Oshkosh Corporation — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended June 30, 2021. Oshkosh makes access equipment, defense vehicles and systems, fire and emergency vehicles, and commercial vehicles. Comparisons are with the corresponding 2020 periods unless noted.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $2,208.8 million | $1,580.8 million | $5,674.3 million | $5,072.6 million |
| Gross income | $384.6 million | $257.5 million | $942.3 million | $839.4 million |
| Operating income | $203.8 million | $118.6 million | $440.5 million | $361.3 million |
| Operating margin | 9.2% | 7.5% | 7.8% | 7.1% |
| Net income | $213.9 million | $80.2 million | $383.0 million | $224.5 million |
| Diluted EPS | $3.07 | $1.17 | $5.53 | $3.26 |
| Operating cash flow | Not stated separately for the quarter | $816.8 million | $36.4 million |
Q3 gross margin was approximately 17.4%, compared with 16.3% a year earlier; nine-month gross margin was approximately 16.6%, versus 16.5%. Q3 GAAP EPS included a $69.9 million discrete tax benefit, or approximately $1.00 per share, from carrying back an expected tax loss to prior years. The company also recorded a $1.4 million after-tax restructuring charge in the quarter.
By segment, Q3 sales were $924.3 million for Access Equipment, $710.4 million for Defense, $302.5 million for Fire & Emergency, and $278.1 million for Commercial. Corresponding segment operating margins were 12.2%, 8.4%, 14.7%, and 10.6%.
Liquidity, debt, and capital
- Cash and cash equivalents were $1.166 billion at June 30, 2021, up from $582.9 million at September 30, 2020. Net cash provided by operations for the first nine months was $816.8 million.
- Total debt was $818.6 million, versus $823.1 million at fiscal year-end; debt was 20.2% of total capitalization, down from 22.4%. The company had no revolving-facility borrowings and $832.4 million of available capacity, after letters of credit.
- Current assets were $4.292 billion and current liabilities $2.048 billion. The company reported compliance with credit-agreement covenants and expected to meet them over the next 12 months.
- Cash used in investing was $177.0 million, including $112.6 million for the Pratt Miller acquisition. Cash used in financing was $57.3 million, including $67.9 million of dividends and $22.6 million of share repurchases. Nine-month dividends declared were $0.99 per share.
Material changes and management commentary
- Q3 sales increased 39.7%; nine-month sales rose 11.9%. The rebound in Access Equipment and higher Defense volume were major contributors. Comparisons also reflect pandemic-related weakness in 2020.
- Management said Q3 sales were about $100 million below its beginning-of-quarter expectations, primarily due to supply shortages, especially in Access Equipment. Disruptions caused production inefficiencies and expedited freight costs and were expected to remain a headwind for several quarters.
- Management cited higher materials, freight, and labor costs. Price increases were being implemented, but their benefit was delayed by existing backlog. Q3 operating income benefited from higher volume, improved factory absorption, and lower restructuring costs, partly offset by input costs, incentive compensation, and the return of prior-year temporary cost reductions.
- Backlog was $6.86 billion at June 30, up 29.8% from a year earlier. Access Equipment backlog more than tripled to $1.75 billion; Defense backlog was $3.40 billion, Fire & Emergency $1.22 billion, and Commercial $498.1 million. Approximately 68% of total backlog was not expected to be filled in FY2021.
- Oshkosh acquired Pratt Miller in January 2021 for net assets valued at $111.4 million. The business contributed $23.5 million of Q3 sales and $41.2 million from acquisition through June 30; acquisition goodwill of $44.4 million was allocated to Defense.
Outlook, risks, and contingencies
- FY2021 guidance was sales of approximately $7.80 billion, operating income of $595–$615 million, and diluted EPS of $7.15–$7.30. This EPS outlook includes the $1.00-per-share tax benefit, restructuring costs of $0.19 per share, and acquisition costs of $0.01 per share; adjusted EPS guidance excluding these items was $6.35–$6.50, down at the high end from the prior adjusted range.
- Guidance assumed supply-chain conditions would neither improve nor deteriorate meaningfully during the rest of FY2021. Management expected Q4 sales to increase approximately 18% year over year, while material and freight costs were expected to reduce Q4 consolidated margins by about $35 million and the return of temporary cost-reduction spending to create a further $30 million year-over-year headwind.
- FY2021 segment outlook: Access Equipment sales approximately $3.2 billion and operating margin approximately 10.0%; Defense sales approximately $2.5 billion and margin approximately 8.0%; Fire & Emergency sales $1.2 billion and margin approximately 14.0%; Commercial sales approximately $950 million and margin approximately 8.0%. Corporate expense was expected to be approximately $155 million. The estimated effective tax rate was lowered to approximately 10.5% due to the tax benefit.
- Management forecast approximately $890 million of operating cash flow and $140 million of capital expenditures for FY2021; it expected sufficient liquidity for operations over the next 12 months.
- Oshkosh received a six-year Army contract worth up to $943 million for the Stryker Medium Caliber Weapons System. The USPS selected Oshkosh for its Next Generation Delivery Vehicle program, an IDIQ contract for 50,000–165,000 vehicles over 10 years. The company had received a $482 million order for engineering, tooling, and factory preparation, but future volumes and execution remain subject to budget, litigation, environmental-review, design, and facility/workforce risks.
- Other key risks include continuing supply-chain and labor constraints, inflation and ability to pass through price increases, cyclical demand, government procurement and funding, contract-estimate uncertainty, and customer/dealer concentration. The company disclosed $780.8 million of customer debt credit guarantees with maximum estimated loss exposure of $163.9 million, and $85.5 million of residual-value guarantees with maximum estimated loss exposure of $14.3 million. Management did not expect warranty, litigation, or other ordinary-course claims to have a material effect, while acknowledging uncertainty.
Most important facts for investors to verify
- Whether supply shortages, production constraints, and input-cost inflation persist or worsen, and whether pricing catches up with costs.
- Whether FY2021 sales, operating-income, EPS, and cash-flow guidance is achieved, separating the one-time tax benefit from underlying results.
- Backlog conversion, particularly the timing and economics of Access Equipment orders and the portion expected beyond FY2021.
- USPS NGDV contract developments, including the challenge to the award, environmental-review requirements, final vehicle design, investment needs, and actual order quantities.
- Pratt Miller integration and the realization of expected acquisition benefits, as well as exposure under customer guarantees and long-term defense contracts.