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Text: Earlier today, we published our fourth quarter and full year 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 continue to be very proud of the hard work and disciplined execution of Oshkosh team members as we continue to work through the challenges brought on by the COVID-19 pandemic.
We've talked about it before but it bears repeating, our people-first culture has been a key driver for our strong results in the face of adversity.
Proud Oshkosh team members and their commitment to our strong culture allowed us to overcome significant headwinds this past year, including uncertain customer demand, supplier delivery interruptions, workforce availability issues and many others.
A big shout-out to all 15,000 of our team members and our dedicated suppliers that have worked hard and stepped up during this difficult period to continue meeting our customers' needs.
As a reminder, our fourth quarter call is always a little different from our other quarterly calls as I'll review both the quarterly highlights and the full year results before turning it over to John and Mike.
For the fourth quarter, we delivered sales of nearly $1.8 billion and adjusted earnings per share of $1.30.
Much like I said regarding our third quarter performance, we've controlled what we can control while responding quickly to challenges outside of our control.
This is important as we were able to grow adjusted operating income in our defense, fire & emergency and commercial segments over the prior year while achieving consolidated adjusted decremental margins of 19%.
In our largest segment, access equipment, we delivered 23% adjusted decremental margins during the quarter where revenues were down nearly 40%.
John will go into more specifics on the segments, but the access equipment markets in North America and Europe remain soft and the timing of recovery remains uncertain.
We are encouraged by utilization data that is approaching pre-pandemic levels and believe the market is stabilizing.
We'll be paying close attention to rental industry metrics as well as engaging in annual purchase discussions with our customers over the next few months.
Finally, we are announcing a 10% increase to our quarterly cash dividend to $0.33 per share.
This is our seventh consecutive annual increase and reflects the confidence we have in our business model and the longer-term outlook.
There's no doubt that 2020 has been one of the most memorable years in recent history as the global pandemic has created disruptions of significant proportions, and I'm proud of the efforts and results that our people were able to deliver.
For example, our access equipment segment overcame a nearly $1.6 billion year-over-year sales decline to deliver an impressive 8.5% full year adjusted operating margin.
Our fire & emergency segment delivered two consecutive quarters of record adjusted operating margin percentages to end the year.
Our commercial segment posted a decade-plus high full year adjusted operating income margin of 7.5%.
And defense successfully executed our ramp-up of the JLTV program despite a host of headwinds brought on by the global pandemic.
All of these represent significant accomplishments in the midst of the pandemic and demonstrate our strengths as a different integrated global industrial.
We ended the year on a high note with solid performance in the fourth quarter.
During the year, we executed a combination of companywide temporary and permanent cost reductions.
And Mike will talk about how these actions will impact our cost structure in 2021 in his section.
I also want to call out some of the great work our teams have been doing regarding corporate responsibility with a focus on ESG.
We don't typically talk about ESG metrics on earnings calls, but our efforts to reduce greenhouse gas emissions and energy usage, along with our team member engagement and safety performance, are among many areas that we believe help differentiate Oshkosh from other companies.
We continue to earn recognition from agencies that track and evaluate company performance for these important nonfinancial measures, and we believe they further underscore our commitment to excellence, long-term value and sustainability.
Wilson mentioned the pandemic, and I'd like to provide an update since several of our facilities, including our headquarters, are located in the region of Wisconsin that is currently experiencing some of the highest rates of COVID-19 spread in the nation.
Across the company, we've been focused on maintaining the safety of our team members and preventing the spread of the virus, and we have a good track record in doing that.
However, the recent resurgence is creating some workforce availability and supplier delivery challenges.
It's important -- it's as important as ever that we maintain strong safety procedures that meet or exceed CDC guidelines.
Of course, this is challenging as many of us are experiencing pandemic fatigue.
But like Wilson, I'm proud of our team members and our ability to stay focused and effective.
Let's kick off our segment discussions with access equipment.
We've been closely managing our access equipment business during a time of significant double-digit sales declines while still delivering strong adjusted decremental margins and impressive overall adjusted operating margins.
In fact, we've been able to set a new benchmark for financial performance during an industry downturn.
We appreciate the efforts and performance our team members have delivered during these times.
Our positive fourth quarter results are significant, considering the low demand for access equipment, which has resulted primarily from lower equipment utilization, leading to lower capex spending by rental company customers in North America and Europe.
Sales for the quarter were down nearly 40%, and we're therefore continuing to operate our facilities on reduced schedules.
We've taken both temporary and permanent cost reduction actions in the business as we weather the storm.
We believe this is a responsible approach.
It's important to emphasize that we have continued to invest in the business as JLG is the innovation leader in the industry, and we remain confident in the long-term outlook for this business.
We look forward to future product innovation releases as a result of our continuing investment.
We're carefully balancing our cost reductions with the ability to ramp up when the market recovers.
Through the first quarter, we'll keep production lower by operating our U.S. facilities for approximately 50% of the available production weeks.
We will make decisions for the remainder of 2021 as conditions evolve and our customers share their plans.
We are keeping our workforce engaged to be able to meet demand when the market returns.
We are also staying in close communication with our suppliers as they are key to our ability to ramp up when the market comes back.
We know that fleets in North America are aging with the aerials in the 55-month average age range according to the latest data, and we believe this elevated figure bodes well for future demand.
The bottom line for North America is that we are confident in the recovery for the access equipment market, but the specific timing of the recovery remains uncertain.
For the first half of the year, we expect lower year-over-year sales.
We are early in our discussions with our rental company customers, and we expect to gain more clarity on the second half of the year before our next earnings call.
Finally, just as we discussed last quarter, China's economy continues to recover, which we believe offers an opportunity for double-digit sales growth in the region for the foreseeable future.
Our defense segment performed well in the quarter but has been dealing with workforce availability issues that I mentioned earlier as the pandemic is having a notable effect on our ability to schedule people and production.
Despite these challenges, which we experienced more intensively late in the fourth quarter and continued to experience earlier this month, our operations teams have delivered solid results for our U.S. government customer and grew revenues in the year by more than 11%.
Our successful ramp-up of the JLTV program throughout the year led the way and provides a strong foundation as part of our large backlog in the segment.
Our team was happy to receive an expected order for 322 JLTVs from the Belgian Ministry of Defense in October.
The contract with our NATO ally valued at more than EUR115 million further demonstrates the success we are having with the world's best light protected tactical wheeled vehicle.
We expect to begin shipping the vehicles in 2023, and we expect to announce more international JLTV orders in 2021.
We competed against an incumbent competitor to win this order, and we believe it demonstrates the superior cost and performance characteristics of the JLTV product.
I want to comment on the recently enacted Continuing Resolution, or CR.
It used to be rare that the government required a CR to fund spending, but over the last 10 to 12 years, CRs have become the norm.
Our programs of record remain funded under the CR so it does not present an issue for 2021.
Fire & emergency delivered an all-time record for quarterly adjusted operating income of 16.4% in the fourth quarter.
Our team's performance at F&E has been nothing short of phenomenal as they have navigated through supplier issues, customer travel restrictions and other operational challenges, many of which were brought on by COVID-19.
The simplification philosophy that F&E adopted several years ago, along with state-of-the-art product innovation, provides the framework for the team to run its business at such a high level.
We are exiting the year with a strong backlog, supported by a record order year of nearly $1.3 billion despite the negative impacts of COVID-19.
Aged fire truck fleets, combined with the availability of new technologies, underpin our favorable long-term outlook for the F&E market.
That said, tight municipal budgets may constrain demand in the near term.
Fire & emergency is ready for the challenge with a market-leading lineup of high-quality, custom and commercial fire trucks and RF units.
And we continue to invest in new technologies, such as our Fotokite Situational Awareness System in alternative powertrain options that you'll hear more about in future quarters.
Our commercial segment has continued to drive improvement throughout the year despite headwinds caused by the pandemic.
The team delivered strong margins and higher year-over-year adjusted earnings in the fourth quarter despite lower revenues.
Our commercial team posted its highest full year adjusted operating income margin in more than a decade.
This is particularly impressive, given the market impacts from COVID when construction was halted in many areas of the country and shelter-in-place restrictions temporarily reduced demand for waste collection at businesses earlier in the year.
Much of our recent success stems from simplification efforts and disciplined cost management as well as the ramp-up of our new S-Series 2.0 Front Discharge Concrete Mixer, which is driving a lot of excitement and helping us win new customers.
On our last call, we announced restructuring plans to transfer rear discharge concrete mixer production from Minnesota to Ontario, Canada as the team simplifies the business with a focused factory approach.
I'm pleased to report that the transition is progressing according to schedule, and we anticipate a successful completion over the next several months.
We believe this will put us in a prime position to drive sustained margin improvements.
Before I leave this segment, I want to mention our commitment to electrification as a way to reduce greenhouse gas emissions and provide our customers with options as they plan their fleets.
Early in the fourth quarter, there were numerous announcements of plans for electric RCVs in the U.S. market by some companies.
We are proud to be working on electrification solutions across all of our businesses at Oshkosh.
This is particularly true for RCVs as we are partnering with a chassis OEM to deliver five electric RCV units to be used in Boise, Idaho in the summer of 2021.
I'd like to close with a comment about the culture and positive mindset we see from the team at commercial.
They have been working very hard driving business and operational improvements, and their efforts and dedication to task are second to none and we can see it in our results.
This wraps it up for our business segments.
Strong execution allowed us to deliver 19% adjusted decremental margins on a consolidated basis and 23% adjusted decremental margins at access equipment in the fourth quarter.
Consolidated net sales for the quarter were $1.8 billion, down 18.7% from the prior year quarter.
A 39% decrease in access equipment segment sales was the primary driver of the decrease.
Access equipment sales were negatively impacted by lower customer demand, primarily as a result of COVID-19.
As John mentioned, our customers remain cautious with equipment purchases in light of uncertainty surrounding the pandemic and associated softness in nonresidential construction activity.
Consolidated adjusted operating income for the fourth quarter was $124.1 million or 7% of sales compared to $203.1 million or 9.2% of sales in the prior year quarter.
Access equipment segment adjusted operating income declined on lower sales and unfavorable manufacturing absorption as a result of planned shutdowns during the quarter, offset in part by the benefit of COVID-19-related temporary cost reduction actions.
Defense segment adjusted operating income increased as a result of improved product mix and higher sales volume, partially offset by less favorable cumulative contract adjustments and higher engineering and proposal spending in the current year quarter.
Fire & emergency segment operating income increased in the current year quarter as a result of improved price cost dynamics and improved absorption, offset in part by lower sales volume.
And commercial segment fourth quarter adjusted operating income increased due to lower spending in response to the COVID-19 pandemic and favorable material costs, offset in part by adverse product mix and lower sales volume.
Adjusted earnings per share for the quarter was $1.30 compared to earnings per share of $2.17 in the fourth quarter of 2019.
Fourth quarter results benefited by $0.02 per share from share repurchases completed in the prior 12 months.
Finally, we generated strong free cash flow during the quarter to drive full year free cash flow of $238 million.
This is a solid accomplishment during a year where we saw rapid declines in customer demand, which put pressure on working capital.
The COVID-19 pandemic has continued to drive uncertainty in the cadence of customer demand in both our access equipment and commercial segments.
Conversely, strong backlogs in our defense and fire & emergency segments provide good visibility well into 2021.
However, as John mentioned earlier, recent spikes in COVID-19 infection rates are creating workforce availability and supply chain issues, particularly in Wisconsin, where a significant portion of the production occurs for our defense and fire & emergency segments.
The situation is causing production and labor efficiency risks for these two segments and is also likely to impact final truck inspections by customers in the fire & emergency segment.
Taking these factors into account, including the ongoing uncertainty of the pandemic, we're not in a position to provide quantitative expectations for 2021 at this time.
We are actively engaged in discussions with our key customers in the access equipment and commercial segments to understand the requirements for 2021, but we do expect softer year-over-year demand in the first half of 2021 compared to 2020.
Demand for access equipment remains uncertain for the second half of the year, but we expect to have better clarity during the first quarter earnings call as we gain further insight into the trajectory of the pandemic and our customer requirements for 2021.
At access equipment, we are implementing 2-week production shutdowns per month in the United States in the first quarter of 2021 to better align production with customer requirements.
In the second quarter of 2020, we implemented decisive actions which reduced our 2020 pre-tax cost by approximately $120 million.
The reductions were evenly split between three areas: first, salary reductions and furloughs; second, incentive compensation; and third, project travel and other discretionary spending.
As we previously discussed, these cost reductions were largely temporary in nature, and we expect them to return to our expense run rate in 2021.
Additionally, we discussed permanent cost reduction actions during our last earnings call in the access equipment and commercial segments totaling $30 million to $35 million once complete.
We expect these actions will benefit 2021 by approximately $20 million.
Recently, we implemented additional permanent cost reductions totaling $15 million for 2021, which reduced corporate and segment operating expenses.
So we expect to benefit from a total of $35 million of permanent cost reductions in 2021, growing to $45 million to $50 million by 2022.
Return of costs that drove the temporary cost reductions in 2020 will be a headwind to margins in 2021.
However, we are continuing to manage our business in a disciplined manner and will respond to the ongoing uncertainty with our playbooks.
Our balance sheet remains strong with available liquidity of approximately $1.4 billion, consisting of cash of approximately $600 million and availability under our revolving line of credit of approximately $800 million.
We expect a modest increase in capital expenditures to approximately $120 million in 2021.
While we are not providing quantitative financial expectations today, we expect to provide them later in the year.
We just completed the year in which we delivered nearly $5 of adjusted earnings per share in the midst of a global pandemic, and we believe we are in a great position moving into 2021 with our strong balance sheet and cash position.
Our defense and fire & emergency backlogs provide visibility well into 2021, and we took aggressive actions early during the pandemic to lower our costs.
Our culture at Oshkosh is strong, and we have an outstanding group of leaders and team members who have effectively managed production and supply chain disruptions and kept Oshkosh on a positive path since the pandemic began.
We can't let up as the threat is still with us, but I'm reassured by the strength and resilience of our people and believe we will deliver solid sales and earnings performance over the long term.

user
q4 adjusted earnings per share $1.30 excluding items.
compname announces 10 percent increase in quarterly cash dividend to $0.33 per share.
not providing a quantitative outlook for fiscal 2021.
consolidated net sales in q4 of fiscal 2020 decreased 18.7 percent to $1.78 billion.

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