By Richard Pettibone, Forecast International
As economies slowly improve, Oshkosh’s commercial operations are showing signs of growth, while defense continues its slide.
For the fiscal year ended September 30, 2014, Oshkosh reported sales of $6.8 billion, down 11 percent from 2013 sales of $7.7 billion. The company posted a net income of $308.1 million, compared to $316.0 million in 2013.
Defense segment net sales decreased $1.33 billion, or 43.5 percent, to $1.72 billion in fiscal 2014 compared to fiscal 2013. The decrease in defense segment sales was primarily due to an expected decline in sales to the Department of Defense (down $1.08 billion) and lower international sales of MRAP All Terrain Vehicles (M-ATVs).
Under its MOVE strategy, Oshkosh has put in place a plan to deliver long-term growth and meet its long-term financial goals. Under this effort, the company will focus on capturing and improving its historical share in the market recovery; optimizing its cost and capital structure; continuing new product development; and expanding more into international markets.
Although the MOVE program will not be able to counter the downward momentum of defense spending, it will allow the firm to take advantage of recovering commercial markets.
Over four years, Defense sales at Oshkosh have plunged more than $2.5 billion. The slide mirrors the reductions in defense spending brought on by the end of two wars in the Middle East and a desire to broadly cut government spending.
The spike in sales the company enjoyed in 2010 ($9.8 billion) was due to the award of contracts for two major programs. The first was the Family of Medium Tactical Vehicles, which the firm captured from 17-year incumbent BAE Systems. The second was the program to produce M-ATVs for the war in Afghanistan.
The award of the U.S. Army’s FMTV rebuy over BAE Systems was a potential $3 billion coup for Oshkosh. However, reports indicate that Oshkosh’s profit margin on the program is razor thin. After some hiccups, the program reached full-rate production in the third quarter of 2012.
While the program has since moved ahead smoothly, it did hit a road block in the current budget. According to U.S. Army FY15 budget request documentation (March), the Army Acquisition Objective for the FMTV program remains at 83,185 trucks – 38,095 LMTVs and 45,090 MTVs. However, the same budget request reflects no funding for the FMTV program during FY15-FY16. In response to the Army’s intention to temporarily shut down the FMTV production line for two years, the Senate Appropriations Committee has recommended adding $250 million to the FY15 budget specifically to sustain FMTV production and avoid “expensive restart costs.” Production is forecast to resume at a normal rate in 2016.
Looking ahead, Oshkosh is facing another major competition – for the Joint Light Tactical Vehicle. A win here would provide a much-needed boost to the defense operation’s declining revenues. The Army released the final JLTV Request for Proposals (RFP) in December 2014, clearing the way for AM General, Lockheed Martin, and Oshkosh Defense to submit their vehicle proposals. A firm-fixed-price contract is expected to be awarded in late 2015. The award will cover 17,000 vehicles for the Army and Marines during three years of low-rate production and five years of full-rate production.
The unit may find itself on the auction block following Oshkosh’s reorganization into a holding company. The new corporate structure would make it easier for the firm to sell or spin off units. Defense would be an obvious choice now due to the drag it has on the company’s overall performance.