SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(x) Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 31, 2003.
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
for the Transition period from ______________ to ___________________
Commission File Number 1-31371
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Oshkosh Truck Corporation
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[Exact name of registrant as specified in its charter]
Wisconsin 39-0520270
- -------------------------------------- ---------------------------
[State or other jurisdiction of [I.R.S. Employer
incorporation or organization] Identification No.]
2307 Oregon Street, P.O. Box 2566, Oshkosh, Wisconsin 54903
- ----------------------------------------------------- -----
[Address of principal executive offices] [Zip Code]
Registrant's telephone number, including area code (920) 235-9151
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None
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[Former name, former address and former fiscal year, if changed
since last report]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common Stock Outstanding as of January 28, 2004: 814,074
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Common Stock Outstanding as of January 28, 2004: 34,236,588
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1
OSHKOSH TRUCK CORPORATION
FORM 10-Q INDEX
FOR THE QUARTER ENDED DECEMBER 31, 2003
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
- Three Months Ended December 31,
2003 and 2002...........................................3
Condensed Consolidated Balance Sheets
- December 31, 2003 and September 30, 2003.................4
Condensed Consolidated Statement of Shareholders' Equity
- Three Months Ended December 31, 2003.....................5
Condensed Consolidated Statements of Cash Flows
- Three Months Ended December 31, 2003 and 2002 ...........6
Notes to Condensed Consolidated Financial Statements
- December 31, 2003........................................7
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations...........22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.............................................32
Item 4. Controls and Procedures ........................................32
Part II. Other Information
Item 1. Legal Proceedings..........................................33
Item 6. Exhibits and Reports on Form 8-K ..........................33
Signatures ...................................................................34
2
PART I. ITEM 1. FINANCIAL INFORMATION
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands, except
per share amounts)
Net sales $ 493,194 $ 426,336
Cost of sales 404,772 368,697
--------- ---------
Gross income 88,422 57,639
Operating expenses:
Selling, general and administrative 40,031 35,675
Amortization of purchased intangibles 1,663 1,602
--------- ---------
Total operating expenses 41,694 37,277
--------- ---------
Operating income 46,728 20,362
Other income (expense):
Interest expense (1,148) (3,409)
Interest income 250 187
Miscellaneous, net (40) (276)
--------- ---------
(938) (3,498)
--------- ---------
Income before provision for income taxes
and equity in earnings of
unconsolidated affiliates 45,790 16,864
Provision for income taxes 16,712 6,204
--------- ---------
Income before equity in earnings
of unconsolidated affiliates 29,078 10,660
Equity in earnings of unconsolidated
affiliates, net of income taxes 620 632
--------- ---------
Net income $ 29,698 $ 11,292
========= =========
Earnings per share $ 0.85 $ 0.33
Earnings per share assuming dilution $ 0.83 $ 0.32
Cash dividends:
Class A Common Stock $ 0.05000 $ 0.03750
Common Stock $ 0.05750 $ 0.04313
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, September 30,
2003 2003
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 23,588 $ 19,245
Receivables, net 170,115 159,752
Inventories 277,419 242,076
Prepaid expenses 9,416 10,393
Deferred income taxes 32,419 35,092
----------- ----------
Total current assets 512,957 466,558
Investment in unconsolidated affiliates 23,395 21,977
Other long-term assets 12,210 7,852
Property, plant and equipment:
Land 15,264 14,942
Equipment on operating lease to others 8,349 7,574
Buildings 96,722 95,273
Machinery and equipment 172,662 167,481
----------- ----------
292,997 285,270
Less accumulated depreciation (143,934) (138,801)
----------- ----------
Net property, plant and equipment 149,063 146,469
Purchased intangible assets, net 101,566 102,460
Goodwill 348,223 337,816
----------- ----------
Total assets $ 1,147,414 $ 1,083,132
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 102,416 $ 115,739
Floor plan notes payable 26,407 18,730
Customer advances 154,284 164,460
Payroll-related obligations 27,079 33,712
Income taxes 8,951 263
Accrued warranty 28,139 29,172
Other current liabilities 59,245 54,293
Revolving credit facility and current maturities of long-term debt 73,109 51,625
----------- ----------
Total current liabilities 479,630 467,994
Long-term debt 863 1,510
Deferred income taxes 43,257 47,619
Other long-term liabilities 63,357 47,146
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 4,000,000 shares;
none issued and outstanding - -
Class A Common Stock, $.01 par value; authorized 2,000,000 shares;
issued - 815,290 in 2004 and 2003 8 8
Common Stock, $.01 par value; authorized 120,000,000 shares;
issued - 34,848,768 in 2004 and 2003 348 348
Paid-in capital 132,772 129,863
Retained earnings 397,098 369,407
Common Stock in treasury, at cost; 664,796 shares in 2004 and
804,892 shares in 2003 (3,210) (3,760)
Unearned compensation (3,230) (3,401)
Accumulated other comprehensive income 36,521 26,398
----------- ----------
Total shareholders' equity 560,307 518,863
----------- ----------
Total liabilities and shareholders' equity $ 1,147,414 $ 1,083,132
=========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
THREE MONTHS ENDED DECEMBER 31, 2003
(Unaudited)
Accumulated
Common Stock Other
Common Paid-In Retained in Treasury Unearned Comprehensive
Stock Capital Earnings at Cost Compensation Income Total
----- ------- -------- ------- ------------ ------ -----
(In thousands)
Balance at September 30, 2003 $ 356 $ 129,863 $ 369,407 $ (3,760) $ (3,401) $ 26,398 $ 518,863
Net income - - 29,698 - - - 29,698
Loss on derivative
instruments (net of
income tax benefit of $3,545) - - - - - (6,035) (6,035)
Currency translation
adjustments - - - - - 16,158 16,158
Cash dividends:
Class A Common Stock - - (40) - - - (40)
Common Stock - - (1,967) - - - (1,967)
Purchase of Common Stock - - - (18) - - (18)
Amortization of unearned
compensation - - - - 171 - 171
Exercise of stock options - 1,222 - 568 - - 1,790
Tax benefit related to
stock options exercised - 1,687 - - - - 1,687
------ -------- -------- ------- ------- -------- --------
Balance at December 31, 2003 $ 356 $ 132,772 $ 397,098 $ (3,210) $ (3,230) $ 36,521 $ 560,307
====== ======== ======== ======= ======= ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands)
Operating activities:
Net income $ 29,698 $ 11,292
Non-cash adjustments 6,986 49
Changes in operating assets and liabilities (48,745) (16,962)
----------- -----------
Net cash used for operating activities (12,061) (5,621)
Investing activities:
Additions to property, plant and equipment (4,716) (5,174)
Proceeds from sale of assets 46 1,879
Decrease (increase) in other long-term assets (434) 743
----------- -----------
Net cash used for investing activities (5,104) (2,552)
Financing activities:
Net borrowings under revolving credit facility 20,100 -
Proceeds from issuance of long-term debt 965 -
Repayment of long-term debt (240) (12,194)
Dividends paid (2,001) (1,459)
Other 1,772 893
----------- -----------
Net cash provided from (used for) financing activities 20,596 (12,760)
Effect of exchange rate changes on cash 912 261
----------- -----------
Increase (decrease) in cash and cash equivalents 4,343 (20,672)
Cash and cash equivalents at beginning of period 19,245 40,039
----------- -----------
Cash and cash equivalents at end of period $ 23,588 $ 19,367
=========== ===========
Supplementary disclosures:
Depreciation and amortization $ 6,585 $ 6,106
Cash paid for interest 1,141 1,624
Cash paid for income taxes 5,708 1,443
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
OSHKOSH TRUCK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003
(Unaudited)
1. BASIS OF PRESENTATION
- -------------------------
The condensed consolidated financial statements included herein have been
prepared by Oshkosh Truck Corporation (the "Company") without audit. However,
the foregoing financial statements contain all adjustments (which include normal
recurring adjustments except as disclosed herein) that are, in the opinion of
Company management, necessary to present fairly the condensed consolidated
financial statements. Operating results for the periods presented may not be
indicative of the annual results.
In the three month period ended December 31, 2003, the Company recorded a
cumulative catch-up adjustment to increase the life-to-date margin recognized on
its multi-year Medium Tactical Vehicle Replacement ("MTVR") production contract
which is accounted for under the "percentage-of-completion" method. The
adjustment resulted from a settlement during the period of a warranty
reimbursement with a supplier and positive cost performance under the contract
due to increased overall defense segment production volume. The cumulative
life-to-date adjustment increased the margin percentage recognized on the
contract from 5.5% to 6.3%. This change in estimate increased operating income
for the three months ended December 31, 2003 by $6.5 million, net income by $4.1
million and earnings per share by $0.12, including $6.2 million, $3.9 million
and $0.11, respectively, relating to revenues recorded in prior periods. The
Company had recognized a margin percentage of 4.3% on this contract in the three
months ended December 31, 2002.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended September 30, 2003.
2. NEW ACCOUNTING STANDARDS
- ----------------------------
In December 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 132 (revised 2003),
"Employers' Disclosures about Pensions and Other Post-retirement Benefits, an
amendment of FASB Statements No. 87, 88 and 106" (collectively "SFAS No.
132(R)"). SFAS No. 132(R) incorporates all of the disclosure requirements of
SFAS No. 132 "Employers Disclosures about Pensions and Other Post-retirement
Benefits" and increases annual disclosure requirements to include more details
about pension plan assets, benefit obligations, cash flows, benefit costs and
related information.
7
The Company will be required to adopt the new annual disclosure requirements
effective September 30, 2004.
SFAS No. 132(R) also amends Accounting Principles Board ("APB") Opinion No. 28,
"Interim Financial Reporting" to require interim-period disclosure of the
components of net periodic benefit cost and, if significantly different from
previously disclosed amounts, the amounts of contributions and projected
contributions to fund pension plans and other post-retirement benefit plans. The
Company is required to adopt the interim-period disclosure requirements of SFAS
No. 132(R) effective March 31, 2004. Because SFAS No. 132(R) pertains only to
disclosure provisions, the Company's adoption of SFAS No. 132(R) will not have
an impact on the Company's financial condition, results of operations or cash
flows.
In January 2003, the FASB issued Financial Interpretation No. 46, "Consolidation
of Variable Interest Entities" revised December 2003 ("FIN 46(R)"). FIN 46(R)
requires that companies consolidate a variable interest entity if it is subject
to a majority of the risk of loss from the variable interest entity's
activities, or is entitled to receive a majority of the entity's residual
returns, or both. The provisions of FIN 46(R) currently are required to be
applied no later than the first reporting period ending after March 15, 2004 for
variable interest entities in which the Company holds a variable interest that
it acquired on or before January 31, 2003. Companies that acquired a variable
interest after January 31, 2003, continue to apply the provisions of FIN 46 or
apply FIN 46(R) beginning December 31, 2003. Companies that hold a variable
interest in a special purpose entity, as defined, are required to apply either
FIN 46 or FIN 46(R) no later than the end of the first reporting period that
ends after December 15, 2003. The Company has no special purpose entities, nor
has it acquired a variable interest in an entity where the Company is the
primary beneficiary since January 31, 2003. Adoption of FIN 46(R) is not
expected to have an impact on the Company's financial condition, results of
operations or cash flows.
In January 2004, the FASB issued FASB Staff Position ("FSP") No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." FSP No. 106-1 permits the
sponsor of a postretirement health care plan that provides a prescription drug
benefit to make a one-time election to defer accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act") and requires certain disclosures pending further consideration of the
underlying accounting issues.
In December 2003 the Act was signed into law. The Act introduces a prescription
drug benefit under Medicare as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. FASB Statement No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," ("FAS No. 106") provides that
presently enacted changes in the law that take effect in future periods and that
will affect the future level of benefit coverage are required to be considered
in the current-period measurements for benefits expected to be provided in those
8
future periods. The Act also introduced two new features to Medicare that need
to be considered in determining current-period measurements. These features are
1) a subsidy to a plan sponsor based on 28 percent of an individual
beneficiary's annual prescription drug costs between certain amounts ("the
subsidy") and 2) the opportunity for a retiree to obtain a prescription drug
benefit under Medicare. Plan sponsor's eligibility for the subsidy depends upon,
among other things, whether the plan's prescription drug benefit is at least
actuarially equivalent to the Medicare Part D benefit and on how many
Medicare-eligible retired plan participants choose not to enroll in the
voluntary Part D plan. Further, specific regulations necessary to implement the
Act have not yet been issued by the appropriate administrative agency.
Because of these and other questions that exist relative to the Act, there is
general uncertainty as to both the timing and the type of accounting recognition
to be given the subsidy. Questions include whether the subsidy should be
accounted for as a reduction of the accumulated pension benefit obligation
("APBO") and net periodic postretirement benefit cost, or whether the subsidy
represents a payment to the plan sponsor which does not represent a direct
reduction of postretirement benefit costs.
Because the Company does not have (a) sufficiently reliable information
available on which to measure the effects of the Act, (b) sufficient time before
issuance of financial statements that include the Act's enactment date to
prepare actuarial valuations that reflect the effects of the Act, or (c)
sufficient guidance to ensure that the Company's accounting for the effects of
the Act is consistent with generally accepted accounting principles, the Company
has elected to defer recognizing the effects of the Act in the accounting for
its plans under FAS No. 106 and in providing disclosures related to the plan
required by FAS No. 132(R) until authoritative guidance on the accounting for
the federal subsidy is issued or until certain other events occur as provided
for under FSP No. 106-1.
Because of the election to follow deferral provisions of FSP No. 106-1, the
Company's financial statements or accompanying notes for periods following
enactment of the Act do not give effect to the financial impact of the Act,
including any changes in the measurement of the APBO or net periodic
postretirement benefit cost. Specific authoritative guidance on the accounting
for the federal subsidy is pending and the guidance, when issued, could require
the Company to change previously reported information. Although not expected to
be material, at this time the Company cannot provide a reasonable estimate of
the impact of the Act on its financial condition, results of operations or cash
flows.
9
3. COMPREHENSIVE INCOME
- -----------------------------
Total comprehensive income is as follows:
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands)
Net income $ 29,698 $ 11,292
Currency translation adjustments 16,158 11,011
Derivative instruments,
net of income taxes (6,035) 39
---------- ----------
Comprehensive income $ 39,821 $ 22,342
========== ==========
4. EARNINGS PER SHARE
- ----------------------
The following table sets forth the computation of basic and diluted weighted
average shares used in the denominator of the per share calculations:
Three Months Ended
December 31,
2003 2002
---- ----
Denominator for basic earnings per share 34,799,626 33,882,980
Effect of dilutive options and incentive
compensation awards 979,839 900,550
---------- ----------
Denominator for dilutive earnings
per share 35,779,465 34,783,530
========== ==========
Options to purchase 460,000 shares of Common Stock at $29.38 per share were
outstanding in the first quarter of fiscal 2003, but were not included in the
computation of diluted earnings per share because the exercise price of the
options was greater than the average market price of the Common Stock, and
therefore, the effect would have been anti-dilutive.
10
5. INVENTORIES
- --------------------
Inventories consist of the following:
December 31, September 30,
2003 2003
---- ----
(In thousands)
Finished products $ 81,394 $ 68,763
Partially finished products 115,569 114,400
Raw materials 134,311 123,809
---------- ----------
Inventories at FIFO cost 331,274 306,972
Less: Performance-based payments on
U.S. government contracts (39,029) (50,961)
Excess of FIFO cost over LIFO cost (14,826) (13,935)
---------- ----------
$ 277,419 $ 242,076
========== ==========
Title to all inventories related to government contracts, which provide for
performance-based payments, vests with the government to the extent of
unliquidated performance-based payments.
6. INVESTMENT IN UNCONSOLIDATED AFFILIATES
- ------------------------------------------------
The Company's investment in unconsolidated affiliates consists primarily of an
interest in Oshkosh/McNelius Financial Services Partnership ("OMFSP"). The
Company and an unaffiliated third party are general partners in OMFSP. OMFSP was
formed in 1998 when each partner contributed existing lease assets (and in the
case of the Company, related notes payable to third party lenders that were
secured by such leases) to capitalize the partnership. OMFSP manages the
contributed assets and liabilities and engages in new vendor lease business
providing financing, primarily to customers of the Company. OMFSP purchases
trucks, truck bodies and concrete batch plants from the Company, the Company's
affiliates and, occasionally, unrelated third parties for lease to user-lessees.
Company sales to OMFSP were $12.7 million and $12.5 million for the three months
ended December 31, 2003 and 2002, respectively. Banks and other third party
financial institutions lend to OMFSP a portion of the purchase price, with
recourse solely to OMFSP, secured by a pledge of lease payments due from the
user-lessees. Each partner funds one-half of the approximate 8.0% equity portion
of the cost of new equipment purchases. Customers typically provide a 2.0% down
payment. Each partner is allocated its proportionate share of OMFSP's cash flow
and taxable income in accordance with the partnership agreement. Indebtedness of
OMFSP is secured by the underlying leases and assets of, and is recourse to,
OMFSP. However, all such OMFSP indebtedness is non-recourse to the Company and
its partner. Each of the two general partners has identical voting,
participating and protective rights and responsibilities, and each general
partner materially participates in the activities of OMFSP. For these and other
reasons, the Company has determined that OMFSP is a voting
11
interest entity for purposes of FIN 46. Accordingly, the Company accounts for
its equity interest in OMFSP under the equity method.
Included in investments in unconsolidated affiliates in the Company's Condensed
Consolidated Balance Sheet at December 31, 2003 is the Company's investment in
OMFSP of $23.2 million, which represents the Company's maximum exposure to loss
as a result of the Company's ownership interest in OMFSP. This exposure is a
non-cash exposure. Further, the Company has recorded deferred income tax
liabilities related to its investment in OMFSP of $22.1 million at December 31,
2003 that were included in long-term deferred income tax liabilities in the
Company's Condensed Consolidated Balance Sheet. Should the Company's investment
in OMFSP be liquidated for any reason, this deferred income tax liability would
reverse and result in an increase in current income taxes payable by the
Company.
Summarized financial information of OMFSP is as follows:
December 31, September 30,
2003 2003
---- ----
(In thousands)
Cash and cash equivalents $ 4,765 $ 1,879
Investments in sales-type leases, net 191,937 203,034
Other assets 2,689 1,439
--------- ---------
$ 199,391 $ 206,352
========= =========
Notes payable $ 153,178 $ 161,964
Other liabilities 1,552 1,537
Partners' equity 44,661 42,851
--------- ---------
$ 199,391 $ 206,352
========= =========
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands)
Interest income $ 3,362 $ 3,980
Net interest income 968 1,106
Excess of revenues over expenses 1,049 1,241
12
7. PURCHASED INTANGIBLE ASSETS AND GOODWILL
- -------------------------------------------------
The following tables present details of the Company's purchased intangible
assets:
December 31, 2003
--------------------------------------------------------------------
Weighted-
Average Accumulated
Life Gross Amortization Net
---- ----- ------------ ---
(Years) (In thousands)
Amortizable:
Distribution network 40.0 $ 53,000 $ (9,645) $ 43,355
Non-compete 14.5 40,142 (16,132) 24,010
Technology-related 17.7 21,735 (5,808) 15,927
Other 7.6 13,423 (2,073) 11,350
--------- --------- ---------
24.8 128,300 (33,658) 94,642
Non-amortizable tradenames 6,924 - 6,924
--------- --------- ---------
Total $ 135,224 $ (33,658) $ 101,566
========= ========= =========
September 30, 2003
--------------------------------------------------------------------
Weighted-
Average Accumulated
Life Gross Amortization Net
---- ----- ------------ ---
(Years) (In thousands)
Amortizable:
Distribution network 40.0 $ 53,000 $ (9,314) $ 43,686
Non-compete 14.5 40,142 (15,399) 24,743
Technology-related 17.7 21,322 (5,423) 15,899
Other 7.6 13,423 (1,793) 11,630
--------- --------- ---------
24.9 127,887 (31,929) 95,958
Non-amortizable tradenames 6,502 - 6,502
--------- --------- ---------
Total $ 134,389 $ (31,929) $ 102,460
========= ========= =========
Amortization expense recorded for the three months ended December 31, 2003 and
2002 was $1.7 million and $1.6 million, respectively. The estimated future
amortization expense of purchased intangible assets as of December 31, 2003 is
as follows (in thousands):
13
Fiscal Year Ending September 30, Amount
------
(In thousands)
2004 (remaining nine months) $ 4,992
2005 6,610
2006 6,606
2007 6,390
2008 6,256
2009 6,256
Future 57,532
---------
$ 94,642
=========
The following table presents the changes in goodwill during the three months
ended December 31, 2003:
Balance at Foreign Currency Balance at
September 30, Translation December 31,
Segment 2003 Adjustment 2003
------- ---- ---------- ----
(In thousands)
Commercial $ 238,474 $ 10,407 $ 248,881
Fire and emergency 99,342 - 99,342
---------- ---------- -----------
Total $ 337,816 $ 10,407 $ 348,223
========== ========== ===========
8. FINANCIAL INSTRUMENTS
- -------------------------
Historically, the Company has used forward foreign exchange contracts to reduce
the exchange rate risk of specific foreign currency transactions. These
contracts require the exchange of a foreign currency for U.S. dollars at a fixed
rate at a future date.
To protect against a reduction in value of certain forecasted foreign currency
cash receipts from export sales from April 2004 through December 2006 that will
be denominated in British Sterling and to protect against increases in costs of
purchases of certain components from January 2004 through October 2006 that are
payable in British Sterling or euros, all in connection with the Company's
contract to provide certain tactical military truck systems to the United
Kingdom Ministry of Defence, the Company has instituted a foreign currency cash
flow hedging program. The Company has hedged a significant portion of its
estimated foreign currency cash flows in connection with this contract.
At December 31, 2003, outstanding foreign exchange forward contracts totaled
$295.4 million in notional amounts, including $214.2 million in contracts to
sell British Sterling, $0.8 million in contracts to sell euros, $1.5 million in
contracts to purchase British Sterling, $77.2 million in contracts to purchase
euros and $1.7 million in contracts to sell Canadian dollars. Net unrealized
losses (net of related tax effect of $5.2 million) on outstanding foreign
exchange forward contracts at
14
December 31, 2003 totaled $8.9 million and have been included in accumulated
other comprehensive income.
As of December 31, 2003, the Company expects to reclassify $0.6 million of net
gains on derivative instruments from accumulated other comprehensive income to
earnings during the next twelve months due to actual export sales and sales of
product whose underlying cost contain purchases denominated in foreign
currencies.
9. LONG-TERM DEBT
- ------------------
The Company has a $170.0 million revolving credit facility with $71.5 million in
borrowings outstanding at December 31, 2003. The revolving credit facility may
be increased up to an aggregate maximum outstanding amount of $245.0 million at
the Company's discretion, unless the Company is in default under the senior
credit facility.
At December 31, 2003, outstanding borrowings and $24.6 million of outstanding
letters of credit reduced available capacity under the revolving credit facility
to $73.9 million.
Substantially all the domestic tangible and intangible assets of the Company and
its subsidiaries (including the stock of certain subsidiaries) are pledged as
collateral under the revolving credit facility. The revolving credit facility
includes customary affirmative and negative covenants.
The Company's wholly-owned subsidiary in the Netherlands, Geesink Group B.V. and
certain of its wholly-owned affiliates have a euro 2.5 million bank credit
facility (the "facility") in place at December 31, 2003 in conjunction with its
cross-border cash pooling arrangement. The facility provides for borrowings of
up to euro 1.5 million and guarantees of up to euro 1.0 million. The facility
accrues interest at a floating rate (4.50% at December 31, 2003) and contains
certain financial covenants relating to the entities which are party to the
agreement. There were no borrowings outstanding under the facility at December
31, 2003.
Certain of the Company's domestic subsidiaries have outstanding debt to third
parties totaling $2.5 million as of December 31, 2003, of which $1.6 million has
been classified as current due to the Company's intention to prepay this debt in
fiscal 2004.
10. STOCK-BASED EMPLOYEE COMPENSATION PLANS
- ------------------------------------------------
At December 31, 2003, the Company had one stock-based employee compensation
plan, which is described more fully in Note 10 to the Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended September 30, 2003. The Company accounts for this stock-based plan under
the recognition and measurement principles of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations. Except for
restricted stock awards granted in September 2002, no stock-based employee
compensation cost was reflected in
15
previously reported results for any period, as all options granted under this
plan had an exercise price equal to the market value of the underlying Common
Stock on the measurement date.
The following table illustrates the effect on net income and earnings per share
if the Company had applied the fair value recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation:
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands, except
per share amounts)
Net income, as reported $ 29,698 $ 11,292
Add: Stock-based employee
compensation expense recorded
for restricted stock awards,
net of related tax effects 171 171
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (964) (833)
--------- ---------
(793) (662)
--------- ---------
Pro forma net income $ 28,905 $ 10,630
========= =========
Earnings per share:
As reported $ 0.85 $ 0.33
Pro forma 0.83 0.31
Earnings per share assuming dilution:
As reported $ 0.83 $ 0.32
Pro forma 0.81 0.30
11. COMMITMENTS AND CONTINGENCIES
- --------------------------------------
As part of its routine business operations, the Company disposes of and recycles
or reclaims certain industrial waste materials, chemicals and solvents at third
party disposal and recycling facilities, which are licensed by appropriate
governmental agencies. In some instances, these facilities have been and may be
designated by the United States Environmental Protection Agency ("EPA") or a
state environmental agency for remediation. Under the Comprehensive
Environmental Response, Compensation, and Liability Act (the "Superfund" law)
and similar state laws, each potentially responsible party ("PRP") that
contributed hazardous substances may be jointly and severally liable for the
costs associated with cleaning up these sites. Typically, PRPs negotiate a
resolution with the EPA and/or the state environmental agencies. PRPs also
negotiate with each other regarding allocation of the cleanup cost.
As to one such Superfund site, the Company's Pierce Manufacturing Inc.
("Pierce")subsidiary is one of 393 PRPs participating in the costs of
16
addressing the site and has been assigned an allocation share of approximately
0.04%. At December 31, 2003, a report of the remedial investigation/feasibility
study was being completed, and as such, an estimate for the total cost of the
remediation of this site has not been made to date. However, based on estimates
and the assigned allocations, the Company believes its liability at the site
will not be material and its share is adequately covered through reserves
established by the Company at December 31, 2003. Actual liability could vary
based on results of the study, the resources of other PRPs, and the Company's
final share of liability.
In March 2003, the Company and Pierce were each named as one of 52 PRPs
participating in the cost of addressing a Superfund site in Milwaukee,
Wisconsin. In October 2003, the Company and Pierce, along with 47 other PRPs
entered into buyout agreements with the two PRPs who sent the largest volume of
waste to the site. Settlement payments made by the Company and Pierce were
insignificant in amount and were based on the amounts and types of waste each
company sent to the site. The buyout agreements protect the Company and Pierce
from any additional costs associated with the EPA's requirement for the removal
of certain buildings, waste drums, underground storage tanks and contaminated
soil at the site. The buyout agreements do not cover any future costs that may
be necessary to address groundwater contamination and remediation, if required.
The Company believes that any potential remaining liability with respect to this
site will not be material and that it is adequately covered through reserves
established by the Company.
The Company is addressing a regional trichloroethylene ("TCE") groundwater plume
on the south side of Oshkosh, Wisconsin. The Company believes there may be
multiple sources in the area. TCE was detected at the Company's North Plant
facility with testing showing the highest concentrations in a monitoring well
located on the upgradient property line. Because the investigation process is
still ongoing, it is not possible for the Company to estimate its long-term
total liability associated with this issue at this time. Also, as part of the
regional TCE groundwater investigation, the Company conducted a groundwater
investigation of a former landfill located on Company property. The landfill,
acquired by the Company in 1972, is approximately 2.0 acres in size and is
believed to have been used for the disposal of household waste. Based on the
investigation, the Company does not believe the landfill is one of the sources
of the TCE contamination. Based upon current knowledge, the Company believes its
liability associated with the TCE issue will not be material and is adequately
covered through reserves established by the Company. However, this may change as
investigations proceed by the Company, other unrelated property owners, and the
government.
In connection with the acquisition of the Geesink Norba Group, the Company
identified potential soil and groundwater contamination impacts from solvents
and metals at one of its manufacturing sites. The Company is conducting a study
to identify the source of the contamination. Based on current estimates, the
Company believes its liability at this site will
17
not be material and any responsibility of the Company is adequately covered
through reserves established by the Company.
At December 31, 2003 and September 30, 2003, the reserve for environmental
matters was $5.6 million and $5.3 million, respectively.
The Company has guaranteed certain customers' obligations under deferred payment
contracts and lease purchase agreements. The Company's guarantee is limited to
$1.0 million per year during the period in which customer obligations are
outstanding. The Company is also contingently liable under bid, performance and
specialty bonds totaling approximately $148.9 million and open standby letters
of credit issued by the Company's bank in favor of third parties totaling
approximately $24.6 million at December 31, 2003.
Product and general liability claims arise against the Company from time to time
in the ordinary course of business. The Company is generally self-insured for
future claims up to $1.0 million per claim. Accordingly, a reserve is maintained
for the estimated costs of such claims. At December 31, 2003 and September 30,
2003, the reserve for product and general liability claims was $18.5 million and
$18.0 million, respectively, based on available information. There is inherent
uncertainty as to the eventual resolution of unsettled claims. Management,
however, believes that any losses in excess of established reserves will not
have a material effect on the Company's financial condition, results of
operations or cash flows.
The Company is subject to other environmental matters and legal proceedings and
claims, including patent, antitrust, product liability and state dealership
regulation compliance proceedings that arise in the ordinary course of business.
Although the final results of all such matters and claims cannot be predicted
with certainty, management believes that the ultimate resolution of all such
matters and claims, after taking into account the liabilities accrued with
respect to such matters and claims, will not have a material adverse effect on
the Company's financial condition, results of operations or cash flows. Actual
results could vary, among other things, due to the uncertainties involved in
litigation.
12.WARRANTY AND GUARANTEE ARRANGEMENTS
- --------------------------------------
The Company's products generally carry explicit warranties that extend from six
months to two years, based on terms that are generally accepted in the
marketplace. Selected components (such as engines, transmissions, tires, etc.)
included in the Company's end products may include manufacturers' warranties.
These manufacturers' warranties are generally passed on to the end customer of
the Company's products, and the customer would generally deal directly with the
component manufacturer.
The Company's policy is to record a provision for the expected cost of
warranty-related claims at the time of the sale, and periodically adjust the
provision to reflect actual experience. The amount of warranty liability accrued
reflects management's best estimate of the expected
18
future cost of honoring Company obligations under the warranty plans.
Historically, the cost of fulfilling the Company's warranty obligations has
principally involved replacement parts, labor and sometimes travel for any
field retrofit campaigns. The Company's estimates are based on historical
experience, the extent of pre-production testing, the number of units involved
and the extent of features/components included in product models. Also, each
quarter, the Company reviews actual warranty claims experience to determine if
there are systemic defects that would require a field campaign.
Changes in the Company's warranty liability were as follows (in thousands):
Three Months Ended
December 31,
2003 2002
---- ----
Balance at beginning of period $ 29,172 $ 24,015
Warranty provisions for the period 4,370 3,883
Settlements made during the period (4,117) (4,900)
Changes in liability for pre-existing warranties
during the period, including expirations (1,528) 1,879
Foreign currency translation adjustment 242 211
---------- ----------
Balance at end of period $ 28,139 $ 25,088
========== ==========
In the fire and emergency segment, the Company provides guarantees of lease
payments by customer-lessees to a third-party lessor of equipment purchased from
the Company. The guarantee is limited to $1.0 million per year in total and is
supported by the residual value of the related equipment. The Company's actual
losses under these guarantees over the last ten years have been negligible. In
accordance with Financial Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," no liabilities for pre-January 1, 2003 guarantees have
been recorded. For all such guarantees issued after January 1, 2003, the Company
has recorded the fair value of the guarantee as a liability and a reduction of
the initial revenue recognized on the sale of equipment. Amounts recorded since
January 1, 2003 were not significant.
19
13. BUSINESS SEGMENT INFORMATION
- ---------------------------------
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands)
Net sales to unaffiliated customers:
Commercial $ 182,996 $ 166,751
Fire and emergency 122,861 112,956
Defense 190,387 148,609
Intersegment eliminations (3,050) (1,980)
---------- ----------
Consolidated $ 493,194 $ 426,336
========== ==========
Operating income (loss):
Commercial $ 7,187 $ 7,652
Fire and emergency 11,606 10,025
Defense 37,164 9,588
Corporate and other (9,229) (6,903)
---------- ----------
Consolidated operating income 46,728 20,362
Net interest expense (898) (3,222)
Miscellaneous other (40) (276)
---------- ----------
Income before provision for income
taxes and equity in earnings of
unconsolidated affiliates $ 45,790 $ 16,864
========== ==========
December 31, September 30,
2003 2003
---- ----
(In thousands)
Identifiable assets:
Commercial $ 683,504 $ 645,930
Fire and emergency 346,907 335,509
Defense 110,554 101,570
Corporate and other 6,449 123
---------- ----------
Consolidated $ 1,147,414 $ 1,083,132
========== ==========
20
Net sales by geographic region based on product shipment destination were as
follows:
Three Months Ended
December 31,
2003 2002
---- ----
(In thousands)
United States $ 381,120 $ 377,988
Other North America 2,784 1,587
Europe and Middle East 98,065 37,642
Other 11,225 9,119
--------- ----------
Consolidated $ 493,194 $ 426,336
========= ==========
21
Item 2. Oshkosh Truck Corporation
Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations and other sections of this Form 10-Q contain
statements that Oshkosh Truck Corporation (the "Company" or "Oshkosh") believes
to be "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements other than statements of
historical fact included in this report, including, without limitation,
statements regarding the Company's future financial position, business strategy,
targets, projected sales, costs, earnings, capital spending and debt levels, and
plans and objectives of management for future operations, including those under
the caption "Fiscal 2004 Outlook" are forward-looking statements. When used in
this Form 10-Q, words such as "may," "will," "expect," "intend," "estimates,"
"anticipate," "believe," "should" or "plans" or the negative thereof or
variations thereon or similar terminology are generally intended to identify
forward-looking statements. These forward-looking statements are not guarantees
of future performance and are subject to risks, uncertainties, assumptions and
other factors, some of which are beyond the Company's control, that could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements. These factors include the success of the launch of
the Revolution(TM) composite concrete mixer drum, the outcome of defense truck
procurement competitions, the cyclical nature of the Company's commercial and
fire and emergency markets, risks related to reductions in government
expenditures, the uncertainty of government contracts, the challenges of
identifying acquisition candidates and integrating acquired businesses, risks
associated with international operations and sales, including foreign currency
fluctuations, disruptions in the supply of parts or components from sole source
suppliers and subcontractors and competition. Additional information concerning
factors that could cause actual results to differ materially from those in the
forward-looking statements is contained from time to time in the Company's SEC
filings, including, but not limited to, the Company's Current Report on Form 8-K
filed with the SEC on January 22, 2004.
All forward-looking statements, including those under the caption "Fiscal 2004
Outlook," speak only as of the date the Company files this Quarterly Report on
Form 10-Q with the SEC. The Company has adopted a policy that if the Company
makes a determination that it expects the Company's earnings per share for
future periods for which projections are contained in this Quarterly Report on
Form 10-Q to be lower than those projections, then the Company will publicly
disseminate that fact. The Company's policy also provides that if the Company
makes a determination that it expects earnings per share for future periods to
be at or above the projections contained in this Quarterly Report on Form 10-Q,
then the
22
Company does not intend to publicly disseminate that fact. Except as
set forth above, the Company assumes no obligation, and disclaims any
obligation, to update information contained in this Quarterly Report on Form
10-Q. Investors should be aware that the Company may not update such information
until the Company's next quarterly conference call, if at all.
General
The major products manufactured and marketed by each of the Company's business
segments are as follows:
Commercial - concrete mixer systems, refuse truck bodies, mobile and stationary
refuse compactors and waste transfer stations, portable concrete batch plants
and truck components sold to ready-mix companies and commercial and municipal
waste haulers in the U.S., Europe and other international markets.
Fire and emergency - commercial and custom fire trucks, aircraft rescue and
firefighting trucks, snow removal trucks, ambulances and other emergency
vehicles primarily sold to fire departments, airports and other governmental
units in the U.S. and abroad.
Defense - heavy- and medium-payload tactical trucks and supply parts sold to the
U.S. military and to other militaries around the world.
Results of Operations
Analysis of Consolidated Net Sales
The following table presents net sales by business segment (in thousands):
First Quarter
Fiscal
2004 2003
---- ----
Net sales to unaffiliated customers:
Commercial $ 182,996 $ 166,751
Fire and emergency 122,861 112,956
Defense 190,387 148,609
Intersegment eliminations (3,050) (1,980)
---------- ----------
Consolidated $ 493,194 $ 426,336
========== ==========
23
First Quarter Fiscal 2004 Compared to 2003
Consolidated net sales increased 15.7% to $493.2 million for the first quarter
of fiscal 2004 compared to the first quarter of fiscal 2003. Net sales increases
were recorded in all segments.
Commercial segment net sales increased 9.7% to $183.0 million for the first
quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Concrete
placement product sales were down 1.2% in 2004 compared to 2003, largely due to
lower unit sales volume, offset in part by a higher mix of package sales which
include both a rear-discharge concrete mixer truck body and a purchased chassis.
Refuse product sales were up 21.2% compared to 2003. U.S. refuse product sales
increased 17.0% for the quarter, primarily due to higher unit sales, especially
to large, U.S. commercial waste-haulers. European refuse product sales were up
29.0% compared to 2003, generally as a result of increased unit sales and
because of favorable currency translation adjustments as a result of the
increased strength of the euro compared to the U.S. dollar.
Fire and emergency segment net sales increased 8.8% to $122.9 million for the
first quarter of fiscal 2004 compared to the first quarter of fiscal 2003,
principally due to higher airport product sales.
Defense segment net sales increased 28.1% to $190.4 million for the first
quarter of fiscal 2004 compared to the first quarter of fiscal 2003. Increased
international sales of heavy trucks, including shipments under the Company's
contract with the United Kingdom Ministry of Defence for Heavy Equipment
Transporters ("U.K. HET"), and higher parts sales resulting from the conflicts
in Iraq and Afghanistan more than offset lower Medium Tactical Vehicle
Replacement ("MTVR") contract sales. MTVR sales decreased $32.0 million as the
production rate under this five-year contract declined in advance of contract
expiration in fiscal 2005.
Analysis of Consolidated Operating Income
The following table presents operating income by business segment (in
thousands):
First Quarter
Fiscal
2004 2003
---- ----
Operating income (expense):
Commercial $ 7,187 $ 7,652
Fire and emergency 11,606 10,025
Defense 37,164 9,588
Corporate and other (9,229) (6,903)
--------- --------
Consolidated operating income $ 46,728 $ 20,362
========= ========
24
First Quarter Fiscal 2004 Compared to 2003
Consolidated operating income increased 129.5% to $46.7 million, or 9.5% of
sales, in the first quarter of fiscal 2004 compared to $20.4 million, or 4.8% of
sales, in the first quarter of fiscal 2003.
Commercial segment operating income decreased 6.1% to $7.2 million, or 3.9% of
sales, in the quarter compared to $7.7 million, or 4.6% of sales, in the prior
year quarter. Operating income margins fell in the first quarter of fiscal 2004
compared to the prior year quarter due to a higher mix of relatively
lower-margin package sales and increased new product development expense.
Fire and emergency segment operating income increased 15.8% to $11.6 million, or
9.4% of sales, in the quarter compared to $10.0 million, or 8.9% of sales, in
the prior year quarter. A strong product mix and improved manufacturing
efficiencies contributed to the higher margins in the current quarter.
Defense segment operating income increased 287.6% to $37.2 million, or 19.5% of
sales, in the quarter compared to $9.6 million, or 6.5% of sales, in the prior
year quarter. Operating income increased despite declining sales of lower-margin
MTVR trucks. The largest contributor to the higher operating income results in
the first quarter was the higher international defense truck sales in the
quarter. As a result of a warranty settlement and positive cost performance due
to increased overall defense segment production volume, the Company recorded a
cumulative life-to-date adjustment totaling $6.5 million, including $6.2 million
related to prior period revenues of $769.6 million, to increase the life-to-date
margins recognized on its MTVR contract from 5.5% to 6.3%. Margins on the MTVR
contract were 4.3% in the first quarter of fiscal 2003. Operating income in the
first quarter also significantly benefited from increased sales of higher-margin
parts and lower bid and proposal spending compared to the prior year.
Corporate operating expenses and inter-segment profit elimination increased $2.3
million to $9.2 million in the first quarter of fiscal 2004 compared to the
first quarter of fiscal 2003. Current quarter results included higher variable
incentive compensation and investments in people and services.
Consolidated operating expenses increased 11.8% to $41.7 million, or 8.5% of
sales, in the first quarter of fiscal 2004 compared to $37.3 million, or 8.7% of
sales in the first quarter of fiscal 2003. Increased corporate expenses and
variable selling expenses were partially offset by lower bid and proposal costs
in the first quarter of fiscal 2004 compared to the first quarter of fiscal
2003.
25
Analysis of Non-Operating Income Statement Items
First Quarter Fiscal 2004 Compared to 2003
Net interest expense decreased $2.3 million to $0.9 million in the first quarter
of fiscal 2004 compared to the first quarter of fiscal 2003, largely as a result
of lower average borrowings and the impact of the September 2003 early
retirement of $100 million of 8 3/4% fixed rate debt.
The effective income tax rate was 36.5% for the first quarter of fiscal 2004
compared to 36.8% in the first quarter of fiscal 2003.
Equity in earnings of unconsolidated affiliates of $0.6 million in the first
quarter of fiscal 2004 and 2003 primarily represents the Company's equity
interest in a lease financing partnership.
Financial Condition
First Quarter of Fiscal 2004
During the first three months of fiscal 2004, borrowings under the Company's
revolving credit facility of $20.1 million and $1.0 million of other long-term
borrowings funded cash used in operating activities of $12.1 million, capital
expenditures of $4.7 million and an increase in cash of $4.3 million. Cash used
in operations during the first three months of fiscal 2004 increased compared to
the three months ended December 31, 2002 despite higher earnings as the Company
had higher levels of inventory and receivables, principally related to increased
defense parts sales and international business growth. During the first three
months of fiscal 2003, the Company was liquidating significant receivables and
inventories associated with a large foreign military sale.
The Company's debt-to-total capital ratio at December 31, 2003 was 11.7%
compared to 9.3% at September 30, 2003.
Liquidity and Capital Resources
The Company had $73.9 million of unused availability under the terms of its
revolving credit facility as of December 31, 2003. The Company's primary cash
requirements include working capital, interest payments on indebtedness, capital
expenditures, dividends, and, potentially, future acquisitions. The Company
expects its primary sources of cash will be cash flow from operations and
borrowings under the Company's revolving credit facility.
The Company's cash flow from operations has fluctuated, and will likely continue
to fluctuate, significantly from quarter to quarter due to changes in working
capital requirements arising principally from seasonal fluctuations in sales,
the start-up or conclusion of large defense contracts and the timing of receipt
of individually large performance-based payments from the U.S. Department of
Defense ("DoD").
26
The Company's revolving credit facility contains various restrictions and
covenants, including (1) limits on payments of dividends and repurchases of the
Company's stock; (2) requirements that the Company maintain certain financial
ratios at prescribed levels; (3) restrictions on the ability of the Company to
make additional borrowings, or to consolidate, merge or otherwise fundamentally
change the ownership of the Company; and (4) limitations on investments,
dispositions of assets and guarantees of indebtedness. These restrictions and
covenants could limit the Company's ability to respond to market conditions, to
provide for unanticipated capital investments, to raise additional debt or
equity capital, to pay dividends or to take advantage of business opportunities,
including future acquisitions.
Interest rates on borrowings under the Company's revolving credit facility are
variable and are equal to the "Base Rate" (which is equal to the higher of a
bank's reference rate and the federal funds rate plus 0.50%) or the "IBOR Rate"
(which is the bank's inter-bank offered rate for U.S. dollars in off-shore
markets) plus a margin of 1.00% for IBOR Rate loans under the Company's
revolving credit facility as of December 31, 2003. The margin is subject to
adjustment, up or down, based on whether certain financial criteria are met. The
weighted average interest rate on borrowings outstanding at December 31, 2003
was 2.84%. The Company presently has no plans to enter into interest rate swap
arrangements to limit exposure to future increases in interest rates.
In addition to the Company's revolving credit facility, the Company's
wholly-owned subsidiary in the Netherlands, Geesink Group B.V. and certain of
its affiliates are party to a euro 2.5 million bank credit facility (the
"facility") which supports a cross-border cash pooling arrangement. There were
no borrowings outstanding under the facility at December 31, 2003. See Note 9 to
the Notes to Condensed Consolidated Financial Statements.
Based upon current and anticipated future operations, the Company believes that
capital resources will be adequate to meet future working capital, debt service
and other capital requirements for fiscal 2004. See "Fiscal 2004 Outlook." Debt
levels and capital resource requirements may change, however, because the
Company maintains an active acquisitions strategy and the Company cannot
reasonably estimate the capital requirements of this strategy. In addition, the
Company could face significant working capital requirements in the event of an
award of major new business arising from a current truck procurement competition
in the U.K.
Contractual Obligations, Commercial Commitments and Off-Balance Sheet
Arrangements
The Company's contractual obligations, commercial commitments and off-balance
sheet arrangements disclosures in its Annual Report on Form 10-K for the year
ended September 30, 2003 have not materially changed since that report was
filed.
27
Application of Critical Accounting Policies
The Company's application of critical accounting policies disclosures in its
Annual Report on Form 10-K for the year ended September 30, 2003 have not
materially changed since that report was filed.
Critical Accounting Estimates
The Company's disclosures of critical accounting estimates in its Annual Report
on Form 10-K for the year ended September 30, 2003 have not materially changed
since that report was filed.
New Accounting Standards
Refer to Note 2 to the Condensed Consolidated Financial Statements for a
discussion of the impact on the Company's financial statements of new accounting
standards.
Customers and Backlog
Sales to the DoD comprised approximately 33% of the Company's sales in the first
three months of fiscal 2004. No other single customer accounted for more than
10% of the Company's net sales for this period. A substantial majority of the
Company's net sales are derived from customer orders prior to commencing
production.
The Company's backlog at December 31, 2003 increased 33.8% to $1,437.7 million
compared to $1,074.3 million at December 31, 2002. Commercial segment backlog
increased 41.3% to $215.4 million at December 31, 2003 compared to December 31,
2002. Unit backlog for front-discharge concrete mixers was up 35.3% while unit
backlog for rear-discharge concrete mixers was up 70.7% as concrete placement
markets began to strengthen during the first quarter. Unit backlog for refuse
packers was up 90.7% domestically and down 11.6% in Europe. Domestic refuse
backlog improved due to improving orders from commercial waste haulers. Although
orders increased during the quarter ended December 31, 2003, European refuse
backlog remained down due to a soft European economy. Fire and emergency segment
backlog increased 10.1% to $347.6 million at December 31, 2003 compared to
December 31, 2002, due to higher orders in the six months ended December 31,
2003 compared to the same period ended December 31, 2002. The defense segment
backlog increased 44.3% to $874.8 million at December 31, 2003 compared to
December 31, 2002, principally due to the award of a U. K. Wheeled Tanker
contract with shipments commencing in fiscal 2005, increased parts and heavy
truck orders related to the conflicts in Iraq and Afghanistan and due to funding
received under the Company's Family of Heavy Tactical Vehicles ("FHTV") and MTVR
contracts and the recently awarded $49.4 million contract to remanufacture heavy
trucks for the U.S. military. Approximately 31.6% of the Company's December 31,
2003 backlog is not expected to be filled in fiscal 2004.
Reported backlog excludes purchase options and announced orders for which
definitive contracts have not been executed. Additionally, backlog
28
excludes unfunded portions of the DoD FHTV and MTVR contracts. Backlog
information and comparisons thereof as of different dates may not be accurate
indicators of future sales or the ratio of the Company's future sales to the DoD
versus its sales to other customers.
Fiscal 2004 Outlook
The Company estimates that fiscal 2004 consolidated net sales will approximate
$1.97 billion, up 2.3% from fiscal 2003 net sales. If the U.S. Marine Corps
funds the wrecker under the MTVR contract, then the Company's consolidated sales
estimate would increase by approximately $30.0 million. No acquisitions are
assumed in any of the Company's fiscal 2004 estimates. Also, all comparisons are
to fiscal 2003 actual results.
The Company estimates that commercial sales will increase about 9.2% to
approximately $810.0 million in fiscal 2004. The Company is projecting an
increase in concrete placement sales of about 9.0% in fiscal 2004, reflecting
industry volume growth due to a modest economic recovery and the launch of the
Revolution(TM) composite mixer drum. The Company expects to sell approximately
650 Revolution(TM) composite concrete mixer drums in fiscal 2004. The Company is
projecting domestic refuse sales to increase about 17.0% in fiscal 2004, largely
due to projected volume increases with the largest U.S. waste haulers, with the
Company expecting municipal refuse spending to remain soft. The Company expects
that Geesink Norba Group refuse product sales will be basically flat in fiscal
2004 with no recovery in the European market and based on the current strong
euro to the U.S. dollar.
The Company expects that fire and emergency sales will be down about 3.7% to
approximately $515.0 million. The Company believes that industry fire apparatus
market volumes may be down 10.0% in fiscal 2004 due to municipal and state
budget constraints. The Company expects strong snow removal and aircraft rescue
and firefighting vehicle sales to offset some of the weakness in fire apparatus
sales.
The Company is projecting defense sales to decrease 0.3% to $655.0 million. The
Company believes this estimate could increase by approximately $30.0 million if
the U.S. Marine Corps funds the MTVR wrecker requirement. Before consideration
of any potential MTVR wrecker call-up, the Company expects MTVR sales to decline
about $126.0 million in fiscal 2004, consistent with contract requirements. The
Company estimates that most of that decrease will be offset by higher estimated
international sales, higher parts sales and higher sales under the Company's
FHTV contract.
By quarter, the Company estimates that fiscal 2004 sales will approximate $472.5
million in quarter two, $528.5 million in quarter three and $476.0 million in
quarter four.
The Company is projecting consolidated operating income to be up about 24.6% to
approximately $161.0 million in fiscal 2004.
29
In the commercial segment, the Company projects operating income to increase
25.7% to $50.5 million. The Company is projecting margins to increase in this
segment due to improved manufacturing efficiencies resulting from higher sales
volume and higher margins on expected sales of its new Revolution(TM) composite
mixer drum.
The Company is projecting fire and emergency segment operating income to
decrease 3.0% to $50.5 million in fiscal 2004, consistent with the estimated
sales decrease in this segment.
The Company is projecting defense operating income to increase 36.8% to $94.0
million in fiscal 2004. This estimate assumes lower bid and proposal spending,
substantially lower sales of relatively lower-margin MTVR trucks, but increased
sales of relatively higher-margin FHTV and international defense trucks. The
estimate also includes the benefit of sales of the recently-awarded $49.4
million remanufacturing contract and increased parts sales. This estimate
assumes the MTVR contract margins remain at 6.3%. The Company continues to
target higher margins over the contract life. Quarterly, the Company monitors
manufacturing cost performance and the durability of fielded trucks, among other
factors, and adjusts margins on the contract based on revised estimates to
complete this contract. Another important factor impacting defense segment
earnings in fiscal 2004 will be the status of a U.S. Marine Corps contract
modification to the base MTVR contract to fund wreckers on an MTVR chassis. If
funded, the Company believes the modification would add approximately $30.0
million in sales at higher margins than earned under the base MTVR contract.
The Company expects corporate expenses to approximate $34.0 million in fiscal
2004, up from $31.8 million in fiscal 2003. This increase reflects higher
estimated variable compensation and other estimated expense increases. The
Company is projecting net interest costs to decrease $7.0 million in fiscal 2004
to $5.0 million, reflecting available cash flow and the early repayment of
senior subordinated notes in September 2003.
The Company estimates that in fiscal 2004 its effective tax rate will
approximate 36.5% and that equity in earnings of its unconsolidated affiliates
will approximate $2.2 million after taxes.
These estimates result in the Company's estimate of fiscal 2004 net income
increasing 33.8% to $101.2 million. By quarter, the Company expects that net
income will approximate $18.4 million in quarter two, $27.1 million in quarter
three and $26.0 million in quarter four. Based on an estimated 36.15 million
average diluted shares outstanding for the year, these net income estimates
result in earnings per share estimates of $0.51 in quarter two, $0.75 in quarter
three, and $0.71 in quarter four. Net income and earnings per share are
projected to decline in the fourth quarter of fiscal 2004 compared to the fourth
quarter of fiscal 2003 when a cumulative adjustment was made to increase MTVR
margins.
The Company estimates that debt will fluctuate with seasonal working capital
needs increasing to $80.0 million at March 31, 2004 and then
30
decrease to $50.0 million at June 30, 2004 and $20.0 million at September 30,
2004. The Company anticipates capital spending to approximate $30.0 million in
fiscal 2004, much of which the Company expects will support the continued
worldwide rollout of the Revolution(TM) composite mixer drum.
Looking forward to fiscal 2005, the Company expects MTVR contract sales to
decline further as this contract concludes. By then, the Company hopes that
other defense truck sales opportunities, an economic recovery, the rollout of
the Revolution(TM) composite mixer drum and, potentially, acquisitions would
offset MTVR sales declines.
The expectations set forth in "Fiscal 2004 Outlook" are forward-looking
statements and are based in part on certain assumptions made by the Company,
some of which are referred to in, or as part of, the forward-looking statements.
These assumptions include, without limitation, the sale of 650 Revolution(TM)
composite mixer drums in the U.S. in fiscal 2004 at favorable pricing and costs;
the Company's estimates for concrete placement activity, housing starts and
mortgage rates; a modest economic recovery in the U.S. and no economic recovery
in Europe; the Company's expectations as to timing of receipt of sales orders
and payments and execution and funding of defense contracts; the Company's
ability to achieve cost reductions; the anticipated level of production and
margins associated with the MTVR contract and a related MTVR wrecker variant
contract and the funding thereof; international defense truck contracts and the
FHTV contract; the expected level of U.S. Department of Defense procurement of
replacement parts and remanufacturing of trucks; the expected level of
commercial "package" body and purchased chassis sales compared to "body only"
sales; the Company's estimates for capital expenditures of municipalities for
fire and emergency and refuse products, of airports for rescue and snow removal
products and of large commercial waste haulers generally and with the Company;
the Company's ability to sustain market share gains by its fire and emergency
and refuse products businesses; anticipated levels of capital expenditures,
especially with respect to the rollout of the Revolution composite mixer drum;
the Company's planned spending on new product development; the Company's
estimates for costs relating to litigation, insurance, raw materials and
components; the Company's targets for Geesink Norba Group sales and operating
income; the Company's planned spending on product development and bid and
proposal activities with respect to defense truck procurement competitions and
the outcome of such competitions; the Company's estimates for debt levels,
interest rates and working capital needs; and that the Company does not complete
any acquisitions. The Company cannot provide any assurance that the assumptions
referred to in the forward-looking statements or otherwise are accurate or will
prove to have been correct. Any assumptions that are inaccurate or do not prove
to be correct could have a material adverse effect on the Company's ability to
achieve the results that the forward-looking statements contemplate.
31
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's quantitative and qualitative disclosures about market risk for
changes in interest rates and foreign exchange risk are incorporated by
reference in Item 7A of the Company's Annual Report on Form 10-K for the year
ended September 30, 2003 and have not materially changed since that report was
filed except as noted below.
The Company's export sales have historically been denominated in the Company's
functional currency, the U.S. dollar. In March 2003, the Company entered into a
multi-year contract to provide Wheeled Tanker systems to the U.K. Ministry of
Defence. This contract, which is included in the Company's backlog at December
31, 2003 and which calls for deliveries in fiscal 2005 through fiscal 2007, is
denominated in British Sterling. Additionally, in connection with this Wheeled
Tanker contract, the Company has entered into requirements subcontracts with
various third parties. Certain of these subcontracts call for payments in euros
and British Sterling. The Company has hedged a significant portion of the
forecasted cash flows related to this contract by entering into forward foreign
exchange contracts. Any portion of these contractual cash flows that remain
unhedged will subject the Company to foreign currency transaction risk and
related financial volatility. See Note 8 to the Condensed Consolidated Financial
Statements for details regarding the Company's use of forward foreign exchange
contracts in connection with the Wheeled Tanker contract and other forecasted
purchases and sales denominated in foreign currency.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures. In accordance with Rule
13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), the
Company's management evaluated, with the participation of the Company's Chairman
of the Board, President and Chief Executive Officer and Executive Vice President
and Chief Financial Officer, the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
under the Exchange Act) as of the end of the quarter ended December 31, 2003.
Based upon their evaluation of these disclosure controls and procedures, the
Chairman of the Board, President and Chief Executive Officer and the Executive
Vice President and Chief Financial Officer concluded that the disclosure
controls and procedures were effective as of the end of the quarter ended
December 31, 2003 to ensure that material information relating to the Company,
including its consolidated subsidiaries, was made known to them by others within
those entities, particularly during the period in which this Quarterly Report on
Form 10-Q was being prepared.
Changes in internal control. There was no change in the Company's internal
control over financial reporting that occurred during the quarter ended
December 31, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
32
OSHKOSH TRUCK CORPORATION
PART II. OTHER INFORMATION
FORM 10-Q
December 31, 2003
Item 1. Legal Proceedings
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
- -------------------
31.1 Certification by the Chairman, President and Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act, dated January 30,
2004.
31.2 Certification by the Executive Vice President and Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated
January 30, 2004.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer, pursuant to 18 U.S.C. ss.1350, dated January 30, 2004.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. ss.1350, dated January 30, 2004.
(b) Reports on Form 8-K
- ----------------------------
Current Report on Form 8-K dated October 28, 2003 reporting the
announcement of the Company's earnings for the fiscal year ended September
30, 2003, a conference call in connection with such announcement and risk
factors for the Company.
33
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OSHKOSH TRUCK CORPORATION
January 30, 2004 /S/ R. G. Bohn
-----------------------------------------------------
R. G. Bohn
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
January 30, 2004 /S/ C. L. Szews
-----------------------------------------------------
C. L. Szews
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
January 30, 2004 /S/ T. J. Polnaszek
-----------------------------------------------------
T. J. Polnaszek
Vice President and Controller
(Principal Accounting Officer)
34
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
31.1 Certification by the Chairman, President and Chief Executive Officer,
pursuant to Section 302 of the Sarbanes-Oxley Act, dated January 30,
2004.
31.2 Certification by the Executive Vice President and Chief Financial
Officer, pursuant to Section 302 of the Sarbanes-Oxley Act, dated
January 30, 2004.
32.1 Written Statement of the Chairman, President and Chief Executive
Officer, pursuant to 18 U.S.C. ss.1350, dated January 30, 2004.
32.2 Written Statement of the Executive Vice President and Chief Financial
Officer, pursuant to 18 U.S.C. ss.1350, dated January 30, 2004.
35