
- Whether Access Equipment demand and production recover as management expected, and whether the projected full-year segment sales growth materializes.
- How steel inflation, supplier constraints, and pandemic-related production disruptions affect margins and cash generation in later quarters.
- Whether Defense contract estimates and catch-up adjustments are repeatable; Q1 earnings included a material $14.8 million operating-income benefit from these adjustments.
- Whether the large operating cash inflow, which included a customer advance and working-capital movements, is sustainable.
- Integration, purchase accounting, and expected returns from the $115 million Pratt Miller acquisition.
- Developments in customer guarantees, warranty claims, litigation, and tax positions, including possible audit resolutions.