Oshkosh Learns Some Hard Truths About Defense Contracting

by: Matthew Potter
January 31, 2011

Category: BAE Systems, Business Line, Companies, Congress, Contract Additions, Contract Awards, Department of Defense, Events, Federal Budget Process, logistics, Oshkosh Truck Corp, production program, Services, States, Texas, U.S. Army, U.S. Marine Corps, Wisconsin | RSS 2.0

Oshkosh (OSK) is the Wisconsin based manufacturer of heavy equipment such as concrete truck, fire engines, ambulances and selected military vehicles. Over the last few years they have been able to aggressively expand their military line including winning two major manufacturing contracts for support vehicles for the U.S. military.

Due to the downturn in the world’s economy since 2007 the company’s earnings and profits have been affected by declining demand for construction equipment and the decision by many governments not to invest in new vehicles. Starting in 2009 the winning of two major contracts for the U.S. Defense Department began to offset the losses from the commercial side of the company.

The MRAP-AT design submitted by Oshkosh won the contest for a new more maneuverable Mine Resistant Ambush Protected (MRAP) vehicle for use in Afghanistan. This program earned the company over $4 billion in contracts and counting to build the base system and variants.

Oshkosh was also able to move production of the Family of Medium Tactical Vehicles (FMTV) from BAE Systems (BAE:LSE) plant in Sealy, TX. The FMTV trucks and trailers have been made for over a decade and are the standard transport vehicle for the U.S. Army and Marines. Thousands of new systems need to be purchased to replace those damaged or destroyed in Iraq and Afghanistan as the U.S. recapitalizes its equipment. The transfer of production was a serious blow to the town and BAE’s earnings in the U.S.

In 2009 the combination of these two contracts helped reduce the company’s losses. It was hoped that the improvement in the economy overall would help buoy commercial sales and soften the impact of any reduction in military business.

Most military hardware contracts have definitive quantities or length. The U.S. buys only a certain amount of items driven by requirements. Unlike commercial lines which can go on for decades if the product is good and continuously upgraded the total number of units purchased may be limited. Oshkosh is starting to face that with the MRAP-ATV. In the last quarter profit decreased over forty percent as that vehicle began its production decline.

The company still has thousands of FMTV systems to build but that program is very price conscious which is why Oshkosh was able to win it away from BAE. They were able to underbid the original manufacturer which is good for the Government but may not be that great for the company at least in the short term. Even though to meet the needs of the customer Oshkosh is ramping up hiring and expanding facilities. This too will put pressure on their earnings and profits.

Most large military contractors rely on supporting equipment once it is in service as well as winning the contracts to develop their replacements. With some types of systems like trucks it may be years before a follow-on program enters development. As the fighting in Iraq and Afghanistan ends the demand for MRAP systems will decline. The U.S. is already struggling to fit them into their tactical organizations as they were a reaction to a certain threat and mission in operations since 2001.

Overall Oshkosh has done well with their defense business but they must find ways to continue their success. If not eventually they could be facing the same situation as BAE and Sealy.

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