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Oshkosh Corporation (NYSE:OSK)

F3Q09 Earnings Call

July 30, 2009 9:00 am ET

Executives

Patrick Davidson – Vice President, Investor Relations

Robert G. Bohn – Chairman and Chief Executive Officer

Charles L. Szews – President and Chief Operating Officer

David M. Sagehorn – Executive Vice President, Chief Financial Officer

Analysts

Charles Brady – BMO Capital Markets

[Balafields Akoos] – Morningstar Incorporated

Jerry Revich – Goldman Sachs

Alex Blanton – Ingalls & Snyder

Jim McIlree – Collins Stewart

Jamie Cook – Credit Suisse

[Paul Bottiner] - Longbow Research

Steve Barger – Keybanc Capital Markets

[Chris Waltzer] - Robert W. Baird

Ben Elliott – Sterne Agee & Leach

Walter Liptak – Barrington Research

Operator

Welcome to the Oshkosh Corporation fiscal year 2009 third quarter financial results conference call. (Operator Instructions) I would now like to turn the call over to Mr. Pat Davidson, Vice President of Investor Relations for Oshkosh Corporation.

Patrick Davidson

Earlier today, we published our third quarter results for fiscal 2009. A copy of the release is available on our website at www.oshkoshcorporation.com. Today's call is being webcast and is accompanied by a slide presentation also available on our website. The audio replay and slide presentation will be available on our website for approximately 12 months. Please refer now to slide two of that slide presentation.

Our remarks that follow, including answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks that could cause actual results to be materially different. Those risks include, among others, matters that we have described in our Form 8-K filed with the SEC this morning and other filings we make with the SEC. We disclaim any obligation to update these forward-looking statements, which may not be updated until our next quarterly call, if at all.

On July 1, we completed the sale of our European refuse collection business, RCB business, and results for this business are reported as a discontinued operation in the accompanying slides. All sales and income figures that we discuss today refer to continuing operations, unless otherwise stated.

Presenting today for Oshkosh Corporation will be Bob Bohn our Chairman and Chief Executive Officer, Charlie Szews our President and Chief Operating Officer, and Dave Sagehorn our Executive Vice President and Chief Financial Officer.

Let's begin by turning to slide three and I'll turn it over to you, Bob.

Robert G. Bohn

While we continue to face challenges as a result of the weak economy, the biggest news for Oshkosh in our third fiscal quarter far and away was the announcement that Oshkosh was a successful bidder on a major U.S. Department of Defense DOD procurement competition resulting in a sole source contract to provide the MRAP All Terrain Vehicle, M-ATV for our men and women serving in Afghanistan.

I can say that, as a company, we are honored and humbled to have been selected to produce these critically important vehicles. We understand the urgent need to protect the lives of our troops to provide them with the mobility they need for the rough, mountainous terrain of Afghanistan. Many of our employees working on this project are veterans or who have family members in the theater of conflict. All of us working on the M-ATV program appreciate the service of our troops in Afghanistan, Iraq and around the world.

Our men and women serving in the theater and the American public can be assured that we and our suppliers are working 24/7 to quickly deliver these lifesaving vehicles to our troops in Afghanistan so that they are able to safely perform their missions and return home. We believe the combination of our survivability and mobility solutions, including our patented TAK-4 Independent Suspension Systems, will provide the troops with an outstanding solution for the extreme conditions encountered in Afghanistan and elsewhere around the world.

The initial order that we received is for 2,244 M-ATVs. Our customer has publicly remarked that there could be soon an additional delivery order for another 3,000 vehicles and possibly more over time, although we have not received any orders for any additional units as of today.

We are executing a comprehensive production plan utilizing existing facilities in Oshkosh, Wisconsin and McConnellsburg, Pennsylvania. We have also had formulary discussions with competitors for this program about assisting us in producing these vehicles, but we are not at any point where any final decisions have been made. What I can say is that we are fully committed to delivering the 2,244 vehicles by the end of December 2009. Charlie will talk more about this in a few moments.

Please turn to slide four. Our sales in the third fiscal quarter continued to reflect the scenario of a Tale of Two Cities. Significant sales growth in our defense segment, as well as in certain business in our foreign emergency segment, wasn't enough to overcome significantly lower sales in many of our other businesses, particularly those that have exposure to construction markets.

For the quarter, we reported net sales of $1.2 billion, a decline of 36% from last year's third quarter. Our lower sales went to operating income of $38.3 million and a net loss of $22 million from continuing operations. In spite of these disappointing results in the third quarter, we continued to generate cash and reduced our net debt, which we define as the total interest bearing debt less cash and cash equivalents, by nearly $120 million in our quarter.

Reducing our net debt has been and remains a top goal of ours. In fact, we have lowered net debt by $635 million over the last 12 months. That's a significant achievement in the midst of the worst recession in 70 years.

We remain diligent and focused on reducing working capital and lowered our inventories by $265 million since last year's third fiscal quarter. And this is after leaning forward and purchasing a significant amount of M-ATV inventory in advance of the contract award. Working capital management will remain a key initial for us.

Please turn to slide five and I'll provide our view of current business conditions. We remain committed to driving costs out of the businesses, which is especially important as we have not seen any improvement in our non-defense markets over the last several months.

To remind you, earlier in the year we reduced base pay for all domestic salaried employees, we implemented periodic furloughs for salaried and production employees at corporate and in most segments of the company, eliminated the bonuses in 2009, eliminated our 401k match for '09 for most employees, and implemented further reductions to marketing, information technology and of course other spending.

In the third fiscal quarter, we took some additional capacity offline and further reduced the work schedules for employees in our access equipment, commercial, and fire and emergency segments. These moves, along with many lean projects that are being implemented around the company, have allowed us to better align our production capacity and capability with demand as we work to reduce inventories yet remain responsive to our customers.

Now, with the M-ATV win we are reviewing our options regarding some of the compensation adjustments that we have asked our employees to endure. In particular, we are waiting to learn of any additional M-ATV delivery orders and their magnitude to assess what we can do before reversing any previously implemented compensation reductions.

Our employees have been very understanding in accepting these sacrifices and this contract may permit us to restore some pay if we receive some additional delivery orders, particularly as many people across this company are working hard to meet the M-ATV and other customer commitments. We will continue to drive cash generation and debt payment, while striving to develop new products that allow us to maintain our leading market positions today.

And last but not least, on July 1 we closed on the sale of the European business the Geesink Norba Group. This is a business that had struggled to return to acceptable levels of profitability so we made the strategic decision to sell the business and have successfully done so in the transaction with a private equity buyer. We wish the employees of Geesink all the best, but we are firm in our belief that we will be more effective going forward as we focus on our efforts in our remaining businesses and, of course, executing on the important M-ATV contract.

While the M-ATV win and previous awarded TAK-4 suspension orders have significantly improved our outlook since our last quarterly call, we will continue to manage the businesses to address the current economic conditions. We are confident that we have the strong foundation and framework in place for our businesses to emerge stronger in the eventual economic recovery.

With that, I'll turn it over to Charlie for more detailed discussion by segment.

Charles L. Szews

Please turn with me to slide six and we'll get started. Conditions for our customers in the access equipment business have not improved and, as a result, we continue to experience the negative effects of the global recession and weak construction markets.

Last quarter we said that we expected a seasonal uptick in sales for the third fiscal quarter. This uptick simply did not happen as we experienced weakness in most major geographies in the third quarter. A bright spot is our successful inroad into China and other Asian markets, which we expect will experience significant growth in the coming years.

We believe that equipment utilization and rental rates, which were down noticeably in the second fiscal quarter, have continued to weaken but at a slower rate. It will take improvement in both of these measures before customers begin to commit spending for new equipment purchases. Until that time, we expect to see customers continue to conserve their capital and age their rental fleet assets.

During the quarter, JLG announced that it was discontinuing production in multiple smaller facilities. We believe that our lean activities will permit us to support production in the next economic upturn with this smaller footprint. Meanwhile, JLG's operations team is very, very busy building M-ATV crew capsules and preparing to startup final assembly of M-ATV vehicles soon.

For those of you who have toured JLG, you know that they have a very strong and capable operations team that understands high volume production. JLG stands ready to meet or exceed our customer's M-ATV production expectations. We continued to adjust production rates in this segment to better match demand and were successful in reducing inventories again during the quarter, although we believe we have more opportunities in this area.

We believe that we are unlikely to experience significant recovery in this segment until we see some improvement in underlying construction activity and improve access to credit, which we currently believe may not occur until later in calendar 2010.

Please move with me to slide seven. Let's take a look at defense. As Bob mentioned earlier, we are both pleased and humbled to have been chosen as the winner to provide M-ATVs to the U.S. Department of Defense. This vehicle is an advanced armor system and the ability to quickly traverse very difficult terrain. The components are proven and durable, just what our troops need. A lot of Oshkosh employees and suppliers put in some very long hours to compete for this honor, and we are all pleased to serve our troops with these lifesaving vehicles.

Today, we plan to present the remainder of the 45 M-ATVs scheduled for delivery during the first 30 days following the contract award. This is a tremendous accomplishment by our team and suppliers and we received excellent support from our government partner to start off on the right foot. We believe we have the right facilities and processes and are confident in our ability to quickly ramp up production to be building 1,000 units per month in the month of December 2009 to meet the requirements for this existing order and to allow quick delivery of any additional orders for M-ATVs that we may receive.

We are estimating operating income margins on this program that are roughly comparable to margins we've realized with our defense vehicles over the past few quarters. Crew capsules will be assembled at our JLG McConnellsburg, Pennsylvania facility with final assembly initially taking place at our Oshkosh Harrison Street facility. Soon, final vehicle assembly will also take place at our McConnellsburg facility.

This redundancy will allow us to ramp up production quickly and provide ample capacity for this program. We have configured our M-ATV design to simplify assembly and high volume which should aid our production ramp up. We and our suppliers will be making some incremental capital equipment and tooling investments over the next few months to achieve and sustain these high production rate requirements.

The retrofitting of existing MRAPs with our TAK-4 independent suspension is also progressing very nicely. Last week we received another order to deliver TAK-4 suspension kits for additional MRAPs. We are working with Force Protection in Kuwait to install these suspensions on their Cougar MRAPs. We are actively engineering our TAK-4 under multiple MRAP brands and supporting the mobility and blast testing of these variants. We believe that this effort will lead to additional TAK-4 orders over the next few months.

We are often asked about our funding for defense vehicles and I am pleased to say that there is adequate funding for Oshkosh products in the fiscal year '09 budget and overseas contingency operations supplemental to permit a strong fiscal 2010 performance. There will be some period of time before the federal government's fiscal 2010 budget with embedded supplemental requests is signed into law, but we are encouraged with what we see for both traditional Oshkosh vehicles, as well as for M-ATVs and spare parts.

At this time, we don't have substantial visibility into the funding for our products beyond the fiscal 2010 budget but we are staying very close to the news flow. Last quarter, we mentioned that we are competing for the Australian Defense Force ADF Land 121 competition. That competition isn't expected to be decided until sometime in 2010.

In the meantime, we did submit our bid for the U.S. Army's Family of Medium Tactical Vehicles or FMTV Program, which is a five-year sole-source contract for more than 20,000 vehicles and trailers. Now we do know the competition will be fierce. We need to submit our best and final offer for this program next week and expect a decision in September or October with limited rate production to begin in late 2010.

Clearly, we have very much going on in our defense business. Fortunately, we're a large company with available worldwide resources. So we've asked approximately 100 salary employees from across the companies to support our M-ATV production ramp-up, TAK-4 installations, and to generally help us sustain strong performance in our current defense programs.

This move is in addition to the several hundred new employees we are hiring in Wisconsin and the 550 to 650 people we are calling back to work in Pennsylvania. We look forward to showing our investors and our customers the outstanding capabilities of our organization over the next few months.

Please turn to slide eight to discuss our fire and emergency segment. Our Pierce fire apparatus and airport products businesses both experienced another strong quarter in a difficult market. While we have a full backlog at Pierce for fiscal 2009, we have begun to experience a slowdown in order rates that we have been talking about for several quarters now. While we won't be immune to a slowdown in the industry, we expect Pierce to continue to gain shares. We've capitalized on multiple recent product launches in what we consider to be the best distribution network in the industry.

Our airport products business has been performing quite well as we've talked about over the last several conference calls, and we have experienced some limited benefit from Aircraft Rescue and Fire Fighting or ARF unit sales as a result of the U.S. economic stimulus package. We have been successful with our ARF products, not only in the U.S. but also around the world. Recent contract wins in Indonesia as well as Korea buttressed our performance. And don't forget, China still has plans to build more than 90 new airports by 2020. Our other businesses in this segment continue to be impacted by the weak economy.

Please turn to slide nine for a discussion of our commercial segment. Our concrete placement products business continues to face an industry with a very low demand as customers hold off on capital spending for new equipment. Our domestic refuse collection vehicle business continues to benefit from a solid backlog. We have seen some weakening in orders from independent waste haulers in the quarter as they assess where the economy is headed.

However, we believe that our strong position with leading private waste haulers will provide us with an advantage as we expect that several of our larger customers will continue to update their fleets with new equipment.

As we have been talking about for several quarters now, we are excited about customer response to our compressed natural gas CNG RCVs. We are experiencing growing requests for reduced emissions CNG powered vehicles. We believe we are uniquely positioned to offer these configurations to companies in municipalities that are looking for economical solutions with reduced emissions. Both tax incentives and stimulus funding are available for CNG powered units, which can be very beneficial as customers look to purchase these units.

That's a brief overview of our operations. Dave, please take it from here.

David M. Sagehorn

Please turn to slide ten. Consolidated net sales were $1.23 billion for the third fiscal quarter down 36.1% compared to the third fiscal quarter of last year. Similar to prior quarters, increased sales in our defense and fire and emergency segments were not enough to offset significantly lower sales in our access equipment and commercial segments.

Improved operating margins at our defense and fire and emergency segments as a result of higher volumes and improved manufacturing efficiencies, along with the impact of cost reduction actions throughout the company, weren't enough to offset significantly weaker performance at our access equipment segment due largely to lower sales volumes and credit loss provisions. For the quarter, we recorded a net loss per share of $0.30.

Interest expense, net of interest income, increased by $13.7 million in the third fiscal quarter compared to the prior year quarter due to higher interest rates on lower average borrowings after completing our credit agreement amendment. We recorded a $0.9 million tax charge in the quarter. The charge on the pre-tax loss was largely the result of the reversal of a portion of our European tax incentive and un-benefited losses of foreign operations offset in part by discreet tax benefits related to the company's other foreign operations during the quarter.

We remained within the limits of our financial covenants in the third quarter and while we aren't providing guidance for revenue, operating income or net income, we do expect to remain compliant with our credit agreement financial covenants over the next year aided by the recent M-ATV win and the sale of Geesink. If we receive additional M-ATV delivery orders and TAK-4 orders that would only improve the situation.

Now let's take a look at each of the segments in detail. Please turn to slide 11. Access equipment sales were $211.2 million in the third fiscal quarter down 77% compared to the same period last year. New equipment sales declined in all regions with Europe, Africa and Middle East or EMEA and North America regions each down approximately 85% compared to the prior year quarter. The rest of the world equipment sales were down more than 50% in the quarter.

Similar to the second fiscal quarter sales of aerial work platforms, which generally have higher margins than telehandlers, were down a greater percentage than telehandlers although the percentage difference decline between the two was narrower in this quarter. The segment recorded an operating loss of $71.2 million compared to operating income $125.2 million in the prior year quarter.

Operating margins continue to be negatively impacted by sharply lower volumes in the related under-absorption of fixed costs. Margins were also negatively impacted by an increase in credit loss provisions of $26.5 million. We continue to work with our customers to collect amounts owed to us but believe that increased bad debt reserves are appropriate given the current economy.

Additionally margins were reduced by approximately 650 basis points due to sales of units containing higher material costs purchased or committed to prior to the sharp drop in commodity costs late in calendar 2008. Restructuring charges of $3.5 million were also recorded in this segment during the quarter in conjunction with facility closures and staffing reductions. Our cost reduction efforts again helped to offset some of the impact of lower sales in this segment.

We didn't see the seasonal uptick in orders that we expected during the quarter in this segment or other indicators that orders would improve in the near-term. In addition, the general state of the economy led us to believe that the turn around to the equipment market would start later than previously expected.

These and other factors let us to believe that we had an interim impairment indicator and we performed a detailed impairment analysis of our access equipment segment. Based upon this analysis, we determined that no impairment charge was required in the third quarter of fiscal 2009.

Backlog for access equipment was $115.4 million at June 30, 2009, a decrease of 80% compared to June 30, 2008. Of this backlog, $74.9 million reflects orders from military telehandlers. Previously military telehandlers were not included in backlog calculations for this segment. Excluding military telehandler backlog, this segment experienced a 93% backlog decline compared to June 30, 2008.

Please turn to slide 12. Defense segment sales were $605.4 million up 23.7% compared to last year's third fiscal quarter due to continued strong demand for both new trucks and parts and service. Operating income increased 39.5% to $92.9 million compared to $66.5 million in the prior year quarter.

Operating income margin in the quarter increased to 15.3% compared to 13.6% in the third quarter of fiscal 2008. The increase in operating income margin was largely result of increasing in manufacturing efficiencies and lower product development costs. Over the last six months we've been particularly successful in our defense business and leaning out our manufacturing processes and freeing up floor space, just in time for M-ATV production.

Results in the quarter on a comparative basis were not significantly impacted by M-ATV program costs as we were spending heavily on the joint light tactical vehicle program in the third quarter fiscal 2008. However, we do expect that our consolidated capital spending for fiscal 2009 will increase to approximately $50 million to $55 million as a result of investments we will make to allow us to quickly ramp up M-ATV production. And we expect our manufacturing expenses to increase in the fourth fiscal quarter as we relocate activities in our defense and JLG businesses to accommodate M-ATV production.

Backlog in this segment was $3.3 billion June 30, 2009 up 140% compared to June 30, 2008. The increase in backlog was largely the result of several large contract awards early in the year for our FHTV products and the recent $1.05 billion dollar M-ATV contract award.

Please turn to slide 13. Turning to fire and emergency, sales increased 6.5% to $299.6 million compared to the prior year's third fiscal quarter due mostly to strong Pierce and airport products deliveries that more than offset weaker towing and recovery sales. Pierce continues to gain market share based on the most recent fame of market share data, which is based on industry orders through March 31, 2009.

Operating income in this segment increased to $31.7 million or 10.6% of sales compared to the prior year quarter due largely to higher volume, improved product mix and manufacturing efficiencies at our Pierce and airport products businesses, as well as the impact of cost reductions. Compared to prior year, fire and emergency backlog was down 13.7% to $577.6 million on June 30, 2009 due mostly to a lower fire apparatus backlog related to weaker municipal spending.

Please turn to slide 14. Commercial sales decreased 43.6% to $138.4 million compared to last year's third fiscal quarter. The decrease was driven by substantially lower sales of concrete mixers and batch plants into a lesser extent, lower RCV sales. Concrete placement product sales declined almost 75% compared to the prior year quarter as customers struggled with the impact of continued low residential construction activity. And that was off already depressed concrete placement volume in last year's third fiscal quarter.

RCV sales were down 20% compared to the prior year quarter partially due to the moderation in sales to independent waste haulers, as well as the shift in the timing of shipments for some larger customers to the back half of calendar 2009. Operating income in this segment decreased to $2.1 million or 1.5% of sales compared to $5.6 million or 2.3% of sales in the prior year quarter. The impact in significantly lower sales on margins was largely offset by extensive cost reduction actions implemented earlier in the fiscal year.

Backlog for the commercial segment at June 30, 2009 was $75.2 million down 52% compared to June 30, 2008 on significantly lower backlog for concrete placement products. Bob mentioned that we closed the Geesink sale on July 1. We expect to report an approximate $35 million gain on the sale of Geesink in the fourth fiscal quarter.

In addition, we're in the process of restructuring the former holding company parent of Geesink, which we expect will result in a tax benefit of $60 million to $75 million to be recorded in the fourth fiscal quarter. A majority of this tax credit would be recorded in discontinued operations.

I'll turn it back over to Bob now. Please turn to slide 15.

Robert G. Bohn

We are very happy to have the opportunity to provide lifesaving M-ATVs to our men and women serving in Afghanistan and will be laser focused on the ramp up of this extremely important program. The M-ATV program and in TAK-4 orders for M-RAP improve our fiscal 2010 outlook. We don't know the magnitude yet of any additional delivery orders, but further orders should permit Oshkosh to pay down more debt in fiscal 2010 and provide additional room under the financial covenants in our credit agreement.

We also have a great team to support our other businesses who are dealing with the greatest economic recession since the great depression. I'm proud of the way our company has responded to these challenging times by cutting cost and making personal sacrifices to help our great company remain strong.

As a result of the efforts of all our employees, we continue to generate positive cash flow and we're still able to invest in new product development to help drive sales throughout the remainder of this recession into the next upturn in the economy. As we have said previously, Oshkosh Corporation is built strong and we will work to succeed in these challenging times.

With that, I'll turn it back to Pat and the operator for questions.

Patrick Davidson

I'd like to remind everyone to limit their questions to one plus a follow-up and please try to avoid questions with multiple subparts as it makes it very difficult to ensure that everybody participates. After the follow up we ask that each participant get back in queue to ask additional questions and we'll go from there.

Operator, please begin the Q&A period of this call.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Charlie Brady - BMO Capital Markets.

Charles Brady – BMO Capital Markets

In regards to defense on the M-ATV contract and the ramp up costs, can you quantify sort of what the margin impact might be on Q4 as you ramp that up? And also just to clarify, when you said the margins you expected on that contract, do you expect that to be on par with previous defense segment margins? That's not segment margins that's original equipment margins, or am I incorrect?

David M. Sagehorn

Let's start with the ramp up cost. I think we will see positive benefit overall from M-ATV in the fourth quarter, which would be inclusive of ramp up costs that we are incurring. I don't think it's going to be significant contribution but I do believe it will be positive. And then in terms of the margins on the program, it is more in line with the equipment margin not the segment margins overall.

Operator

(Operator Instructions) Our next question comes from [Balafields Akoos] – Morningstar Incorporated.

[Balafields Akoos] – Morningstar Incorporated

I just had a question about the JLG business considering now you're using, I don't want to say abandoned, but warehouses that aren't being used for the defense contract and new M-ATV contract. Are there thoughts to kind of discontinue producing and manufacturing JLG equipment and go more towards the core of the company with defense? And I know, obviously, the acquisition was to get growth and diversify outside of defense but now it's just weighing down on results.

Robert G. Bohn

JLG is just a phenomenal company and builds great equipment, scissor lifts, telehandlers, and of course the large booms. That's our core business there and when we get out of this awful recession we're in, that business will come back again, hopefully towards the end of '10 and then start to get better in '11.

But we are so happy that the unemployment rate is north of 25% or 26% McConnellsburg in that area to be able to bring back skilled people that have been laid off to build these trucks. They're building all the cabs and they're also going to build 50% of the production there and then 50% here. And, of course, we have by your question a lot of open capacity and room to do that there.

Charles L. Szews

Let's be clear that even with building the M-ATV vehicles in Pennsylvania, we still have very ample capacity to produce all the requirements and access equipment market for our business for the near-term there is really no issue whatsoever. We've got plenty capacity, we've got inventory on the ground around the world and we will sustain our leadership position.

[Balafields Akoos] – Morningstar Incorporated

Given the decline in sales I'm just surprised there wasn't an impairment. I know you've already taken a few over the past two quarters but to me it seems like given the 70% such decline there would have been another one.

David M. Sagehorn

We did as we commented on in our prepared marks, I believe there was an indicator just as we expected that business will take longer to recover as we see what's going on in the economy, and we did perform a detailed analysis that indicated that no impairment was required.

Charles L. Szews

Just to be clear, when we did the impairment on this business in the second fiscal quarter, our business was already down70% so it's not like the business has gone down dramatically since then.

Operator

(Operator Instructions) Our next question comes from Jerry Revich - Goldman Sachs.

Jerry Revich – Goldman Sachs

Bob, I'm wondering if you could talk about how much interest you're seeing from your former competitors due to subcontract work. Are you seeing a lot of interest there and if the military asked you to deliver another 3,000 vehicles by June, when would you need to have a new subcontract agreement in place for subcontracting to be an option?

Robert G. Bohn

Well we have talked to some of our partners out there about some subcontracting work. We have not made any decisions at this time. With what we've got here at Harrison Street and South Plant and of course what we just talked about early out in McConnellsburg and that facility, even if the JLG business would come back sooner than later, we still have amble capacity and capability to build everything. But we sill are in some discussions with some of our partners out there, some of the OEMs to see if there's something they can't do.

Jerry Revich – Goldman Sachs

And in the access equipment segment after the provision you just recorded, how much do you have left in loan guarantees compared to the 160 you had at quarter-end, and I'm wondering if you could comment on whether your credit write-offs in the quarter were similar to the loss provisions or were they less?

David M. Sagehorn

Jerry, I don't have the numbers of the amount that we have actually outstanding in terms of the credit guarantees right in front of me here. We may have to get back to you on that. I think it's somewhere in the let's say close to $150 million range would be our maximum exposure on that.

In terms of the charges that we've taken, a very small amount of those have actually filed for bankruptcy or gone out of business. Obviously, it's a tough economy out there, it's challenging in the credit markets and as we see customers that may need to refinance or restructure, that's generally when we'll take a look at whether we believe we need to set up a reserve for those customers. But we continue to work with all of them and hope they come through this without any major losses to themselves and ourselves.

Operator

(Operator Instructions) Our next question comes from Alex Blanton - Ingalls & Snyder.

Alex Blanton – Ingalls & Snyder

The additional 3,000 vehicles that have been disclosed that might be ordered and I think actually it said in July but you just got a few hours left to do that, maybe a day or so, but presumably it will be coming in shortly. If we use the same price per unit as indicated on the first order for 2,244 units, that would be an additional 1.4 billion giving you a total of 2.46 billion to be delivered by the end of March.

But other reports that I've seen put that total at 3.3 billion. Do you know why that is? Is there something in the follow on contract that is not in the original one? Or are those spare parts in addition to complete units? Where did the 3.3 billion come from for the total of 5,244 vehicles?

Charles L. Szews

The 3.3 is an assessed value that assumes battle damage, repairs and other cost related to the contract. So what we're talking about here are base vehicles and a limited amount of spares and so that's what's in the 2.5 billion.

Alex Blanton – Ingalls & Snyder

So the other 800 million is later? It's not to be delivered by next March, right?

Charles L. Szews

Correct. There could be some other parts that should be delivered, it's a matter of how fast certain things occur and some of that additional funding doesn't go to Oshkosh.

Alex Blanton – Ingalls & Snyder

Now on the AWP business, I followed it for 12 or 13 years and when you get a decline like you're seeing now, it's almost always because the rental fleets will buy about 85% of these area work platforms are aging their fleets they're just letting them get older. They just stop buying for awhile. But that doesn't mean the usage of those machines is dropping like that.

It's dropping, but it's nothing like that. So they age their fleets for awhile and then they stop aging their fleets, and when they stop the business just starts going the other way very rapidly. It's similar to an inventory corrections phenomena. So from your talks with United Rentals and other big rental fleets, what's the age of their AWP fleet now? Do you know? And when might they, are they talking about getting back to a normal level of purchasing?

Charles L. Szews

Alex, it's very difficult to get accurate numbers on the age of their fleets and quite often you hear numbers and it includes our access equipment and includes dirty equipment and everything else so it's very difficult. But certainly they're aging their fleets right now. Certainly they reduce the size of their fleets as well.

So it does support your comments that eventually here there's going to be a need to replace the fleet. The large rental companies really don't have the infrastructure to maintain a very aged fleet so there is a point in time when they really do need to begin to replace their fleet. And, obviously, we hope that's not to far away. But we're in out charted territory right now and we really can't tell you how quickly this can turn around.

Alex Blanton – Ingalls & Snyder

When you say infrastructure you're really talking maintenance, right? They can't maintain there older fleets themselves so they'll need to replace them.

Charles L. Szews

Correct.

Operator

Our next question comes from Jim McIlree – Collins Stewart.

Jim McIlree – Collins Stewart

On the TAK-4, I know that you are supplying force protection and your release says or the presentation says that you are working with other MRAP providers. Have you supplied other MRAP providers with the TAK-4 or is that still in progress situation?

Charles L. Szews

Well, we're in different stages with different MRAP providers. We have installed our TAK-4 on some vehicles. They have had off-road mobility testing. They've done some blast testing on these vehicles. And in other cases, we have exchanged drawing and that sort of thing and are in a different stage a little bit, it's paced I guess I would say. But certainly we're really in discussions well beyond forced protection in terms of putting our TAK-4 independent suspension under MRAP vehicles.

Operator

Our next question comes from Jamie Cook - Credit Suisse

Jamie Cook - Credit Suisse

My question back on the M-ATV, obviously there's a big ramp there, you guys have to make 1,000 vehicles per month and I know you have plenty of capacity, but how do you think about managing the supply chain and possible bottleneck on things beyond your control.

And then I guess just may second question, I don't think you guys addressed this, but can you just talk about additional inventory opportunities, what's left with JLG, fire and emergency, and commercial. And just how, even with the M-ATV, how do think about balance sheet and managing or improving your balance sheet?

Charles L. Szews

You have multiple subparts there. But they were real excited about the M-ATV contract, obviously Jamie. And we think we can really prove that capability of this team with this contract. As we said in our prepared remarks, the M-ATV design is really relatively the simplified assembly process it's a bolt together process. It's not the mono cart call kind of situation. So we're really in a situation where final assembly of these vehicles we can do it in high volume.

In terms of supply chain, we have today over 50 people spread across the world at factories of our suppliers and just validating making sure that they have the capacity to build. We've done our assessments on virtually every supplier already. Where we believe we have a risk we've created secondary sources and we're obviously monitoring them on a daily basis. And we really believe our supply chain will come through. They have been working 24/7, like us and we're really proud of the supply chain and what they can do. Did I hit all your parts?

Jamie Cook - Credit Suisse

I just want to think about the balance sheet. I mean even with the M-ATV, your balance sheet could use a lot of improvement. So, how do you think about that? Is there inventory reductions that are possible, do you get prepayments from the government and is that enough to improve your balance sheet, or does something else need to be done like equity?

Charles L. Szews

Well, first of all we do have more opportunities to reduce our inventory really in virtually very segment. And we've been really broadening our lien efforts in the last six months to be able to accomplish that. So, I do think it's a big number. It's relatively good size number of what we can take out of inventory, so having said that, we expect to add quite a bit of inventory over the next few months with the M-ATV contract.

Yes, we have big inventory right now in M-ATV at the end of June. We have to lean forward and be able to produce 45 vehicles in the first month and then we've got to produce additional vehicles next month. And long lead time items meant we're strung out pretty good in terms of inventory on that program already. But you can do the math and what we've talked about in terms of margins but this certainly has benefit to our P&L outlook going forward, and we're going to be fine.

Operator

Our next question comes from [Paul Bottiner] - Longbow Research.

[Paul Bottiner] - Longbow Research

In the JLG business there, if we think about taking out the $26.5 million credit loss provision against this quarter. Is that margin, I think it would come out to around 15%, is that something that we should expect going forward in that business or can you improve upon it now that you are outsourcing some of this M-ATV program to JLG and if you can just talk [inaudible] below the margin expectations in that business?

David M. Saghorn

I think, obviously, we picked up on a bad debts. In addition, we did comment on we are continuing to be impacted in that business by the higher material cost coming through. With the sales levels where they are in that business it's just taking longer to flush through some of that higher priced steel and other materials that we procured earlier in the fiscal year.

So, you factor that in, we've also had restructuring cost in that business for the last several quarters. So, obviously, when you pull all of those together that would provide a dramatic improvement overall in the margins of that segment, excluding any of the M-ATV impact. With M-ATV we do expect that will benefit JLG's bottom line as we head into fiscal 2010, but we're still working between our defense and JLG's segments to finalize all the details on that.

[Paul Bottiner] - Longbow Research

I mean, if we can get an idea, what percent of the either work force coming back or in terms of the lines how much the facility usually took is there any kind of metric where you can get some idea from it.

Charles L. Szews

Of how much of the facility we going to use?

[Paul Bottiner] - Longbow Research

Well, I mean in terms of just the number of workers that are coming back and what percent of the worker at that facility is that?

Charles L. Szews

We did remark that 550 to 650 employees of JLG are being recalled. So, that is a significant number.

[Paul Bottiner] - Longbow Research

And what's the total on that normally?

Charles L. Szews

Well, that facility would have 1,500 to 2,000 employees normally and was down by 2/3.

Operator

Our next question comes from Steve Barger – Keybanc Capital Markets.

[Joe Botts] in for Steve Barger – Keybanc Capital Markets

This is actually [Joe Botts] filling in for Steve. I'd like to dig into the M-ATV working capital needs a little bit, and I apologize if I missed this earlier in the call. But giving what you know about the production schedule, can you update us on what the needs might be and specifically if you have applied for defense prepayment?

David M. Saghorn

There were provisions, a government financing clause in the RFP for the program and we are in discussions with the government on what the final payment terms will be and expect to finalize those here in the near future. But in the event that we receive or settle on a payment structure, which more closely matched our out flows with the in flows from that program. It's probably somewhere in the $250 to $300 million of working capital build by the end of our first fiscal quarter, and that would probably be the max that we see.

[Joe Botts] in for Steve Barger – Keybanc Capital Markets

Then my follow-up to that would be, how would you expect to fund that? Would you potentially look at the equity markets or would you try to do that internally?

David M. Saghorn

Well, we do have more than $500 million available on our revolver today. If we looked at the equity markets as you asked there, we do have a requirement in the credit agreement that all of the proceeds of that would be to go to pay down our term debt. So, really what we would be looking at would be the revolver.

Operator

Our next question comes from [Chris Waltzer] - Robert W. Baird

[Chris Waltzer] - Robert W. Baird

Seeing increased talk about the FMTV program and, if I remember last time, you had a very competitive vehicle, but the Department of Defense went with the incumbent. Can you talk about if anything's changed or how you're thinking about your chances for that program?

Charles L. Szews

You never get too positive before a bid like that one; it's comparative. Certainly BAA wants to retain the business and Navistar would like to get into the business as would Oshkosh. I think everyone will put their best foot forward.

We certainly believe we have a lot to offer the customer; between our terrific production capability, this actually fits in very nicely, that we will actually have the larger workforce we would need to build the program because it fits in nicely after the M-ATV, so we think that's a positive.

We're the only company in the world that makes both medium and heavy payload vehicles for the U.S. Department of Defense and we're an innovation leader can really help the Army continue on their technology insertion program with their vehicles. So we think we've got some advantages. Others can tell you their advantages. Ultimately, our customer will make that call.

[Chris Waltzer] - Robert W. Baird

The tax credit you expect next quarter, the $60 million to $75 million, is that a tax benefit as well – or excuse me, a cash benefit as well or is that just a non-cash?

David M. Sagehorn

That would be a cash benefit in fiscal 2010.

Operator

Our next question comes from Ben Elliott – Sterne Agee & Leach.

Ben Elliott – Sterne Agee & Leach

I just wanted to clarify; I think you mentioned earlier that you're going to do 1,000 vehicles in December or by December and 1,000 vehicles a month? I think I also read in a press release that the government's going to give the additional order for 3,000 at the end of July. And I think that would imply you'd pretty much have everything delivered by the end of March.

They also said they didn't expect you to outsource any of the business and, given what you've said about the capacity you have at JLG for the cabs and all the excess capacity and all the planning that goes in a supply chain, is there any reason, a compelling reason, other than being nice, that you would outsource some of the business to your competitors?

And if you could also touch on the fire and emergency business with the assistance to firefighter grant program winding down, how is funding sort of improved or what are the fire departments doing on that front to purchase new vehicles?

Robert G. Bohn

We are talking to some of the folks out there in this industry that we've had relationships with for some time just to see if there's anything they can provide for us, but as of today and as of this time, we have more than ample capacity and capability to build everything ourselves.

But we should sure – this is so important for the soldiers and so important for Afghanistan and, if there's anybody out there that can help support us and give us that backup, I mean it's something we're listening to. But at this time, we're clearly going forward with what we're doing here in Pennsylvania and we have ample capacity in that, and thank you for referring to us as sometimes being nice. Go ahead, Charlie, you can answer the fire and emergency question.

Charles L. Szews

Certainly, it's a more challenging environment right now for municipalities with their municipal tax receipts down. We do see that impacting their order rates at the present time, we commented on that. And so it's a time for companies like Pierce, our subsidiary, to turn up the heat and be innovative and that's what we're doing, at the fire department instructors' conference here a few months ago.

Pierce wants some really nice, new products, they're gaining traction in the marketplace and we've got an outstanding team there and we're going to fight for every order just like our competitors.

Ben Elliott – Sterne Agee & Leach

You mentioned, I guess, your credit agreement, I think the question was about working capital and your needs, and the credit agreement is the only stipulation, if you raise equity capital, that it would be used to pay down debt; is that such a bad thing?

David M. Sagehorn

Well, no, not necessarily, but I think the question revolved around using equity specifically to support the working capital requirements of the M-ATV program. I was just pointing out a provision in the credit agreement.

Operator

Our next question comes from Walt Liptak – Barrington Research.

Walter Liptak – Barrington Research

My question is on the debt covenants and considering the working capital cash outflow for M-ATV, where do you stand on the covenants and with the creditors?

Robert G. Bohn

Walt, as we said in the prepared remarks, we don't believe we will have an issue here in the foreseeable future. Obviously M-ATV is going to benefit us significantly over the course of at least the next year.

Walter Liptak – Barrington Research

How should we think about JLG's break even point? Presuming that you'd have M-ATV delivered early in 2010, do you need to get volumes to recover before you get the core JLG to break even?

Robert G. Bohn

I think if you exclude M-ATV, I think when you look at the run rate of where JLG is now, it does have to be north of that, I think, to where we would get to a break even point. I don't have a specific number for you. Obviously, we're continuing to look to take out costs there, become more efficient, lean out the operations there more, on top of what they've already done and accomplished there, which is a lot. But I do think that the volumes would have to be higher than the current run rate.

David M. Sagehorn

They've really done a good job there, Walt, when you look at lean and what they've done in manufacturing, Craig and his team. I mean, we're going to be able to kick up and build at least 500 trucks a month there in December and, hopefully, the economy turns around and gets better sooner than later. We could still build all this or lifts, all the products for Caterpillar telehandlers and for ourselves and the big booms in those facilities with what we've done.

It's amazing what you do during trying times and how you look at what you've done before and make changes. I mean, Charlie talked about it a little bit earlier in our defense business and operations here. I know you've been through here, Walt, if you came through here again just recently, I mean things have really changed; the guys are doing a good job.

Operator

Our next question comes from Charles Brady – BMO Capital Markets.

Charles Brady – BMO Capital Markets

In regard to the commercial segment, Geesink is presented as discontinued operations; can you give us a sense of how that business performed in the quarter just to get a comparison on an apples-to-apples basis, before it was continued operations? And then the follow-up to that, I'm assuming now that this business ought to stay in the black, given that Geesink's no longer rolled into that?

Robert G. Bohn

Charlie, not sure I totally understand the first part of the question, but they did have a small profit in the first quarter – I'm sorry in the third quarter, excluding Geesink, so on what we'll call a go-forward basis, and that compares to about a little north of a $5 million profit or operating income in the third quarter of last year.

So excluding Geesink, they were profitable. Obviously, our mixer business is flat on its back, in terms of volumes there. We've been down for several years and it has continued to go down this year. I think the team has done a great job, when you look at the decrease in sales, year-over-year in the third quarter and the relatively small impact on the operating income line.

So the team there has taken out significant costs and brought their cost structure more in line with the run rate for that business. So, obviously, our goal is to keep that business profitable every quarter, so we'll just have to see how that plays out.

David M. Sagehorn

We can't wait for that business to come back. I mean, these trucks out there are tired, they have the rock inside, they're carrying 38,000 pounds, 40,000 pounds of cement and you still see them on the streets today, but they still have some new trucks sitting in their fleet. And that business will eventually come back, as well as when we see some light at the end of the tunnel for housing and for non-residential, that'll affect JLG, too.

So, I mean, with consolidations that they've done, Mike and Charlie and the team, service centers and still exceeding the customers expectations out there I can't wait for this business to come back because you can remember before the margins were pretty bleak in that business. And we just need this thing to come back.

We're at an all time low in this business even when we go back to the great depression in that so eventually it's going to come back because we're built on concrete in this world and we see little or no improvement in the infrastructures so far here in the states, but maybe that will come sometime after the first of the year.

Charles Brady – BMO Capital Markets

Just to clarify the first part of my question I guess if you look at the results that you presented Q3 '08 you did a 2.3% positive margin Q3 '09 1.5% but excluding the Geesink last year it was an operating loss of 3% or so I'm just trying to square that. What would it compare to the 1.5% today compared to the negative 3 last year? It wouldn't be 1.5 it would be what?

David M. Saghorn

No let's take a step back. On prior year numbers that you're looking at the 2.3% margin excludes Geesink.

Charles Brady – BMO Capital Markets

Correct. And with Geesink it was a negative 3%.

David M. Saghorn

Okay a year ago.

Charles Brady – BMO Capital Markets

A year ago current year quarter we're at plus 1.5 excluding Geesink. If we were to include Geesink to compare to that minus 3% what would the current quarter be?

David M. Saghorn

Are you asking what Geesink results were in the quarter?

Charles Brady – BMO Capital Markets

I guess what I'm trying to get to is if you can consolidate Geesink into the current quarter what would the operating margin have been?

David M. Saghorn

I guess I'm struggling to understand, obviously, going forward we're living without Geesink and going to move forward without. I think the best way to look at it would be excluding Geesink.

Charles L. Szews

Charlie, we did have a loss in Geesink in the quarter. The margin obviously would have been done in the June quarter because it was in the non-Geesink portion of the business it was down either add Geesink in and the margin would have been it would have been more negative.

Let's take one more question.

Operator

Our last question comes from [Chris Waltzer] - Robert W. Baird.

[Chris Waltzer] - Robert W. Baird

Do your comments do you expect to remain debt conveyance compliant through the next year assuming that you are able to structure the M-ATV program so the government funds at least some of your working capital needs?

David M. Saghorn

We believe we would be in compliance in either scenario.

Charles L. Szews

Thank you for getting on today and listening to our great, great company. I'll tell you what the M-ATV is a game changer for our company. A significant game changer and with what we're doing with the TAK-4 suspension with those 15,000 to 17,000 MRAP vehicles out there that were built over the last several years, there is also opportunity there going forward so we're working very hard.

We have three priorities in this company it's the M-ATV the M-ATV and the M-ATV and everybody is working on hard and we will meet and exceed the customers' expectations. But clearly a great win for our company and a game changer especially in the worst recession in 70 years. So thank you and have a great day.

Operator

This concludes today teleconference you may disconnect your lines at this time. Thank you for your participation.

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Source: Oshkosh Corporation F3Q09 (Qtr End 06/30/09) Earnings Call Transcript
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