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 March 31, 2003.
or
( ) Transaction 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
Oshkosh Truck Corporation
--------------------------------------------------------------------------------
[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
None
--------------------------------------------------------------------------------
[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 as
common stock, as of the latest practicable date.
Class A Common Stock Outstanding as of April 28, 2003: 413,425
Common Stock Outstanding as of April 28, 2003: 16,652,734
OSHKOSH TRUCK CORPORATION
FORM 10-Q INDEX
FOR THE QUARTER ENDED MARCH 31, 2003
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income
- Three Months and Six Months Ended
March 31, 2003 and 2002.............................3
Condensed Consolidated Balance Sheets
- March 31, 2003 and September 30, 2002.................4
Condensed Consolidated Statement of Shareholders' Equity
- Six Months Ended March 31, 2003.......................5
Condensed Consolidated Statements of Cash Flows
- Six Months Ended March 31, 2003 and 2002 .............6
Notes to Condensed Consolidated Financial Statements
- March 31, 2003........................................7
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ............28
Item 3. Quantitative and Qualitative Disclosures about
Market Risk...............................................43
Item 4. Controls and Procedures........................................43
Part II. Other Information
Item 1. Legal Proceedings .............................................45
Item 4. Submission of Matters to a Vote of Security Holders............45
Item 6. Exhibits and Reports on Form 8-K ..............................46
Signatures....................................................................47
2
PART I. ITEM 1. FINANCIAL INFORMATION
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Net sales $ 453,377 $ 415,605 $ 879,713 $ 777,098
Cost of sales 387,585 356,109 756,282 667,578
---------- ---------- ---------- ----------
Gross income 65,792 59,496 123,431 109,520
Operating expenses:
Selling, general and administrative 39,798 34,439 75,473 65,244
Amortization of purchased intangibles 1,607 1,475 3,209 2,915
---------- ---------- ---------- ----------
Total operating expenses 41,405 35,914 78,682 68,159
---------- ---------- ---------- ----------
Operating income 24,387 23,582 44,749 41,361
Other income (expense):
Interest expense (3,497) (5,617) (6,906) (12,039)
Interest income 307 271 494 556
Miscellaneous, net 601 51 325 (199)
---------- ---------- ---------- ----------
(2,589) (5,295) (6,087) (11,682)
---------- ---------- ---------- ----------
Income before provision for income taxes
and equity in earnings of unconsolidated
partnership 21,798 18,287 38,662 29,679
Provision for income taxes 8,178 6,706 14,382 10,010
---------- ---------- ---------- ----------
Income before equity in earnings
of unconsolidated partnership 13,620 11,581 24,280 19,669
Equity in earnings of unconsolidated
partnership, net of income taxes 494 586 1,126 1,106
---------- ---------- ---------- ----------
Net income $ 14,114 $ 12,167 $ 25,406 $ 20,775
========== ========== ========== ==========
Earnings per share $ 0.83 $ 0.72 $ 1.50 $ 1.24
Earnings per share assuming dilution $ 0.81 $ 0.70 $ 1.46 $ 1.21
Cash dividends:
Class A Common Stock $ 0.07500 $ 0.07500 $ 0.15000 $ 0.15000
Common Stock $ 0.08625 $ 0.08625 $ 0.17250 $ 0.17250
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, September 30,
2003 2002
---------- -------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 19,794 $ 40,039
Receivables, net 161,517 142,709
Inventories 266,993 210,866
Prepaid expenses 7,640 7,414
Deferred income taxes 32,281 26,008
---------- ----------
Total current assets 488,225 427,036
Investment in unconsolidated partnership 21,870 22,274
Other long-term assets 22,330 11,625
Property, plant and equipment 270,922 261,045
Less accumulated depreciation (127,688) (120,684)
---------- ----------
Net property, plant and equipment 143,234 140,361
Purchased intangible assets, net 101,994 104,316
Goodwill 329,453 318,717
---------- ----------
Total assets $1,107,106 $1,024,329
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 115,749 $ 116,422
Floor plan notes payable 31,870 23,801
Customer advances 164,114 119,764
Payroll-related obligations 30,638 34,474
Income taxes 3,572 8,597
Accrued warranty 26,297 24,015
Other current liabilities 50,635 47,754
Revolving credit facility and current
maturities of long-term debt 13,227 18,245
---------- ----------
Total current liabilities 436,102 393,072
Long-term debt 124,526 131,713
Deferred income taxes 46,921 39,303
Other long-term liabilities 48,588 50,481
Commitments and contingencies - Note 10
Shareholders' equity 450,969 409,760
---------- ----------
Total liabilities and shareholders' equity $1,107,106 $1,024,329
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
Common Accumulated
Stock in Other
Common Paid-In Retained Treasury Unearned Comprehensive
Stock Capital Earnings at Cost Compensation Income Total
-------- --------- --------- ---------- ------------ ------------- ---------
(In thousands)
Balance at
September 30, 2002 $ 178 $ 117,179 $ 300,713 $ (7,636) $ (4,086) $ 3,412 $ 409,760
Net income -- -- 25,406 -- -- -- 25,406
Gain on derivative
instruments (net of
income taxes of $20) -- -- -- -- -- (33) (33)
Currency translation
adjustments -- -- -- -- -- 15,990 15,990
Cash dividends:
Class A Common Stock -- -- (62) -- -- -- (62)
Common Stock -- -- (2,871) -- -- -- (2,871)
Amortization of unearned
compensation -- -- -- -- 342 -- 342
Exercise of stock options -- 210 -- 754 -- -- 964
Tax benefit related to
stock options exercised -- 1,473 -- -- -- -- 1,473
-------- --------- --------- --------- --------- --------- ---------
Balance at March 31, 2003 $ 178 $ 118,862 $ 323,186 $ (6,882) $ (3,744) $ 19,369 $ 450,969
======== ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
OSHKOSH TRUCK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
March 31,
---------------------
2003 2002
-------- --------
(In thousands)
Operating activities:
Net income $ 25,406 $ 20,775
Non-cash adjustments 9,979 4,597
Changes in operating assets and liabilities (25,469) 60,494
-------- --------
Net cash provided from operating activities 9,916 85,866
Investing activities:
Additions to property, plant and equipment (11,767) (4,873)
Proceeds from sale of assets 3,760 1
Increase in other long-term assets (8,409) (1,305)
-------- --------
Net cash used for investing activities (16,416) (6,177)
Financing activities:
Net repayments under revolving credit facility - (55,200)
Repayment of long-term debt (12,219) (21,830)
Dividends paid (2,927) (2,875)
Other 964 1,941
-------- --------
Net cash used for financing activities (14,182) (77,964)
Effect of exchange rate changes on cash 437 (13)
-------- --------
Increase (decrease) in cash and cash equivalents (20,245) 1,712
Cash and cash equivalents at beginning of period 40,039 11,312
-------- --------
Cash and cash equivalents at end of period $ 19,794 $ 13,024
======== ========
Supplementary disclosures:
Depreciation and amortization $ 12,328 $ 12,249
Cash paid for interest 7,136 12,203
Cash paid for income taxes 17,583 27,495
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
OSHKOSH TRUCK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003
(In thousands, except share and per share amounts)
(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.
Certain reclassifications have been made to the fiscal 2002 financial statements
to conform to the fiscal 2003 presentation.
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, 2002.
2. NEW ACCOUNTING STANDARDS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires certain guarantees to be recorded at fair value and
requires a guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote. Generally, FIN
45 applies to certain types of financial guarantees that contingently require
the guarantor to make payments to the guaranteed party based on changes in an
underlying that is related to an asset, liability, or an equity security of the
guaranteed party; performance guarantees involving contracts which require the
guarantor to make payments to the guaranteed party based on another entity's
failure to perform under an obligating agreement; indemnification agreements
that contingently require the guarantor to make payments to an indemnified party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the indemnified party; or indirect guarantees of the
indebtedness of others. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002. Disclosure requirements under FIN 45 are
effective for financial statements ending after December 15, 2002 and are
applicable to all
7
guarantees issued by the guarantor subject to FIN 45's scope, including
guarantees issued prior to FIN 45. The adoption of FIN 45 did not have a
material effect on the Company's financial condition, results of operations or
cash flows (see Note 11).
In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation--Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition to SFAS No. 123's
fair value method for accounting for stock-based employee compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and Accounting
Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The Company adopted early the provisions of SFAS No. 148
as of October 1, 2002 and has included the required disclosures in Note 9.
Adoption of SFAS No. 148 did not have a material impact on the Company's
financial condition, results of operations or cash flows.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities" with the objective of improving financial reporting by companies
involved with variable interest entities. A variable interest entity is a
corporation, partnership, trust, or any other legal structure used for business
purposes that either (a) does not have equity investors with voting rights, or
(b) has equity investors that do not provide sufficient financial resources for
the entity to support its activities. Historically, entities generally were not
consolidated unless the entity was controlled through voting interests. FIN 46
changes that by requiring a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the "primary beneficiary" of that entity. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements of FIN
46 apply to existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Also, certain disclosure requirements apply to
all financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established.
The Company is in the process of assessing the impact of FIN 46 as it relates to
its interest in Oshkosh/McNeilus Financial Services Partnership ("OMFSP") (see
Note 6). The Company expects to complete such assessment and adopt FIN 46 in the
fourth quarter of fiscal 2003. FIN 46 may not apply to the Company's interest in
OMFSP because there is substantial evidence that the partnership is a voting
interest entity rather than a
8
variable interest entity. If it is determined to apply, then the Company would
likely sell its interest in OMFSP or restructure its interest in OMFSP such that
the Company is not considered a primary beneficiary of OMFSP.
3. COMPREHENSIVE INCOME
Total comprehensive income is as follows:
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
(In thousands) (In thousands)
Net income $ 14,114 $ 12,167 $ 25,406 $ 20,775
Currency translation adjustments 4,979 (2,318) 15,990 (6,081)
Derivative instruments,
net of income taxes (72) (5) (33) (15)
-------- -------- -------- --------
Comprehensive income $ 19,021 $ 9,844 $ 41,363 $ 14,679
======== ======== ======== ========
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 Six Months Ended
March 31, March 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Denominator for basic earnings per share 16,988,072 16,788,624 16,964,525 16,751,675
Effect of dilutive options and incentive
compensation awards 454,121 491,892 452,441 458,159
---------- ---------- ---------- ----------
Denominator for dilutive earnings
per share 17,442,193 17,280,516 17,416,966 17,209,834
========== ========== ========== ==========
Options granted on February 4, 2003 to purchase 27,000 shares at $62.47 per
share and options granted on February 8, 2002 to purchase 30,000 shares at
$55.00 per share in fiscal 2003 and 2002, respectively, were outstanding, 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.
9
5. INVENTORIES
Inventories consist of the following:
March 31, September 30,
2003 2002
--------- -------------
(In thousands)
Finished products $ 96,049 $ 67,147
Partially finished products 115,851 89,742
Raw materials 119,336 121,596
-------- --------
Inventories at FIFO cost 331,236 278,485
Less: Performance-based payments on
U.S. government contracts (48,732) (54,368)
Excess of FIFO cost over LIFO cost (15,511) (13,251)
-------- --------
$266,993 $210,866
======== ========
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 PARTNERSHIP
The Company and an unaffiliated third party are general partners in OMFSP, a
general partnership. 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 to customers of the Company. OMFSP
purchases trucks, truck bodies and concrete batch plants from the Company and
the Company's affiliates for lease to end customers. 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 equity portion of the cost of
new truck and batch plant purchases, and each partner is allocated its share of
OMFSP cash flow and taxable income as determined by the partnership agreement.
Indebtedness of OMFSP is secured by the underlying leases and assets of, and is
recourse to, OMFSP. Such debt is non-recourse to the Company. Each of the two
general partners has identical participating and protective rights and
responsibilities, and accordingly, the Company accounts for its equity interest
in OMFSP under the equity method.
The Company's investment in the unconsolidated partnership of $21.9 million at
March 31, 2003 included in the Company's Condensed Consolidated Balance Sheet
represents the Company's maximum exposure to loss as a result of the Company's
ownership interest in the partnership. This exposure is a non-cash exposure.
Further, the Company has recorded deferred income tax liabilities related to its
investment in the unconsolidated partnership of $20.2 million at March 31, 2003
that are
10
included in long-term deferred income tax liabilities in the Company's Condensed
Consolidated Balance Sheet. Should the Company's investment in the
unconsolidated partnership 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 (in thousands):
March 31, September 30,
2003 2002
-------- -------------
Cash and cash equivalents $ 2,166 $ 2,037
Investments in sales-type leases, net 207,136 209,440
Other assets 941 553
-------- --------
$210,243 $212,030
======== ========
Notes payable $164,759 $166,442
Other liabilities 4,291 4,146
Partners' equity 41,193 41,442
-------- --------
$210,243 $212,030
======== ========
Six Months Ended
March 31,
2003 2002
-------- -------
Interest income $7,959 $ 8,409
Net interest income 2,160 2,207
Excess of revenues over expenses 2,268 2,193
7. PURCHASED INTANGIBLE ASSETS AND GOODWILL
The following tables present details of the Company's purchased intangible
assets:
March 31, 2003
Weighted- -----------------------------------
Average Accumulated
Life Gross Amortization Net
--------- --------- ------------ ---------
(Years) (In thousands)
Amortizable:
Distribution network 40.0 $ 53,000 $ (8,651) $ 44,349
Non-compete 14.5 40,132 (13,882) 26,250
Technology-related 17.8 20,979 (4,749) 16,230
Other 9.9 10,373 (1,359) 9,014
--------- ------------ ---------
25.5 124,484 (28,641) 95,843
Non-amortizable tradenames 6,151 -- 6,151
--------- ------------ ---------
Total $ 130,635 $ (28,641) $ 101,994
========= ============ =========
11
September 30, 2002
Weighted- -----------------------------------
Average Accumulated
Life Gross Amortization Net
--------- --------- ------------ ---------
(Years) (In thousands)
Amortizable:
Distribution network 40.0 $ 53,000 $ (7,988) $ 45,012
Non-compete 14.5 40,120 (12,350) 27,770
Technology-related 17.8 20,554 (4,070) 16,484
Other 9.9 10,313 (979) 9,334
--------- ------------ ---------
25.5 123,987 (25,387) 98,600
Non-amortizable tradenames 5,716 -- 5,716
--------- ------------ ---------
Total $ 129,703 $ (25,387) $ 104,316
========= ============ =========
Amortization expense recorded for the six months ended March 31, 2003 and 2002
was $3.2 million and $2.9 million, respectively. The estimated future
amortization expense of purchased intangible assets as of March 31, 2003 is as
follows (in thousands):
Fiscal Year Ending September 30, Amount
-------------------------------- --------
2003 (remaining six months) $ 3,190
2004 6,301
2005 6,255
2006 6,035
2007 5,901
2008 5,901
Future 62,260
--------
$ 95,843
========
The following table presents the changes in goodwill during the six months ended
March 31, 2003:
Balance at Foreign Currency Balance at
September 30, Translation March 31,
Segment 2002 Adjustment 2003
------- ------------- ---------------- ----------
(In thousands)
Commercial $ 219,375 $ 10,736 $ 230,111
Fire and emergency 99,342 - 99,342
--------- -------- ---------
Total $ 318,717 $ 10,736 $ 329,453
========= ======== =========
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8. LONG-TERM DEBT
The Company has outstanding a senior credit facility consisting of a $170.0
million revolving credit facility ("Revolving Credit Facility") with no
borrowings outstanding at March 31, 2003 and a Term Loan A with $36.0 million
outstanding at March 31, 2003. The Revolving Credit Facility and the Term Loan A
mature in January 2006.
At March 31, 2003, $15.3 million of outstanding letters of credit reduced
available capacity under the Revolving Credit Facility to $154.7 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 senior credit facility. The senior credit facility includes
customary affirmative and negative covenants.
The Company has outstanding $100.0 million of 8.75% senior subordinated notes.
The Indenture governing the terms of the senior subordinated notes contains
customary affirmative and negative covenants. The Subsidiary Guarantors (as
defined below in Note 13) fully, unconditionally, jointly and severally
guarantee the Company's obligations under the senior subordinated notes.
Certain of the Company's subsidiaries have outstanding debt to third parties
totaling $1.8 million as of March 31, 2003.
9. STOCK-BASED EMPLOYEE COMPENSATION PLANS
At March 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, 2002. 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 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:
13
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
-------- -------- -------- --------
Net income, as reported $ 14,114 $ 12,167 $ 25,406 $ 20,775
Add: Stock-based employee
compensation expense recorded
for restricted stock awards,
net of related tax effects 171 - 342 -
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (901) (552) (1,798) (1,093)
-------- -------- -------- --------
(730) (552) (1,456) (1,093)
-------- -------- -------- --------
Pro forma net income $ 13,384 $ 11,615 $ 23,950 $ 19,682
======== ======== ======== ========
Earnings per share:
As reported $ 0.83 $ 0.72 $ 1.50 $ 1.24
Pro forma 0.79 0.69 1.41 1.17
Earnings per share assuming
dilution:
As reported $ 0.81 $ 0.70 $ 1.46 $ 1.21
Pro forma 0.77 0.67 1.37 1.14
10. 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 the site. Typically, PRPs negotiate for the
costs associated with cleaning up the site. 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.
subsidiary is one of 382 PRPs participating in the costs of addressing the site
and has been assigned an allocation share of approximately 0.04%.
14
Currently, a report of the remedial investigation/feasibility study is 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 March 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.
The Company is addressing a regional trichloroethylene ("TCE") groundwater plume
at 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 liability, if
any, 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 the ultimate
liability associated with the TCE issue will not be materially different than
the amount of reserves established for the matter as of March 31, 2003. 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 not be material and any
responsibility of the Company is adequately covered through reserves established
by the Company at March 31, 2003.
The Company is subject to other environmental matters and legal proceedings and
claims, including patent, antitrust, product liability and state dealership
regulation compliance proceedings, which 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.
The Company is also contingently liable under bid, performance and specialty
bonds totaling approximately $151.1 million and open standby letters of credit
issued by the Company's bank in favor of third parties totaling approximately
$15.3 million at March 31, 2003.
15
11. 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 included in the Company's end products (such as
engines, transmissions, tires, etc.) 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 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.
Certain warranty and other related claims involve matters of dispute that
ultimately are resolved by negotiation, arbitration or litigation. Infrequently,
a material warranty issue can arise which is beyond the scope of the Company`s
historical experience. The Company provides for any such warranty issues as they
become known and are estimable. If the estimate of warranty costs in the first
six months of fiscal 2003 was increased or decreased by 50%, the Company's
accrued warranty costs, costs of sales and operating income would each change by
$5.0 million, or 19.0%, 0.7% and 11.1%, respectively. It is reasonably possible
that additional warranty and other related claims could arise from disputes or
other matters beyond the scope of the Company's historical experience.
16
Changes in the Company's warranty liability during the six months ended March
31, 2003 were as follows (in thousands):
Balance at September 30, 2002 $ 24,015
Warranty provisions for the period 9,969
Settlements made during the period (10,836)
Changes in liability for pre-existing warranties
during the period, including expirations 2,874
Foreign currency translation adjustment 275
--------
Balance at March 31, 2003 $ 26,297
========
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 FIN 45, 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. Adoption of FIN 45 has not had, and is not
expected to have, a material impact on the Company's financial condition,
results of operations or cash flows.
17
12. BUSINESS SEGMENT INFORMATION
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
--------- --------- --------- ---------
(In thousands) (In thousands)
Net sales to unaffiliated customers:
Commercial $ 182,398 $ 169,978 $ 349,149 $ 299,407
Fire and emergency 141,586 119,682 254,542 215,548
Defense 130,551 127,126 279,160 263,701
Intersegment eliminations (1,158) (1,181) (3,138) (1,558)
--------- --------- --------- ---------
Consolidated $ 453,377 $ 415,605 $ 879,713 $ 777,098
========= ========= ========= =========
Operating income (loss):
Commercial $ 11,384 $ 12,161 $ 19,036 $ 19,457
Fire and emergency 14,315 11,610 24,340 19,363
Defense 6,738 5,087 16,326 13,129
Corporate and other (8,050) (5,276) (14,953) (10,588)
--------- --------- --------- ---------
Consolidated operating income 24,387 23,582 44,749 41,361
Net interest expense (3,190) (5,346) (6,412) (11,483)
Miscellaneous other 601 51 325 (199)
--------- --------- --------- ---------
Income before provision for income
taxes and equity in earnings of
unconsolidated partnership $ 21,798 $ 18,287 $ 38,662 $ 29,679
========= ========= ========= =========
March 31, September 30,
2003 2002
---------- -------------
(In thousands)
Identifiable assets:
Commercial $ 666,324 $ 593,489
Fire and emergency 349,657 325,585
Defense 87,825 75,392
Corporate and other 3,300 29,863
---------- ----------
Consolidated $1,107,106 $1,024,329
========== ==========
Net sales by geographic region based on product shipment destination were as follows:
Six Months Ended
March 31,
2003 2002
--------- ---------
(In thousands)
United States $ 774,895 $ 677,372
Other North America 2,783 4,777
Europe and Middle East 88,627 73,283
Other 13,408 21,666
--------- ---------
Consolidated $ 879,713 $ 777,098
========= =========
18
13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for:
(a) the Company; (b) on a combined basis, the guarantors of the senior
subordinated notes, which include all wholly-owned subsidiaries of the Company
("Subsidiary Guarantors") other than the Geesink Norba Group, McNeilus Financial
Services, Inc., Oshkosh/McNeilus Financial Services, Inc., and Oshkosh Equipment
Finance, LLC, which are the only non-guarantor subsidiaries of the Company
("Non-Guarantor Subsidiaries"), and (c) on a combined basis, the Non-Guarantor
Subsidiaries. Separate financial statements of the Subsidiary Guarantors are not
presented because the Subsidiary Guarantors are jointly, severally and
unconditionally liable under the guarantees, and the Company believes separate
financial statements and other disclosures regarding the Subsidiary Guarantors
are not material to investors.
The Company is comprised of Wisconsin and Florida manufacturing operations and
certain corporate management, information services and finance functions.
Borrowings and related interest expense under the senior credit facility and the
senior subordinated notes are charged to the Company. The Company has allocated
a portion of this interest expense to certain Subsidiary Guarantors through
formal lending arrangements. There are no management fee arrangements between
the Company and its Non-Guarantor Subsidiaries.
19
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2003
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Net sales $ 187,915 $ 232,038 $ 44,380 $ (10,956) $ 453,377
Cost of sales 165,569 198,503 34,535 (11,022) 387,585
--------- --------- --------- --------- ---------
Gross income 22,346 33,535 9,845 66 65,792
Operating expenses:
Selling, general and
administrative 17,284 17,003 5,511 -- 39,798
Amortization of purchased
intangibles -- 1,499 108 -- 1,607
--------- --------- --------- --------- ---------
Total operating expenses 17,284 18,502 5,619 -- 41,405
--------- --------- --------- --------- ---------
Operating income 5,062 15,033 4,226 66 24,387
Other income (expense):
Interest expense (5,569) (743) (44) 2,859 (3,497)
Interest income 96 3,057 13 (2,859) 307
Miscellaneous, net 4,540 (3,644) (295) -- 601
--------- --------- --------- --------- ---------
(933) (1,330) (326) -- (2,589)
--------- --------- --------- --------- ---------
Income before items noted below 4,129 13,703 3,900 66 21,798
Provision for income taxes 1,728 5,061 1,365 24 8,178
--------- --------- --------- --------- ---------
2,401 8,642 2,535 42 13,620
Equity in earnings of subsidiaries
and unconsolidated partnership,
net of income taxes 11,713 -- 494 (11,713) 494
--------- --------- --------- --------- ---------
Net income $ 14,114 $ 8,642 $ 3,029 $ (11,671) $ 14,114
========= ========= ========= ========= =========
20
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2002
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Net sales $ 170,201 $ 219,837 $ 32,455 $ (6,888) $ 415,605
Cost of sales 151,556 186,813 24,480 (6,740) 356,109
Gross income --------- --------- --------- --------- ---------
18,645 33,024 7,975 (148) 59,496
Operating expenses:
Selling, general and
administrative 13,626 15,449 5,364 -- 34,439
Amortization of purchased
intangibles 1 1,412 62 -- 1,475
--------- --------- --------- --------- ---------
Total operating expenses 13,627 16,861 5,426 -- 35,914
--------- --------- --------- --------- ---------
Operating income 5,018 16,163 2,549 (148) 23,582
Other income (expense):
Interest expense (6,237) (5,967) 12 6,575 (5,617)
Interest income 5,086 1,760 -- (6,575) 271
Miscellaneous, net 3,298 (3,353) 106 -- 51
--------- --------- --------- --------- ---------
2,147 (7,560) 118 -- (5,295)
--------- --------- --------- --------- ---------
Income before items noted below 7,165 8,603 2,667 (148) 18,287
Provision for income taxes 2,651 3,175 934 (54) 6,706
--------- --------- --------- --------- ---------
4,514 5,428 1,733 (94) 11,581
Equity in earnings of subsidiaries
and unconsolidated partnership,
net of income taxes 7,653 306 586 (7,959) 586
--------- --------- --------- --------- ---------
Net income $ 12,167 $ 5,734 $ 2,319 $ (8,053) $ 12,167
========= ========= ========= ========= =========
21
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Income
For the Six Months Ended March 31, 2003
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Net sales $ 379,003 $ 441,551 $ 81,494 $ (22,335) $ 879,713
Cost of sales 334,363 379,713 64,452 (22,246) 756,282
--------- --------- --------- --------- ---------
Gross income 44,640 61,838 17,042 (89) 123,431
Operating expenses:
Selling, general and
administrative 32,600 31,853 11,020 -- 75,473
Amortization of purchased
intangibles -- 3,002 207 -- 3,209
--------- --------- --------- --------- ---------
Total operating expenses 32,600 34,855 11,227 -- 78,682
--------- --------- --------- --------- ---------
Operating income 12,040 26,983 5,815 (89) 44,749
Other income (expense):
Interest expense (11,188) (1,379) (56) 5,717 (6,906)
Interest income 185 6,026 -- (5,717) 494
Miscellaneous, net 7,327 (6,601) (401) -- 325
--------- --------- --------- --------- ---------
(3,676) (1,954) (457) -- (6,087)
--------- --------- --------- --------- ---------
Income before items noted below 8,364 25,029 5,358 (89) 38,662
Provision for income taxes 3,295 9,245 1,875 (33) 14,382
--------- --------- --------- --------- ---------
5,069 15,784 3,483 (56) 24,280
Equity in earnings of subsidiaries
and unconsolidated partnership,
net of income taxes 20,337 -- 1,126 (20,337) 1,126
--------- --------- --------- --------- ---------
Net income $ 25,406 $ 15,784 $ 4,609 $ (20,393) $ 25,406
========= ========= ========= ========= =========
22
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Income
For the Six Months Ended March 31, 2002
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Net sales $ 331,891 $ 394,002 $ 61,740 $ (10,535) $ 777,098
Cost of sales 295,281 335,439 47,238 (10,380) 667,578
--------- --------- --------- --------- ---------
Gross income 36,610 58,563 14,502 (155) 109,520
Operating expenses:
Selling, general and
administrative 26,381 28,932 9,931 -- 65,244
Amortization of purchased
intangibles 1 2,787 127 -- 2,915
--------- --------- --------- --------- ---------
Total operating expenses 26,382 31,719 10,058 -- 68,159
--------- --------- --------- --------- ---------
Operating income 10,228 26,844 4,444 (155) 41,361
Other income (expense):
Interest expense (13,307) (11,862) (20) 13,150 (12,039)
Interest income 10,174 3,532 -- (13,150) 556
Miscellaneous, net 6,253 (6,351) (101) -- (199)
--------- --------- --------- --------- ---------
3,120 (14,681) (121) -- (11,682)
--------- --------- --------- --------- ---------
Income before items noted below 13,348 12,163 4,323 (155) 29,679
Provision for income taxes 4,068 4,485 1,514 (57) 10,010
--------- --------- --------- --------- ---------
9,280 7,678 2,809 (98) 19,669
Equity in earnings of subsidiaries
and unconsolidated partnership,
net of income taxes 11,495 1,148 1,106 (12,643) 1,106
--------- --------- --------- --------- ---------
Net income $ 20,775 $ 8,826 $ 3,915 $ (12,741) $ 20,775
========= ========= ========= ========= =========
23
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Balance Sheet
March 31, 2003
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 9,850 $ 2,190 $ 7,754 $ -- $ 19,794
Receivables, net 61,178 68,589 38,112 (6,362) 161,517
Inventories 48,163 183,876 35,163 (209) 266,993
Prepaid expenses and other 26,955 11,422 1,544 -- 39,921
--------- --------- --------- --------- ---------
Total current assets 146,146 266,077 82,573 (6,571) 488,225
Investment in and advances to:
Subsidiaries 588,768 4,078 -- (592,846) --
Unconsolidated partnership -- -- 21,870 -- 21,870
Other long-term assets 15,820 6,510 -- -- 22,330
Net property, plant and equipment 33,044 90,385 19,805 -- 143,234
Purchased intangible assets, net 22 93,050 8,922 -- 101,994
Goodwill -- 212,095 117,358 -- 329,453
--------- --------- --------- --------- ---------
Total assets $ 783,800 $ 672,195 $ 250,528 $(599,417) $1,107,106
========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,989 $ 47,926 $ 25,142 $ (6,308) $ 115,749
Floor plan notes payable -- 31,870 -- -- 31,870
Customer advances 70,618 92,927 569 -- 164,114
Payroll-related obligations 11,335 12,891 6,412 -- 30,638
Income taxes 1,649 -- 1,923 -- 3,572
Accrued warranty 13,302 9,628 3,367 -- 26,297
Other current liabilities 20,219 26,717 3,753 (54) 50,635
Revolving credit facility
and current maturities of
long-term debt 13,000 205 22 -- 13,227
--------- --------- --------- --------- ---------
Total current liabilities 179,112 222,164 41,188 (6,362) 436,102
Long-term debt 123,000 1,385 141 -- 124,526
Deferred income taxes (7,616) 30,613 23,924 -- 46,921
Other long-term liabilities 38,335 7,591 2,662 -- 48,588
Commitments and contingencies
Investments by and advances
from (to) parent -- 410,442 182,613 (593,055) --
Shareholders' equity 450,969 -- -- -- 450,969
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 783,800 $ 672,195 $ 250,528 $(599,417) $1,107,106
========= ========= ========= ========= =========
24
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Balance Sheet
September 30, 2002
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 32,571 $ 2,060 $ 5,408 $ -- $ 40,039
Receivables, net 50,520 62,311 33,655 (3,777) 142,709
Inventories 31,060 150,042 29,884 (120) 210,866
Prepaid expenses and other 25,505 6,773 1,144 -- 33,422
--------- --------- --------- --------- ---------
Total current assets 139,656 221,186 70,091 (3,897) 427,036
Investment in and advances to:
Subsidiaries 558,410 6,259 -- (564,669) --
Unconsolidated partnership -- -- 22,274 -- 22,274
Other long-term assets 7,296 4,329 -- -- 11,625
Net property, plant and equipment 33,852 87,666 18,843 -- 140,361
Purchased intangible assets, net 22 95,994 8,300 -- 104,316
Goodwill -- 212,095 106,622 -- 318,717
--------- --------- --------- --------- ---------
Total assets $ 739,236 $ 627,529 $ 226,130 $(568,566) $1,024,329
========= ========= ========= ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,707 $ 48,432 $ 22,027 $ (3,744) $ 116,422
Floor plan notes payable -- 23,801 -- -- 23,801
Customer advances 53,947 65,817 -- -- 119,764
Payroll-related obligations 13,518 14,848 6,108 -- 34,474
Income taxes 8,064 -- 533 -- 8,597
Accrued warranty 11,755 9,148 3,112 -- 24,015
Other current liabilities 18,148 25,457 4,182 (33) 47,754
Revolving credit facility
and current maturities of
long-term debt 18,000 226 19 -- 18,245
--------- --------- --------- --------- ---------
Total current liabilities 173,139 187,729 35,981 (3,777) 393,072
Long-term debt 130,000 1,586 127 -- 131,713
Deferred income taxes (10,071) 27,445 21,929 -- 39,303
Other long-term liabilities 36,408 11,654 2,419 -- 50,481
Commitments and contingencies
Investments by and advances
from (to) parent -- 399,115 165,674 (564,789) --
Shareholders' equity 409,760 -- -- -- 409,760
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 739,236 $ 627,529 $ 226,130 $(568,566) $1,024,329
========= ========= ========= ========= =========
25
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2003
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Operating activities:
Net income $ 25,406 $ 15,784 $ 4,609 $ (20,393) $ 25,406
Non-cash adjustments 1,307 6,718 1,954 -- 9,979
Changes in operating assets
and liabilities (12,200) (11,014) (2,344) 89 (25,469)
--------- --------- --------- --------- ---------
Net cash provided from (used
for) operating activities 14,513 11,488 4,219 (20,304) 9,916
Investing activities:
Investments in and advances to
subsidiaries (14,375) (2,276) (3,653) 20,304 --
Additions to property, plant
and equipment (2,266) (8,649) (852) -- (11,767)
Other (6,630) (211) 2,192 -- (4,649)
--------- --------- --------- --------- ---------
Net cash provided from (used
for) investing activities (23,271) (11,136) (2,313) 20,304 (16,416)
Financing activities:
Repayment of long-term debt (12,000) (222) 3 -- (12,219)
Dividends paid (2,927) -- -- -- (2,927)
Other 964 -- -- -- 964
--------- --------- --------- --------- ---------
Net cash provided from (used
for) financing activities (13,963) (222) 3 -- (14,182)
Effect of exchange rate changes
on cash -- -- 437 -- 437
--------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents (22,721) 130 2,346 -- (20,245)
Cash and cash equivalents at
beginning of period 32,571 2,060 5,408 -- 40,039
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period $ 9,850 $ 2,190 $ 7,754 $ -- $ 19,794
========= ========= ========= ========= =========
26
OSHKOSH TRUCK CORPORATION
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended March 31, 2002
(Unaudited)
Subsidiary Non-Guarantor
Company Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------- ------------ ------------
(In thousands)
Operating activities:
Net income $ 20,775 $ 8,826 $ 3,915 $ (12,741) $ 20,775
Non-cash adjustments (2,994) 7,441 150 -- 4,597
Changes in operating assets
and liabilities 29,564 30,500 275 155 60,494
--------- --------- --------- --------- ---------
Net cash provided from (used
for) operating activities 47,345 46,767 4,340 (12,586) 85,866
Investing activities:
Investments in and advances to
subsidiaries 34,343 (47,810) 1,168 12,299 --
Additions to property, plant
and equipment (1,161) (1,287) (2,425) -- (4,873)
Other (138) 144 (1,310) -- (1,304)
--------- --------- --------- --------- ---------
Net cash provided from (used
for) investing activities 33,044 (48,953) (2,567) 12,299 (6,177)
Financing activities:
Net repayments under
revolving credit facility (55,200) -- -- -- (55,200)
Repayment of long-term debt (21,400) (398) (32) -- (21,830)
Dividends paid (2,875) -- -- -- (2,875)
Other 1,941 -- -- -- 1,941
--------- --------- --------- --------- ---------
Net cash used for financing
activities (77,534) (398) (32) -- (77,964)
Effect of exchange rate changes
on cash -- -- (300) 287 (13)
--------- --------- --------- --------- ---------
Increase (decrease) in cash and
cash equivalents 2,855 (2,584) 1,441 -- 1,712
Cash and cash equivalents at
beginning of period 4,726 3,394 3,192 -- 11,312
--------- --------- --------- --------- ---------
Cash and cash equivalents at
end of period $ 7,581 $ 810 $ 4,633 $ -- $ 13,024
========= ========= ========= ========= =========
27
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 captions "Fiscal 2003 Outlook" and "Fiscal 2004 and Beyond 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 cyclical nature of the Company's commercial and fire and emergency
markets, the outcome of defense truck procurement competitions, risks related to
reductions in government expenditures, the uncertainty of government contracts,
the challenges of identifying acquisition candidates and integrating acquired
businesses, disruptions in the supply of parts or components from sole source
suppliers and subcontractors, and competition and risks associated with
international operations and sales, including foreign currency fluctuations.
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 April 24, 2003.
All forward-looking statements, including those under the captions "Fiscal 2003
Outlook" and "Fiscal 2004 and Beyond 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 for future periods to be at or above the projections contained in this
Quarterly Report on Form 10-Q, then the Company does not intend to publicly
disseminate that fact. Except as set forth above, the Company assumes no
obligation, and
28
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):
Second Quarter First Six Months
Fiscal Fiscal
2003 2002 2003 2002
--------- --------- --------- ---------
Net sales to unaffiliated customers:
Commercial $ 182,398 $ 169,978 $ 349,149 $ 299,407
Fire and emergency 141,586 119,682 254,542 215,548
Defense 130,551 127,126 279,160 263,701
Intersegment eliminations (1,158) (1,181) (3,138) (1,558)
--------- --------- --------- ---------
Consolidated $ 453,377 $ 415,605 $ 879,713 $ 777,098
========= ========= ========= =========
Second Quarter Fiscal 2003 Compared to 2002
Consolidated net sales increased 9.1% to $453.4 million for the second quarter
of fiscal 2003 compared to the second quarter of fiscal 2002. Net sales
increases were recorded in all segments.
Commercial segment net sales increased 7.3% to $182.4 million for the second
quarter of fiscal 2003 compared to the second quarter of fiscal 2002. Increased
"package" sales (body and chassis) compared to "body-only" sales contributed
most of the sales volume increase. Concrete placement product sales were up 8.0%
in 2003 compared to 2002, as Company
29
sales were favorably impacted by availability of Company-owned commercial
chassis containing engines manufactured prior to the October 1, 2002 effective
date for new environmental regulations. Refuse product sales were up 6.5%
compared to 2002. U.S. refuse truck body and parts sales decreased 13.6% for the
quarter, primarily due to substantially lower sales to large, U.S. commercial
waste-haulers in spite of higher package sales. European refuse product sales
were up 36.7% compared to 2002, generally as a result of increased package
sales, which the Company is now emphasizing, and because of favorable currency
translation adjustments.
Fire and emergency segment net sales increased 18.3% to $141.6 million for the
second quarter of fiscal 2003 compared to the second quarter of fiscal 2002.
Increased sales volume and an improved product sales mix at the Company's Pierce
Manufacturing Inc. ("Pierce") subsidiary were responsible for most of the
segment revenue growth for the quarter compared to the prior year.
Defense segment net sales increased 2.7% to $130.6 million for the second
quarter of fiscal 2003 compared to the second quarter of fiscal 2002 due
primarily to increased parts sales.
First Six Months of Fiscal 2003 Compared to 2002
Consolidated net sales increased 13.2% to $879.7 million for the six months
ended March 31, 2003 compared to the six months ended March 31, 2002.
Commercial segment net sales increased 16.6% to $349.1 million for the six
months ended March 31, 2003 compared to the same period in the prior year.
Concrete placement sales were up 29.0% primarily due to increased front
discharge mixer sales and a higher proportion of rear-discharge mixer "package"
sales compared to the prior year. Domestic refuse sales were 11.4% lower due to
decreased shipments to large, U.S. commercial waste haulers. European refuse
sales increased 32.0% due to increased "package" sales and favorable foreign
currency translation gains.
Fire and emergency segment net sales increased 18.1% to $254.5 million for the
six months ended March 31, 2003 compared to the first six months of fiscal 2002.
Sales increases were largely due to increased unit volume and an improved
product sales mix of domestic fire apparatus at the Company's Pierce subsidiary.
Defense segment net sales increased 5.9% to $279.2 million for the six months
ended March 31, 2003 compared to the same period in the prior year due to
increased sales under the Company's Family of Heavy Tactical Vehicle ("FHTV")
contract and higher parts sales.
30
Analysis of Consolidated Operating Income
The following table presents operating income by business segment (in
thousands):
Second Quarter First Six Months
Fiscal Fiscal
2003 2002 2003 2002
--------- --------- --------- ---------
Operating income (expense):
Commercial $ 11,384 $ 12,161 $ 19,036 $ 19,457
Fire and emergency 14,315 11,610 24,340 19,363
Defense 6,738 5,087 16,326 13,129
Corporate and other (8,050) (5,276) (14,953) (10,588)
-------- -------- -------- --------
Consolidated operating income $ 24,387 $ 23,582 $ 44,749 $ 41,361
======== ======== ======== ========
Second Quarter Fiscal 2003 Compared to 2002
Consolidated operating income increased 3.4% to $24.4 million, or 5.4% of sales,
in the second quarter of fiscal 2003 compared to $23.6 million, or 5.7% of
sales, in the second quarter of fiscal 2002.
Commercial segment operating income decreased 6.4% to $11.4 million, or 6.2% of
sales, in the quarter compared to $12.2 million, or 7.2% of sales, in the prior
year quarter. Operating income margins fell in the second quarter of fiscal 2003
compared to the prior year quarter due to lower margins on "package" sales of
concrete mixers and refuse bodies. The Company earns a lower overall operating
income margin on "package" sales which include purchased commercial chassis.
Fire and emergency segment operating income increased 23.3% to $14.3 million, or
10.1% of sales, in the quarter compared to $11.6 million, or 9.7% of sales, in
the prior year quarter. A strong product mix and favorable manufacturing cost
performance contributed to the higher operating income compared to the prior
year.
Defense segment operating income increased 32.5% to $6.7 million, or 5.2% of
sales, in the quarter compared to $5.1 million, or 4.0% of sales, in the prior
year quarter. Operating income increased as a result of higher parts sales and
lower bid and proposal spending. Also, margins on the multi-year Medium Tactical
Vehicle Replacement ("MTVR") production contract were 4.3% in the second quarter
of fiscal 2003 compared to 3.3% in the second quarter of fiscal 2002. The
Company recorded a cumulative catch-up adjustment to increase the life-to-date
margins recognized on its MTVR contract to 4.3% in the third quarter of fiscal
2002.
Corporate operating expenses and inter-segment profit elimination increased $2.8
million to $8.1 million in the second quarter of fiscal 2003 compared to the
second quarter of fiscal 2002 due to higher variable compensation,
Sarbanes-Oxley Act and related costs, and expenses related
31
to the Company's previously reported plan to increase investments in people and
services.
Consolidated selling, general and administrative expense increased to 9.1% of
sales in the second quarter of fiscal 2003 compared to 8.6% of sales in the
second quarter of fiscal 2002 largely as a result of increased corporate
operating expenses.
First Six Months Fiscal 2003 Compared to 2002
Consolidated operating income increased 8.2% to $44.7 million, or 5.1% of sales,
in the first six months of fiscal 2003, compared to $41.4 million, or 5.3% of
sales, in the first six months of fiscal 2002.
Commercial segment operating income decreased 2.2% to $19.0 million, or 5.5% of
sales, in the first six months compared to $19.5 million, or 6.5% of sales, in
the prior year. Operating income margins were generally lower due to a higher
percentage of "package" sales versus body-only sales in the current year
compared to the previous year. Results for the first six months of fiscal 2003
also benefited from a $0.5 million gain on the sale of certain operating
equipment.
Fire and emergency segment operating income increased 25.7% to $24.3 million, or
9.6% of sales, in the first six months of fiscal 2003 compared to $19.4 million,
or 9.0% of sales, in the prior year period. Increased sales volume, an improved
product sales mix and favorable manufacturing cost performance at Pierce
compared to the prior year were responsible for most of the improved earnings in
this segment.
Defense segment operating income increased 24.4% to $16.3 million, or 5.8% of
sales, compared to $13.1 million, or 5.0% of sales, in the prior year period.
Margins on the MTVR contract were 3.3% in the first six months of fiscal 2002.
Margins on the MTVR contract were increased in the third quarter of fiscal 2002
to 4.3%. The difference in the margin percentage added approximately $1.4
million to the operating income for the first six months of fiscal 2003 compared
to the same period in fiscal 2002. The remaining increase in operating income
for the first six months of fiscal 2003 resulted from higher sales of FHTV
trucks and defense parts, and lower bid and proposal spending compared to the
same period in fiscal 2002.
Corporate expenses and inter-segment profit eliminations increased $4.4 million
to $15.0 million for the six months ended March 31, 2003 compared to the same
period in the prior year. Increases in variable compensation, Sarbanes-Oxley Act
and related costs, and investments in people and services contributed to the
increase.
Consolidated selling, general and administrative expenses increased 15.4% during
the period to $78.7 million compared to $68.2 million in the prior year period.
Consolidated selling, general and administrative expense as
32
a percent of sales was consistent between periods at 8.9% in fiscal 2003 and
8.8% in fiscal 2002.
Analysis of Non-Operating Income Statement Items
Second Quarter Fiscal 2003 Compared to 2002
Net interest expense decreased $2.2 million to $3.2 million in the second
quarter of fiscal 2003 compared to the second quarter of fiscal 2002, largely as
a result of debt reduction in fiscal 2002 resulting from performance-based
payments on the MTVR and FHTV contracts and cash flow from operations and, to a
lesser extent, due to lower interest rates.
The effective income tax rate for the second quarter of fiscal 2003 was 37.5%
compared to 36.7% for the second quarter of fiscal 2002. The higher effective
tax rate in the second quarter of fiscal 2003 reflects lower estimated foreign
tax credits.
Equity in earnings of an unconsolidated partnership of $0.5 million in the
second quarter of fiscal 2003 and $0.6 million in the second quarter of fiscal
2002 represents the Company's equity interest in a lease financing partnership.
First Six Months of Fiscal 2003 Compared to 2002
Net interest expense decreased $5.1 million to $6.4 million in the first six
months of fiscal 2003 compared to fiscal 2002, largely as a result of debt
reduction in fiscal 2002 related to performance-based payments on the MTVR and
FHTV contracts and cash flow from operations and, to a lesser extent, due to
lower interest rates.
The effective income tax rate for the first six months of fiscal 2003 was 37.2%
compared to 33.7% for the comparable period in the prior year. In December 2001,
the Company concluded an audit settlement of a research and development tax
credit claim resulting in a $0.9 million reduction in income tax expense in the
first six months of fiscal 2002. Excluding the impact of the $0.9 million tax
settlement in the first six months of fiscal 2002, the Company's effective
income tax rate was 36.8% in 2002. Fiscal 2003 results reflect a slightly higher
effective rate due to lower estimated foreign tax credits.
Equity in earnings of an unconsolidated partnership of $1.1 million in the first
six months of fiscal 2003 and 2002 represent the Company's equity interest in a
lease financing partnership.
33
Financial Condition
First Six Months of Fiscal 2003
During the first six months of fiscal 2003, cash decreased by $20.2 million to
$19.8 million at March 31, 2003. The reduction in cash during the period was
largely due to repayments of long-term debt of $12.2 million, capital
expenditures of $11.8 million, increases in other long-term assets of $8.4
million, and dividends of $2.9 million partially offset by cash flow from
operating activities of $9.9 million and proceeds from sales of assets of $3.8
million. The increase in other long-term assets arose from a $12.0 million
contribution to the Company's defined benefit pension plans during the second
quarter of fiscal 2003.
In the first six months of fiscal 2003, net cash provided from operating
activities of $9.9 million was significantly lower than the $85.9 million of net
cash provided from operating activities in the first six months of fiscal 2002.
This variance between periods was primarily due to cash flows associated with
changes in operating assets and liabilities. The following table presents cash
flows associated with changes in operating assets and liabilities.
Six Months Ended
March 31,
2003 2002
---------- ---------
Receivables, net $ (15,376) $ 45,554
Inventories (53,025) 4,099
Accounts payable (2,927) (11,376)
Floor plan notes payable 8,069 (625)
Customer advances 44,327 33,676
Income taxes (3,659) (10,261)
Other (2,878) (573)
--------- --------
Source (use) of cash $ (25,469) $ 60,494
========= ========
During the first six months of fiscal 2003, the Company was building inventories
in anticipation of an expected increase in sales in the second half of fiscal
2003. During the first six months of fiscal 2002, the Company was liquidating
significant receivables from a large commercial waste-hauler related to a higher
concentration of sales in the previous quarter. In addition, during the first
six months of fiscal 2002 the Company was liquidating significant receivables
and inventories associated with a large foreign military sale.
The Company's debt-to-total capital ratio at March 31, 2003 was 23.4% compared
to 26.8% at September 30, 2002.
34
First Six Months of Fiscal 2002
During the first six months of fiscal 2002, cash increased by $1.7 million to
$13.0 million at March 31, 2002. Cash provided from operating activities of
$85.9 million was used to fund capital expenditures of $4.9 million, pay
dividends of $2.9 million and reduce short- and long-term debt by $77.0 million.
In the first six months ending March 31, 2002, net cash provided from operating
activities of $85.9 million was significantly impacted by cash flows associated
with changes in operating assets and liabilities. In fiscal 2002, the Company
had initiated planned actions to reduce cash invested in working capital,
principally receivables and inventories, in light of the recession in the U.S.
economy. Cash was provided from increases in customer advances as a higher
percentage of customers took advantage of prepayment programs. Declines in
accounts payable in the first six months of fiscal 2002 were due to reductions
in inventory. Income taxes payable decreased in the first six months of fiscal
2002 due to increases in income tax payments made during the period. Income tax
payments were $27.5 million in the first six months of fiscal 2002 and were
impacted by a delay in estimated tax payments from the fourth quarter of fiscal
2001 to the first quarter of 2002 resulting from a one-time benefit from recent
U.S. tax legislation.
Liquidity and Capital Resources
The Company had $154.7 million of unused availability under the terms of its
Revolving Credit Facility as of March 31, 2003. The Company's primary cash
requirements include working capital, interest and principal payments on
indebtedness, capital expenditures, dividends, and, potentially, future
acquisitions. The primary sources of cash are expected to 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").
The Company's senior credit facility and senior subordinated notes contain
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
35
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 senior 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 and Term Loan A as of March 31, 2003. The margins are
subject to adjustment, up or down, based on whether certain financial criteria
are met. The weighted average interest rate on borrowings outstanding at March
31, 2003 was 2.28% for Term Loan A. The Company presently has no plans to enter
into interest rate swap arrangements to limit exposure to future increases in
interest rates.
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 2003. See "Fiscal 2003 Outlook."
Capital resource requirements may change, however, because the Company maintains
an active acquisitions strategy and the capital requirements of this strategy
cannot be reasonably estimated. In addition, the Company could face significant
working capital requirements in the event of an award of major new business
arising from current truck procurement competitions for new defense contracts in
the U.S. and the U.K.
Contractual Obligations and Commercial Commitments
The Company's contractual obligations and commercial commitments disclosures in
its Annual Report on Form 10-K for the year ended September 30, 2002 have not
materially changed since that report was filed, except for the addition of two
operating leases in connection with a manufacturing facility and in connection
with certain equipment with combined total minimum rentals of $13.4 million;
with payments due of $0.6 million for the remainder of fiscal 2003, $1.2 million
annually in fiscal 2004 through fiscal 2007 and $8.0 million thereafter.
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 March 31,
2003 and which calls for deliveries in fiscal 2005 through 2007, is denominated
in British Pounds Sterling. Additionally, in connection with this Wheeled Tanker
contract, the Company has entered into requirements subcontracts with various
third parties. These subcontracts call for payments in euros. The Company
expects that it will hedge a significant portion of the contract's cash flows of
approximately 143 million in British Pounds Sterling and 77 million in euros by
entering into forward foreign exchange contracts. Any portion of
36
these contractual cash flows that remain unhedged will subject the Company to
foreign currency transaction risk and related financial volatility.
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, 2002 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, 2002 have not materially changed
since that report was filed.
New Accounting Standards
Guarantee Obligations: In November 2002, the Financial Accounting Standards
Board ("FASB") issued Financial Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be
recorded at fair value and requires a guarantor to make significant new
disclosures, even when the likelihood of making any payments under the guarantee
is remote. Generally, FIN 45 applies to certain types of financial guarantees
that contingently require the guarantor to make payments to the guaranteed party
based on changes in an underlying that is related to an asset, liability, or an
equity security of the guaranteed party; performance guarantees involving
contracts which require the guarantor to make payments to the guaranteed party
based on another entity's failure to perform under an obligating agreement;
indemnification agreements that contingently require the guarantor to make
payments to an indemnified party based on changes in an underlying that is
related to an asset, liability, or an equity security of the indemnified party;
or indirect guarantees of the indebtedness of others. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Disclosure
requirements under FIN 45 are effective for financial statements ending after
December 15, 2002 and are applicable to all guarantees issued by the guarantor
subject to FIN 45's scope, including guarantees issued prior to FIN 45. The
adoption of FIN 45 did not have a material effect on the Company's financial
condition, results of operations or cash flows (see Note 11 to Notes to
Condensed Consolidated Financial Statements).
Accounting for Stock-Based Compensation: In December 2002, the FASB issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition to SFAS No. 123's fair value method for accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 and Accounting
37
Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting," to
require disclosure in the summary of significant accounting policies of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. The Company early adopted the provisions of SFAS No. 148
as of October 1, 2002 and has included the required disclosures in Note 9 to the
Notes to Condensed Consolidated Financial Statements. Adoption of SFAS No. 148
did not have a material impact on the Company's financial condition, results of
operations or cash flows.
Variable Interest Entities: In January 2003, the FASB issued FIN 46,
"Consolidation of Variable Interest Entities" with the objective of improving
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights, or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities.
Historically, entities generally were not consolidated unless the entity was
controlled through voting interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. A
company that consolidates a variable interest entity is called the "primary
beneficiary" of that entity. FIN 46 also requires disclosures about variable
interest entities that a company is not required to consolidate but in which it
has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements of FIN 46 apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Also, certain
disclosure requirements apply to all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established.
The Company is in the process of assessing the impact of FIN 46 as it relates to
its interest in Oshkosh/McNeilus Financial Services Partnership ("OMFSP") (see
Note 6 to Notes to Condensed Consolidated Financial Statements). The Company
expects to complete such assessment and adopt FIN 46 in the fourth quarter of
fiscal 2003. FIN 46 may not apply to the Company's interest in OMFSP because
there is substantial evidence that the partnership is a voting interest entity
rather than a variable interest entity. If it is determined to apply, then the
Company would likely sell its interest or restructure its interest in OMFSP such
that the Company is not considered a primary beneficiary of OMFSP.
Customers and Backlog
Sales to the DoD comprised approximately 35% of the Company's sales in the first
six months of fiscal 2003. No other single customer accounted for more than 10%
of the Company's net sales for this period. A substantial
38
majority of the Company's net sales are derived from customer orders prior to
commencing production.
The Company's backlog at March 31, 2003 increased 54.7% to $1,360.1 million
compared to $879.4 million at March 31, 2002. Commercial segment backlog
decreased 5.9% to $145.6 million at March 31, 2003 compared to March 31, 2002.
Backlog for front-discharge concrete mixers was down 25.4% while backlog for
rear-discharge concrete mixers was down 9.1%. Backlog for refuse packers was
down 4.8% domestically but up 16.4% in Europe. Front-discharge concrete mixer
backlog decreased due to increased shipments in the first six months of fiscal
2003 compared to the prior year period. Rear-discharge concrete mixer backlog
decreased slightly in the current year period compared to the prior year
consistent with the overall level of lower shipments in the first six months of
fiscal 2003 compared to 2002. The domestic refuse backlog was lower due to fewer
orders from large, U.S. commercial waste-haulers. European refuse backlog
increased largely as a result of a stronger euro compared to the U.S. dollar and
a higher proportion of package sales. Fire and emergency segment backlog
increased 1.6% to $306.7 million at March 31, 2003 compared to March 31, 2002.
The defense segment backlog increased 114.7% to $907.8 million at March 31, 2003
compared to March 31, 2002, principally due to the award of a U. K. Wheeled
Tanker contract with shipments commencing in fiscal 2005 and due to funding
received under the Company's FHTV and MTVR contracts. Approximately 46.5% of the
March 31, 2003 backlog is not expected to be filled in fiscal 2003.
Reported backlog excludes purchase options and announced orders for which
definitive contracts have not been executed. Additionally, backlog 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 2003 Outlook
The Company estimates that consolidated net sales will grow approximately 7.2%
in fiscal 2003 to $1.870 billion. The Company expects consolidated operating
income to increase 1.2% to approximately $112.5 million in fiscal 2003, or
approximately 6.0% of sales. The Company expects earnings per share from
continuing operations assuming dilution to increase 7.2% to $3.70 per share in
fiscal 2003.
The Company estimates that commercial segment sales will increase 5.8% in fiscal
2003 to $718.0 million. The Company expects a 2.5% increase in U.S. concrete
placement sales in fiscal 2003, attributable to higher package sales. The
Company expects its U.S. refuse sales to be flat in fiscal 2003. The Company
expects industry volume to decline in excess of 10.0% in fiscal 2003, but the
Company expects volume increases from its largest commercial waste customers and
other market share gains to offset the industry decline. The Company estimates
that the Geesink Norba Group sales will increase approximately 22.6% in fiscal
2003 based on an
39
increase in package sales and translation gains resulting from a stronger euro,
offset in part by a weak European economy.
The Company estimates that commercial segment operating income will decrease
approximately 8.8% in fiscal 2003 to $43.0 million. The Company expects concrete
placement operating income to decline 12.4% reflecting weak customer orders and
planned development spending and start-up costs associated with the
Revolution(TM) composite concrete mixer drum. The Company plans to sell less
than one hundred Revolution drums in fiscal 2003, utilizing the production
facilities of the Company's partner in Australia. Freight costs from Australia
will limit any profit opportunity from those sales. The Company plans to have a
U.S. production facility for the Revolution drum operational by the end of
fiscal 2003, and to reach high rate of production for sales in fiscal 2004. In
fiscal 2005 and fiscal 2006, the Company plans to acquire the rights to this
technology for Europe, Asia, Australia and perhaps Africa/Middle East. The
Company expects domestic refuse operating income to decline about 20.0% in
fiscal 2003 due to more package sales of chassis and packer bodies and fewer
body-only sales. Internationally, the Company expects that the strong euro and
benefits from the cost reduction efforts in fiscal 2002 at Geesink Norba Group
will more than offset weaker end markets throughout Europe, resulting in a 15.0%
to 20.0% operating income improvement in fiscal 2003.
The Company expects that fire and emergency segment sales will be up 12.4% to
$535.0 million in fiscal 2003. During the first fiscal quarter, the Company
believes that municipal orders for fire apparatus began to slow. The Company
estimates fire and emergency operating income to increase 8.2% to approximately
$53.0 million in fiscal 2003, largely due to strong orders received in fiscal
2002.
The Company estimates defense segment sales to increase 5.1% to $625.0 million
in fiscal 2003. The Company estimates defense segment operating income will
increase 16.7% to approximately $47.5 million in fiscal 2003, up $3.5 million
from previous estimates. This estimate assumes that MTVR contract margins remain
at 4.3% in fiscal 2003. The Company continues to target margins of 6.0% to 6.5%
over the contract life. The Company reviews its estimated costs to complete the
MTVR long-term production contract periodically, or as events change, based on
factors such as the cost performance achieved to date and the durability of
fielded trucks. In June 2002, the Company negotiated a modification of the MTVR
contract to replace a bare chassis with requirements for vehicles with a dump or
a wrecker variant. The wrecker variants are complex vehicles that will undergo
significant testing. The U.S. Marine Corps has until January 2004 to fund the
wrecker requirements under the contract. The Company has chosen to account for
funding of the wrecker variant by recognizing such wrecker sales as a separate
contract from the base MTVR contract. The practical effect of this change is
that we would not recognize a cumulative catch-up adjustment to earnings when
such wreckers are funded, but rather record higher earnings as each wrecker is
shipped in fiscal 2004 and 2005. Since the Company expects to ship about
one-half of the
40
anticipated wreckers in fiscal 2005, this change may shift significant earnings
from fiscal 2004 into fiscal 2005. How the wreckers perform in testing, the
timing and number of wreckers actually funded by the U.S. Marine Corps under the
separate contract and the cost performance on those trucks will be important
factors in the Company's ability to achieve its targeted MTVR margins of 6.0% to
6.5% over the lives of the base contract and the wrecker variant contract.
The Company expects consolidated sales of approximately $495.0 million in each
of the third and fourth quarters of fiscal 2003.
The Company expects corporate expenses to increase from $25.8 million in fiscal
2002 to $31.0 million in fiscal 2003. The increase reflects investments planned
to build the Company's management team, higher variable incentive compensation
costs and higher Sarbanes-Oxley and related costs.
The Company expects net interest expense to approximate $13.0 million in fiscal
2003. The Company projects debt to decline on average in fiscal 2003 following
the significant debt reduction in fiscal 2002; however, the Company expects
working capital requirements to increase progressively during fiscal 2003 due to
the start-up of the U.K. Tank Transporter contract and the U.K. Wheeled Tanker
contract.
The Company expects debt to increase from $137.8 million at March 31, 2003 to
$145.0 million at June 30, 2003 and $150.0 million at September 30, 2003. These
increases reflect the start-up of the U.K. Tank Transporter and U. K. Wheeled
Tanker contracts. The Company estimates capital spending at no more than $30.0
million in fiscal 2003, including the required capital spending to construct a
U.S. facility to manufacture the Revolution(TM) composite concrete mixer drum.
Fiscal 2004 and Beyond Outlook
There have been a number of recent developments that will affect the Company's
fiscal 2004 and beyond outlook. The Company will not provide detailed guidance
with respect to fiscal 2004 until the Company's July 2003 earnings conference
call. The Company does not expect to announce significant earnings growth
expectations for 2004 when it provides guidance in July 2003, as it is unlikely
that the U.S. and European economies will be in an economic recovery at that
time.
In the Company's defense segment, there have been a number of developments. On
April 17, 2003, the United States Army notified the Company that the Army had
awarded the five-year Family of Medium Tactical Vehicles ("FMTV") A1 Competitive
Rebuy production contract for 7,063 trucks and 3,826 trailers to Stewart &
Stevenson Services, Inc., a competitor of the Company. The Company requested and
received a debriefing meeting with the Army regarding certain matters relating
to the procurement. The Company does not currently intend to file a formal
protest of the award with the U.S. General Accounting Office. The recent
41
announcement on the FMTV contract will reduce sales expectations beginning in
fiscal 2004. The Company signed a contract in April 2003 with the United Kingdom
Ministry of Defence to provide 350 wheeled tankers that supply fuel and water on
missions worldwide. The equipment portion of the contract is valued at
approximately $230 million with approximately 20% of sales expected in fiscal
2005, 50% expected in fiscal 2006 and 30% expected in fiscal 2007. This
represents a significant delay in truck system deliveries from fiscal 2004 into
fiscal 2005. As described earlier, the accounting for the wrecker variants under
the MTVR contract may shift earnings from fiscal 2004 into fiscal 2005. Since
bid and proposal spending in fiscal 2003 was lower than anticipated, there will
be fewer opportunities to reduce bid and proposal spending in fiscal 2004.
Putting these and other developments together, the Company would expect defense
operating income in fiscal 2004 to be about flat compared to fiscal 2003.
However, if the U.S. Marine Corps funds the full requirement for the wrecker
variants under the MTVR contract, then the Company would expect defense
operating income to increase approximately 15.0% in fiscal 2004 from current
estimates.
In the fire and emergency segment, municipal budget issues are creating a
slowdown in orders for fire apparatus that the Company expects will challenge
results in fiscal 2004. The introduction of the Company's new Side Roll
Protection(TM) safety features and other new product introductions should help
the Company gain market share to offset lower overall industry purchases of fire
apparatus, but the extent of the industry weakness will not be known for several
months.
Lastly, the Company expects its commercial segment will provide the greatest
opportunity for earnings growth in fiscal 2004 on two fronts. First, the
Revolution(TM) composite mixer drum has the potential to drive earnings growth
in the commercial segment as the Company's new Revolution production facility is
ramped up to high rate production. Second, the Company expects that the recent
further weakening of concrete placement and refuse sales would provide even
greater earnings leverage in an economic recovery.
In summary, the Company believes that an economic recovery and the launch of the
Revolution(TM) drum have the potential to drive earnings growth for the Company
in fiscal 2004, but the Company's outlook for the year may develop slowly as the
direction of the U.S. and European economies is clarified.
Looking forward to fiscal 2005 and beyond, the Company expects declining defense
sales as the MTVR contract concludes. By then, the Company hopes that an
economic recovery, the rollout of the Revolution(TM) composite drum and
potentially acquisitions would offset MTVR sales declines and foster earnings
growth.
The expectations set forth in "Fiscal 2003 Outlook" and "Fiscal 2004 and
Beyond 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,
42
without limitation, no economic recovery or recession in U.S. and European
economies; the Company's estimates for concrete placement activity, housing
starts and mortgage rates; 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 margins
associated with the MTVR contract and a related MTVR wrecker variant contract;
the anticipated level of sales associated with defense parts, international
defense truck contracts and the FHTV contract; 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
expected level of commercial "package" body and 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 products and
of large commercial waste haulers; the expected level of operating income of the
Geesink Norba Group; the Company's ability to sustain market share gains by its
fire and emergency and refuse products businesses; anticipated levels of sales
of, and capital expenditures associated with, the Revolution composite mixer
drum; the Company's estimates for costs relating to insurance, steel,
litigation, the Sarbanes-Oxley Act and related matters and investments in people
and services; 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.
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, 2002 and have not materially changed since that report was
filed, except as disclosed in "Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations, Contractual
Obligations and Commercial Commitments" herein.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. In accordance
with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"),
within 90 days prior to the filing date of this Quarterly Report on Form 10-Q,
an evaluation was carried out under the supervision and with the participation
of the Company's management, including the Company's Chairman of the Board,
President and Chief Executive Officer and Executive Vice President and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Exchange Act). Based upon their evaluation of these disclosure
43
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
date of such evaluation 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.
(b) Changes in internal controls. There were no significant changes
in the Company's internal controls or other factors that could significantly
affect these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
44
OSHKOSH TRUCK CORPORATION
PART II. OTHER INFORMATION
FORM 10-Q
March 31, 2003
Item 1. Legal Proceedings
None.
Item 4. Submission of Matters To A Vote of Security Holders
At the annual meeting of shareholders held on February 4, 2003, all of the
persons nominated as directors were elected. The following table sets forth
certain information with respect to such election.
Shares
Shares Withholding Other Shares
Name of Nominee Voted for Authority Not Voted
--------------- ---------- ----------- ------------
Class A Common Stock Nominees
J. W. Andersen 401,811 1 12,871
R. G. Bohn 401,811 1 12,871
F. M. Franks, Jr. 401,811 1 12,871
M. W. Grebe 401,811 1 12,871
K. J. Hempel 401,789 23 12,871
S. P. Mosling 401,811 1 12,871
J. P. Mosling, Jr. 401,811 1 12,871
Common Stock Nominees
R. M. Donnelly 14,472,178 63,511 2,100,437
D. V. Fites 14,471,981 63,708 2,100,437
R. G. Sim 14,402,701 132,988 2,100,437
45
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(99.1) Written Statement of the Chairman, President and Chief
Executive Officer, pursuant to 18 U.S.C. ss.1350, dated May 2,
2003.
(99.2) Written Statement of the Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C. ss.1350, dated May 2,
2003.
(b) Reports on Form 8-K
Current Report on Form 8-K dated January 23, 2003 reporting the
announcement of the Company's earnings for the first quarter ended
December 31, 2002, a conference call in connection with such
announcement and risk factors for the Company.
46
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
May 2, 2003 /S/ R. G. Bohn
-----------------------------------------
R. G. Bohn
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
May 2, 2003 /S/ C. L. Szews
-----------------------------------------
C. L. Szews
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
May 2, 2003 /S/ T. J. Polnaszek
-----------------------------------------
T. J. Polnaszek
Vice President and Controller
(Principal Accounting Officer)
47
CERTIFICATIONS
I, Robert G. Bohn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oshkosh Truck
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 2, 2003 /S/ R. G. Bohn
-----------------------------------------
R. G. Bohn
Chairman, President and
Chief Executive Officer
48
I, Charles L. Szews, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Oshkosh Truck
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
May 2, 2003 /S/ C. L. Szews
-----------------------------------------
C. L. Szews
Executive Vice President and
Chief Financial Officer
49
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(99.1) Written Statement of the Chairman, President and Chief Executive
Officer, pursuant to 18 U.S.C ss.1350, dated May 2, 2003.
(99.2) Written Statement of the Executive Vice President and Chief
Financial Officer, pursuant to 18 U.S.C.ss.1350, dated May 2,
2003.
50